Intention To Create Legal Relations Does Not Necessarily Lead To An Enforceable Contract

Barbudev v (1) Eurocom Cable Management Bulgaria EOOD & others (ECM) (2) [2012] EWCA Civ 548 (Comm)

Barbudev had been the CEO and 40% shareholder in a Bulgarian cable television and internet company (X) acquired by ECMB which, along with the other defendants, was a Warburg Pincus company.

The pre-sale negotiations for X included a number of discussions as to Barbudev's continuing involvement in X after sale of his 40% stake. The essence of the discussions was that Barbudev would be entitled to take a 10% stake in the Purchaser for €1.65 million. It became clear during negotiations of the share purchase agreement (SPA) that the terms of the subsequent investment could not be agreed before the SPA was signed, so a side letter was prepared. The principal terms of the side letter were:

"In consideration for you agreeing to enter into the proposed transaction and to sign the Transaction Documents, the Purchaser [i.e. ECMB] hereby agrees that, as soon as reasonably practicable after the signing of the Agreement by all Parties, 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 Agreement and we agree to negotiate the Investment Agreement in good faith with you. Such terms shall include, without limitation, the following: you shall invest an aggregate amount of not less than €1.65 million in consideration for a combination of shareholder debt and registered shares which shall represent 10% of the registered share capital of the Purchaser on the date of the Investment Agreement...tag along and drag along provisions which are customary for a transaction of this nature shall be included in the Investment Agreement."

Subsequently, Barbudev entered into the SPA with ECMB and X was sold. Drafts of the investment agreement relating to Barbudev's 10% investment were exchanged and negotiated, but were never signed, partly because there were other issues arising from the deal which were given priority. In the end, Warburg Pincus sold X some 3 years after closing, without Barbudev having invested in ECMB.

In the Court of Appeal, Barbudev contended that the side letter constituted a legally enforceable contract. Warburg Pincus argued that it was merely an agreement to agree. Mr Barbudev claimed that WP had assured him that the side letter was legally binding – more particularly, it was given to him to persuade him to drop his insistence that closing of the SPA should be...