Summary

Quite often in transactions or when signing an agreement, an issue may crop up which the parties agree to deal with post completion or post execution of an agreement. This may be because a relatively minor point threatens to delay closing on a major transaction. In these circumstances the parties sometimes agree to enter into side letters where the parties agree that they will continue negotiations on this point post-completion. However, in both Ireland and England, these agreements to negotiate are legally unenforceable.

A recent English Court of Appeal judgment has reaffirmed that agreements to agree and agreements to negotiate are unenforceable as they lack certainty. Interestingly though, the Appeal Court over-ruled the High Court on the issue of intention. A contract cannot be made without the intention of the parties to create a legally binding arrangement. The Court of Appeal has now confirmed that, notwithstanding that an agreement may itself be unenforceable, the requisite intention to create a legal agreement may still be present. This ruling may indicate that a court will find that an intention to create legal relations exists where there is an agreement to agree.

Intention as a Requisite for Enforceability

In the context of commercial contracts, the intention to create legal relations is presumed. This presumption can be rebutted by the party asserting a lack of intention. In order to determine the intention of the parties a Court will look at the objective conduct of the parties, it will have regard to the relevant circumstances and, where it is in a commercial context, the Court will review the alleged agreement for business sense. But even where agreement between the parties is itself lacking on certain issues, the actions and words of the parties may be used to show the parties’ intention that agreement on those issues was not a prerequisite to the conclusion of a legally binding agreement.

The Barbudev v Eurocom Appeal Case

A recent English case, Georgi Barbudev v Eurocom Cable Management Bulgaria Eood & Ors [2012] EWCA Civ 548 examined this matter.

This case involved an appeal on a point of law to determine whether a side letter signed by both parties agreeing to negotiate an Investment Agreement in good faith was enforceable. The plaintiff, Georgi Barbudev, was the CEO and major shareholder in a successful Bulgarian cable company. Warburg Pincus Group made an offer to purchase the shareholding of the company from the plaintiff. During negotiations the plaintiff expressed a desire to invest in what would be a newly merged business postcompletion.

It became clear that the investment agreement would not be finalised before the share purchase agreement. To avoid a delay to completion, the parties executed a side letter providing 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 and we agree to negotiate the Investment Agreement in good faith with you”

The Court of Appeal concluded that this was an agreement to agree and as such was unenforceable as it lacked certainty. However, the court then found that the letter itself, notwithstanding that it was unenforceable, was sufficient evidence of the intention of the parties to create legal relations. The Court paid particular regard to:

  • the fact that the letter was drawn up by lawyers;
  • the wording was that of legal relations, for example “In consideration of…”;
  • that the letter contained a choice of law and a choice of jurisdiction clause and referred to relevant legislation; and
  • the confidentially provisions were intended to be binding whatever the status of the remainder of the letter.

Conclusion

This judgment illustrates that a court may regard whether an agreement was drafted by lawyers as evidence of an intention to create legal relations. Though the judgment is not binding in Ireland, it could be persuasive in an Irish court.

We would suggest that when drafting such ‘agreements to agree’ the parties should clearly specify which provisions are intended to be legally binding and which are not, in a similar fashion to how heads of terms are drafted.