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 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 expressed his strong desire 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 the Court of first instance which had held that the parties had not intended to create legal relations. The appeal judges found that the parties had intended to create legal relations, on the basis that:

  • Lawyers had drafted the side letter
  • The wording used in the document was of a legal nature
  • There was a reference 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 the other parts of the letter

However, the parties' intention to create legal relations did not mean that the letter was legally enforceable. Aikens LJ expressed the view that the wording "the opportunity to invest in the Purchaser on the terms to be agreed between us" was not the language of a binding commitment, and no amount of taking account of the commercial context and Mr B's concerns and aims could make it so. Finally, there remained many crucial matters that were not finalised in the side letter, and these needed to be agreed before it could be said that there was a sufficiently certain contract.

For parties wishing to rely on an enforceable side letter to assist them with their commercial objectives, the advice is to proceed with caution. Not only should such documents contain the characteristics necessary for creating legal relations between the parties, but they should also be drafted in such a manner to make them binding on the parties. Inclusion of all the essential terms to make the agreement work is necessary.

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