Side letters need clear terms to ensure they are legally binding
A recent Court of Appeal decision upheld a High Court decision in which a side letter entered into between parties to a share purchase agreement was held not to be a legally binding agreement.
In GV Barbudev versus Eurocom Cable Management Bulgaria Eood & Others the Court of Appeal had to consider whether a side letter dated April 12, 2006 between the parties to the court action was legally enforceable by Mr Barbudev.
Mr B, a Bulgarian businessman, was the major shareholder and CEO of a large cable company in Bulgaria. During the negotiations to sell the shares Mr B made it clear to the purchaser that he wanted to reinvest some or all of the consideration he obtained into the purchaser's new merged business.
Negotiations followed on the terms of the share purchase agreement and discussions were also ongoing in relation to the share Mr B would receive in the business following completion of the sale.
One of the conditions in the agreement to be fulfilled before completion was the entering into of the investment agreement.
This condition could be waived by Mr B and the other shareholders and was done so on the basis that negotiations were to continue on the investment agreement.
A side letter was entered into stipulating that the purchaser "shall offer [Mr B] 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".
The investment agreement was never signed.
Subsequently the purchasing entity was sold and Mr B instigated proceedings for losses sustained as a result of the failure by ECMB to honour the terms of the side letter.
The Court of Appeal found that there was an intention to create legal relations as could be seen from the language used in the letter.
It was drafted by lawyers and included many clauses found in legal contracts. However the court found that the letter was an "agreement to agree" meaning that it was unenforceable. The words "opportunity to invest in the company on terms to be agreed between us" was held not to be the language of a binding commitment.
Although the court didn't need to move on the issue of whether the terms of the letter were sufficiently certain, which is a requirement for a legally enforceable document, the court expressed the view that the terms were not certain.
Many side letters are composed hastily which can lead to mistakes. However, even as in this case where the letter was composed using legal language, it failed for Mr B as the terms of the deal were not set out sufficiently and clearly enough in the letter.
It seems the lesson to be learnt from this case is that where parties intend for a document to be legally enforceable it must be drafted not only to create legal relations but also with clear and certain terms.
Celia Worthington, senior partner of the Commercial Department of Worthingtons Solicitors Belfast