agreement to agree - Mills & Reeve LLP

briefing

September 2012

Going back to basics: ensuring your side letter is more than a mere “agreement to agree” The Barbudev litigation arises out of the negotiations and subsequent sale of Eurocom Plovdiv EOOD (EP), to the Warburg Pincus Group (WPG). In addition to negotiating a Share Purchase Agreement (SPA), it was agreed between the parties that an Investment and Shareholders Agreement (ISA) would be prepared allowing Mr Barbudev (CEO and major shareholder of EP) to obtain a stake in the new business that WPG intended to create. The SPA was to be conditional on the signing of the ISA, however, it was proposed that both parties should benefit from a right to unilaterally waive the same. As the opportunity to invest in the new entity was a key motivation for selling to WPG, the subject of the unilateral waiver became a disputed issue between the parties. When it became clear that either way, an ISA would not be ready for signature at the proposed date of signing of the SPA, the possibility of a side letter was discussed. While the side letter is reproduced in full in the judgment, for present purposes, the following issues (as highlighted by the Court of Appeal) are relevant: o

The side letter was drafted by WPG’s lawyers and circulated to all parties

o

The side letter contained legal terminology such as “in consideration of you agreeing to enter into”

o

There was reference within the document to the Contracts (Rights of Third Parties) Act 1999 as well as the inclusion of confidentiality terms which were intended to be binding whatever the status of other parts of the letter

o

Under the heading “Investment Agreement”, the side letter read as follows:

“In consideration for you agreeing to enter into the Proposed Transaction and to sign the Transaction Documents, the Purchaser 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”. (Emphasis added). Having rejected an initial submission regarding the oral assurances or otherwise put to Mr Barbudev in respect of the side letter, the Court of Appeal was left to determine two points: first, was there an intention to create legal relations and if so, secondly, whether the side letter when put in context was an enforceable contract or a mere “agreement to agree”. 1

The court held that it was clear from the terms of the side letter that the parties had had the requisite intention to create legal relations at the time of its creation. Unfortunately for Mr Barbudev however, this was not the end of the matter. When considered in more detail, the court felt that the terms of the side letter failed to demonstrate the language of a “binding commitment” and “no amount of taking account of the commercial context and Mr Barbudev’s concerns and aims can make it so”. Accordingly, the court had no option other than to declare that the side letter was no more than an “agreement to agree” and as such, unenforceable at law. The failure to replicate this intention in the drafting overrode any belief of the parties as to what the side letter represented. Despite having reached the conclusion that there was nothing more than an agreement to agree in existence between the parties, the Court of Appeal continued on to consider whether or not the side letter, had it been capable of enforcement, contained sufficiently certain terms. On this point, the court felt that the terms of the side letter were not sufficiently certain to constitute an enforceable contract. In particular, key terms such as good and bad leaver provisions, minimum sums of investment, and “tag along” and “drag along” provisions had not yet been considered by the parties. So where does this leave the humble side letter? It is clear from the decision in Barbudev that simply passing a side letter to a solicitor to draft will not create an enforceable contract. If either party intends to rely on the side letter as a contractual document in the future (as is almost invariably the case), those drafting must be certain that the document in front of them would pass the first year law student’s test of what a true contract should contain. In particular: o

Is the language used illustrative of an already agreed outcome or an opportunity to negotiate?

o

Could the agreements reached be easily changed by either party?

o

If using figures, is there an opportunity for that figure to change (even if upwards-only)?

o

Does the agreement cover all issues or skeleton terms only?

o

And not to forget the fundamental question – did both parties intend for the document to be relied upon as a legally binding agreement?

Get in touch Junaid Haroon Senior Solicitor T +44(0)121 456 8240 [email protected]

www.mills-reeve.com T +44(0)844 561 0011 Mills & Reeve LLP is a limited liability partnership authorised and regulated by the Solicitors Regulation Authority and registered in England and Wales with registered number OC326165. Its registered office is at Fountain House, 130 Fenchurch Street, London, EC3M 5DJ, which is the London office of Mills & Reeve LLP. A list of members may be inspected at any of the LLP's offices. The term "partner" is used to refer to a member of Mills & Reeve LLP. The contents of this document are copyright © Mills & Reeve LLP. All rights reserved. This document contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances. Where hyperlinks are provided to third party websites, Mills & Reeve LLP is not responsible for the content of such sites. Mills & Reeve LLP will process your personal data for its business and marketing activities fairly and lawfully in accordance with professional standards and the Data Protection Act 1998. If you do not wish to receive any marketing communications from Mills & Reeve LLP, please contact Suzannah Armstrong on 01603 693459 or email [email protected]

2