Side letter confirmed as non-binding agreement to agree
BARBUDEV v EUROCOM CABLE MANAGEMENT BULGARIA (CA) [2012]
The Court of Appeal (CA) confirmed that a side letter was a non-binding agreement to agree but, contrary to the High Court judge, found that the letter did show an intention to create legal relations, which is one of the necessary elements for a contract to be formed.
Facts:
See September 2011 for the facts of this case. B appealed the decision that the side letter he and E had entered into was unenforceable. The CA dismissed the appeal and rejected B’s claim for over €5m in damages against E.
Decision:
- There were three issues for the CA to look at which the previous Court had considered:
- whether there had been an intention to create legal relations;
- whether there was an agreement to agree; and
- whether the terms were sufficiently certain.
- Intention to create legal relations - although the side letter was not found to be binding, the CA said there was clearly an intention to create legal relations for the following reasons:
- its language evidenced this intention, using the language typical of a binding contract “in consideration of you agreeing to enter into...”;
- there was a reference to the Contracts (Rights of Third Parties) Act 1999 and a statement that the letter would be governed by English law; and
- the parties clearly intended that the confidentiality undertakings in the letter would be contractually enforceable between them, whatever the status of other parts of the letter might be.
- Agreement to agree - the CA went on to look at whether the side letter was just an agreement to agree which, under English law, is not enforceable. It said it was an agreement to offer B "the opportunity to invest in the Purchaser on the terms to be agreed between us". That was held not to be the language of a binding commitment, and no amount of taking account of the commercial context and B’s intention could make it so. The side letter made it clear that the terms of the investment contract were not agreed; they were to be negotiated "…in good faith”.
- Sufficiently certain terms - the wording that B could invest an aggregate amount of "…not less than €1,650,000…" meant that he could invest more than this and so the CA held the sum to be invested, which was one of the key parts of the agreement, was not sufficiently certain.
Points to Note:
- If all of the essential elements of a contract are not present, such as certainty of the essential terms, then ‘agreements’ will not be enforceable, no matter what they are called or how closely they resemble a formal written contract. The label attached to a document carries little or no weight. It is the substance of what is contained within a document which is important.
- Equally a statement that it is the intention of the parties that a side letter is to be binding will not be conclusive if any of the required elements for a binding contract are missing.
- Conversely, if all of the essential elements required to form a contract are present then a binding contract may come into force even if negotiations are continuing in relation to certain aspects. This will particularly be the case where the parties begin to act as though a contract does exist.
- Therefore great care needs to be taken to ensure that when agreeing relatively informal ‘side letters’, ‘heads of agreement’, ‘letters of intent’ and the like that the documentation properly and clearly reflects the parties’ intentions and has the desired effect, whether to create a binding contract or not, as the case may be.