Agreement To Agree Or Agreement?

Side letters are often used by parties (i) in place of formal contracts, (ii) to provide assurance in relation to future contracts and (iii) to document any last-minute changes to contracts. The difficulty is that they are not always written in such a way as to be legally binding.

This sixteenth issue of Insight considers the decision of the Court of Appeal in Barbudev v Eurocom Cable Management Bulgaria EOOD & Ors [2012] EWCA Civ 548, and provides practical advice on what to do if (i) you want a binding side letter, (ii) you do not want a binding side letter and (iii) how to proceed if you want only part of your side letter to be binding.

Side letters are the equivalent of letters of intent which are commonly used in the construction industry. The legal principles referred to in this issue of Insight therefore apply equally to letters of intent and side letters.

The Barbudev case

The facts

Barbudev concerned a side letter to a Share and Purchase Agreement (an agreement through which companies are commonly sold) in relation to the proposed sale of a Bulgarian cable TV and internet company which appeared to offer Mr Barbudev (the investor) the opportunity to invest in a newly merged entity on terms that were to be agreed in an Investment and Shareholders Agreement.

The side letter confirmed that Eurocom Cable Management Bulgaria EOOD & Ors (the sellers of the company) would negotiate the sale of the company in good faith and some of the principal terms of the investment (including a minimum sale figure for the company of not less than €1.65million) were included. The side letter was drafted by lawyers, contained legal terminology such as "in consideration of your agreeing to enter into" and ended with an English law jurisdiction clause.

Ultimately, the Investment and Shareholders Agreement was never entered into and Mr Barbudev sought to enforce the terms of the side letter in relation to the lost investment opportunity he said he suffered when his investment fell through.

The case went first to the High Court and then the Court of Appeal.

Decision of the High Court

The High Court emphasised that whilst it was clear the parties intended the side letter to be a binding contract, a mere intention to create legal relations was not enough. The obligations the parties intended to create must also be enforceable.

The side letter did contain some information about the proposed terms of the investment but not in sufficient detail to be legally...