UK: Agreement To Agree Or Agreement?

Last Updated: 31 October 2012
Article by Lisa Kingston

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 enforceable. The key terms of the agreement had not been fixed and the sale price of "not less than" €1.65m was too uncertain.

Decision of the Court of Appeal

The Court of Appeal disagreed with the High Court that the parties had intended the side letter to be legally binding, but agreed that the terms of the side letter were too vague to be enforceable. The outcome was therefore the same in the High Court as in the Court of Appeal.

The side letter did no more than provide Mr Barbudev with "the opportunity to invest in the Purchase on terms to be agreed between us", which was not the language of a binding commitment, regardless of the commercial context and purpose for which the side letter was produced.

What Mr Barbudev was left with, therefore, was an "agreement to agree".

How do you make sure a side letter is legally binding?

For side letters to have legal force, they must meet the requirements of a contract under English law. The parties must demonstrate (i) a clear and unambiguous intention to enter into a contract and (ii) an agreement as to the key terms (such as price) or an objective means for achieving agreement of those terms.

It is not sufficient to ask your lawyer to draft your side letter as this will not of itself create a legally binding contract. What you need to do is to think more about the substance (or content) of the side letter.

A legally binding side letter should:

  • Contain terms that imply certainty (use words such as "shall");
  • Contain language that demonstrates that the key terms are already agreed, as opposed to being open for further negotiation by one of the parties;
  • Include payment terms;
  • Not be open to change by one of the parties;
  • Cover all the key issues, not just some of them;
  • Confirm the parties intend the document to be legally binding;
  • Be signed by both parties once agreed; and
  • If you are incorporating terms by reference, be very clear which standard form of contract, or draft contract, and which terms of that contract you mean to incorporate.

If the above cannot be done and you want your side letter to be legally binding, then it is best not to use a side letter at all.

What should you do if you do not wish your side letter to be legally binding?

This sounds unusual but not as unusual as you might think, since parties often use documents to record their legal intentions without wishing to be legally bound. Heads of terms of agreement are a good example.

If you do not want your side letter to be legally binding, extra care must be taken to rebut the automatic assumption that the parties intended to create legal relations.

Your side letter should:

  • Be headed with the words "subject to contract" so it is clear that the parties are still negotiating and finalising terms;
  • Contain phrases such as "terms to be agreed" or "terms to be negotiated";
  • Reflect the fact that there are matters that are still to be agreed (for example, identify the contract that needs to be prepared);
  • Be as vague as possible. State that the terms are not exhaustive and use phrases such as "may agree" and "may negotiate";
  • Explicitly state that the parties do not intend to be contractually bound by the side letter.

If you want some of the terms to be legally binding

If possible, you should try and avoid only some of the terms being legally binding as the side letter will then contain grey areas and it will be easier for it to be challenged at a later date.

If you have no alternative, clearly specify which provisions are intended to be legally binding and which are not. Generally, clauses which contain confidentiality and other commercial boilerplate clauses, such as law and jurisdiction clauses, will be binding.

Conclusion

If a side letter (or letter of intent) is to be binding, it must function as a freestanding contract and comply with the ordinary principles of contract law.

A free-standing contract has two essential ingredients.

First, in the context of commercial contracts such as side letters or letters of intent, there must be an intention to create legal relations. This intention is automatically presumed but it can be rebutted if one of the parties wishes to contest any presumed intention. In order to determine the intention of the parties, the court will look at the objective conduct of the parties and the surrounding facts.

Secondly, the alleged agreement must make sense commercially and its terms must be sufficiently clear so as to be capable of enforcement. If this is not the case, then the parties' intention for the agreement to be enforceable will be irrelevant.

In summary, lack of certainty is fatal to the existence of an enforceable contract and the reason for this is obvious: courts cannot enforce vague terms because (i) they cannot decipher what vague terms might mean in a commercial context and (ii) it would deprive the parties of their right to contract upon such terms as they consider fit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Lisa Kingston
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
Rawlison Butler LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
Rawlison Butler LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions