Barbudev v (1) Eurocom Cable Management Bulgaria EOOD & others (ECM) (2)  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 conditional on the investment and shareholders agreement being entered into.
The High Court held that the terms of the side letter were too uncertain to be enforceable. The side letter could not be intended to create legal relations "if it is unenforceable in its entirety", i.e. because it was too uncertain and an agreement to agree. Barbudev appealed.
The Court of Appeal upheld the decision of the High Court that there was no binding contract:
- The Court of Appeal disagreed with the judge's view that the side letter did not create legal relations. It was clear from the terms of the side letter itself that the parties intended to create legal relations. It was drafted by Freshfields and its language was that of legal relations (e.g. there was wording such as "In consideration of you agreeing to enter into..."). There was a reference to the Contracts (Rights of Third Parties) Act 1999 and an English governing law clause. The parties clearly intended that the confidentiality provision in the letter would be contractually enforceable, whatever the status of the other parts of the letter.
- However, an intention to create legal relations was not sufficient to make the side letter enforceable. The wording of the side letter that the purchaser would "offer you the opportunity to invest in the Purchaser on the terms to be agreed... and we agree to negotiate the Investment Agreement in good faith with you..." was without doubt no more than an "agreement to agree" and constituted an unenforceable agreement between the parties. That was clear from many authorities, not least Walford v Miles.
- The terms of the side letter were too uncertain to be enforceable. This was not a simple sale of a number of shares in a new/merged business, for a certain price. The parties were contemplating an agreement that would determine the relationship between a majority and minority shareholder. The judge had identified six matters which in his view needed to be agreed before an investment and shareholder agreement would be sufficiently certain so as to be workable. The Court of Appeal agreed with this. Although there were, for instance, a reference in the side letter to tag along and drag along provisions, the fact that detailed discussions had taken place on exactly how put and call options could be exercised it showed that there remained many crucial matters that were not agreed in the side letter which had to be agreed before there could be a sufficiently certain contract.
This is a case where the parties did intend to create legal relations in a document drawn up by solicitors, but yet failed to have an enforceable agreement. Generally, the courts will infer such an intent in dealings between businesses, but it is still important to have sufficient certainty and agreement over the terms for a deal to be enforceable. Note that it is still possible for the parties to have reached a binding agreement with some (non-essential) clauses still to be agreed. This means that, if a heads of terms contains the main agreed terms of the deal, and yet is not intended to be legally enforceable, this must be clearly stated. Otherwise the courts are likely to treat the heads of terms as legally binding.
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