Barbudev v Eurocom Cable Management Bulgaria Eood & Ors [2012] EWCA Civ 548

Summary

The Court of Appeal considered a side letter was unenforceable as an agreement to agree with no certainty as to its terms and a lack of intention to create legal relations between the parties. The Court of Appeal confirmed the first instance finding that the side letter was unenforceable but, interestingly, found that the parties did intend to create legal relations.

Background

Mr Barbudev entered into an SPA with the Warburg Pincus Group (“WPG”) to sell his company Eurocom Plovdiv (“EP”). WPG intended to merge EP with another company and, as part of EP’s acquisition, it was anticipated that Mr Barbudev would have the opportunity to acquire up to 10% of the newly merged company together with a role in its management.

On this basis, the parties entered into a side letter, drafted by lawyers, which confirmed their agreement to enter into an investment and shareholders agreement (“ISA”) following the conclusion of the SPA. The side letter set out that the ISA would be negotiated in “good faith with you” and included specific terms relating to the investment, the chief term being that Mr Barbudev “shall invest an aggregate amount of not less than €1,650,000 for…10% of the registered share capital”. The letter also contained boiler plate clauses, such as a governing law and jurisdiction clause.

Following conclusion of the SPA, the ISA was not completed. Mr Barbudev sued the defendants to enforce the terms of the side letter. The High Court held that a side letter was unenforceable because it was an agreement to agree with no certainty as to its terms and there was a lack of intention to create legal relations between the parties. Mr Barbudev appealed.

Issues

The Court of Appeal considered: (1) whether the parties intend to create legal relations; and (2) whether there was an agreement to agree or binding contract.

Decision

Aikens LJ found that the parties did intend to create legal relations between themselves. Aikens LJ was persuaded by the fact that the letter was drafted by lawyers; the language used in the letter, such as “in consideration of you agreeing to enter into”; the letter’s reference to the Contract (Rights of Third Parties) Act 1999; and the letter’s boiler plate confidentiality provisions.

However, it was held that that 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 has to consider the nature of the legal relations that were actually created and the terms of the letter in a commercial context.

Aikens LJ determined that the letter was an agreement to agree as it did not contain the language of a binding commitment and no amount of taking into account the commercial context and Mr Barbudev’s concerns and aims, could make it so. It was clear that the terms of Mr Barbudev’s investment were not agreed and were to be negotiated “in good faith with you”. Even though particular terms were set out, these terms were not sufficiently certain to make the letter a binding contract. For example, Mr Barbudev investing “not less than €1,650,000” left open the possibility that he would invest more for a greater stake in the company.

Comment

This case serves as a useful indication of the factors which the courts will take into account when considering whether parties intended to create a legal relationship or not. It is important to bear this in mind when drafting or reviewing side letters or heads of terms because clearly here the involvement of lawyers and the inclusion of standard legal wording all pointed to an intention to create legal relations.

Further intention to create legal relations is only one part of creating a legally enforceable contract and the case also emphasises the need to make sure that when providing side letters of this kind, the parties are clear about which provisions are intended to be legally binding and which are not. Where provisions are intended to be legally binding, this must be expressly set out in the letter and the provisions must be drafted in such a way as to be capable of being enforced and not merely amounting to an agreement to agree.