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 .
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 the other parts of the letter
However, although the parties intended to create legal relations, it did not follow that the effect of the side letter was to create a legally enforceable contract. The Court had to consider the nature of the legal relations that were actually created and the terms of the side letter in a commercial context.
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. Furthermore, there remained many crucial matters that were not agreed in the side letter and which needed to be agreed before it could be said that there was a sufficiently certain contract.
In this case, the Court of Appeal's finding that there was an intention to create legal relations did not assist Mr. B in enforcing the side letter. The court went on to consider the nature of the legal relations that were actually created in order to see if the agreement constituted an enforceable contract and held that the side letter was not enforceable.
Accordingly, for parties wishing to rely on the enforceability of a side letter to assist them with their commercial objectives, the advice is to proceed with caution from the outset. However, this case also illustrates how readily the court will find that a written agreement prepared by lawyers is evidence of intention to create legal relations.
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