Barbudev v Eurocom Cable Management Bulgaria Eood & Ors

Commercial parties may intend to create legal relations without making every contemplated obligation enforceable. The court must identify objectively both whether legal relations were intended and the nature of the obligations actually assumed.

An undertaking to offer an investment on terms yet to be agreed, coupled with an obligation to negotiate those terms in good faith, is an unenforceable agreement to agree. A contract also fails for uncertainty where the parties contemplated a detailed investment and shareholders’ agreement but left essential provisions governing their relationship unresolved. Agreement on a minimum investment and percentage shareholding will not cure the omission of those critical terms.

The appellant sold his interest in a Bulgarian cable business to an entity associated with the respondents. He wished to reinvest part of the proceeds for a 10% interest in the merged business. A signed Side Letter said that he would be offered an opportunity to invest on terms to be agreed in an investment and shareholders’ agreement, which the parties would negotiate in good faith.

Blair J held in the Commercial Court, [2011] EWHC 1560 (Comm), that the Side Letter was an unenforceable agreement to agree, lacked essential terms and did not create enforceable investment rights. The appellant challenged that conclusion and an adverse finding that no collateral oral assurance had been given. The central questions were whether legal relations were intended, whether the Side Letter created a binding investment commitment, and whether its terms were sufficiently certain.

1. Appeal dismissed. Aikens LJ, with whom Lloyd LJ and the President of the Queen’s Bench Division agreed, upheld the finding that no oral assurance created a collateral contract. The trial judge’s conclusion depended principally upon his assessment of oral evidence. An appellate court could intervene only if the conclusion resulted from a fundamental evidential error, was unavailable on the evidence or was unreasonable. None of those grounds was established.

2. The Court disagreed with the judge on intention to create legal relations. The Side Letter had been drafted by solicitors and used contractual language. Its reference to the Contracts (Rights of Third Parties) Act 1999, its English governing-law clause and its enforceable confidentiality provisions objectively demonstrated the requisite intention. That conclusion did not establish an enforceable right to acquire the investment. Intention to create legal relations and enforceability were distinct questions.

3. The agreement was contained solely in the Side Letter, construed in its commercial setting. The letter promised an opportunity to invest “on the terms to be agreed” and required good-faith negotiation of the future investment agreement. This was no more than an agreement to agree. Even the stated investment terms were open: the investment was to be not less than €1.65 million, while the percentage and monetary amount could potentially increase. Such an agreement was unenforceable under Walford v Miles [1992] 2 AC 128.

4. The Side Letter also failed for uncertainty. The parties contemplated an investment and shareholders’ agreement regulating the relationship between majority and minority shareholders, rather than a simple sale of shares for an agreed price. Essential matters remained unresolved, including arrangements for good and bad leavers, exit and buy-out rights, put and call options, and tag-along and drag-along provisions. A minimum investment and minimum shareholding were insufficient to make that contemplated relationship workable and certain.

5. The Side Letter therefore conferred no enforceable investment right. The alternative issue whether the later Final Protocol released any such right did not arise.

1. Court of Appeal (Civil Division): In [2012] EWCA Civ 548, dismissed the appeal. It disagreed with the trial judge on intention to create legal relations but upheld his conclusions that the Side Letter was an unenforceable agreement to agree and was insufficiently certain.
2. Commercial Court: Blair J, in [2011] EWHC 1560 (Comm), held that the Side Letter did not create an enforceable investment contract. He also found that no collateral oral assurance had been given.