Court Rules That A Side Letter Is An Unenforceable Agreement

The Court of Appeal recently had to consider whether a side letter, drafted in parallel to a binding contract, and whose purpose was to confirm the parties' agreement to enter, at a later date, into a separate secondary agreement, was itself legally binding. The case in question was Georgi Velichkov Barbudev v Eurocom Cable Management Bulgaria Food & Ors [2012].

Mr Barbudev ("Mr B") was the major shareholder of Bulgarian cable and internet company Eurocom Plovdiv EOOD ("Eurocom"). Eurocom was being sold to Warburg Pincus Group ("Pincus"), and Mr B wished to reinvest some, or all, of his share proceeds into the proposed new combined business. Mr B and Pincus agreed on an investment amount of 1,650,000 Euros and a figure of 10% of the shares.

A side letter was drafted by lawyers and signed by the parties. It contained a provision stating that: "... we shall offer you the opportunity to invest in the Purchaser on the terms to be agreed between us which shall be set out in the [investment and shareholder's agreement ("ISA")] and we agree to negotiate the [ISA] in good faith with you".

The ISA was never completed and Mr B sued to enforce the terms of the side letter. In June 2011, the High Court held the side letter to be unenforceable. The decision was appealed, and the Court of Appeal had to determine whether the side letter constituted an enforceable agreement, or, on the contrary, a simple non-enforceable agreement to agree.

The Court of Appeal agreed with the High Court, taking the view that the side letter was simply an agreement to agree. However, it disagreed with Blair J on the issue of the intention of the parties to create legal relations. The Court of Appeal found that the parties had intended to create legal relations, on the basis that:

the side letter had been drafted by lawyers the wording used was of a legal nature including references to the Contracts (Rights of Third Parties) Act 1999 and to English law there was a clear intention that the confidentiality agreement was to be contractually enforceable, irrespective of the status of...