Side Letters in Commercial Transactions – Certainty as a prerequisite for enforceability: Barbudev v Eurocom Cable Management Bulgaria EOOD and others 
Recently heard in the High Court, this case arose following the acquisition of a Bulgarian cable television and internet business, Eurocom Plovdiv (‘EP’). The claimant, Mr Barbudev was the principal shareholder in EP. The defendants, part of the Warburg Pincus private equity group, entered into a share purchase agreement (‘SPA’) to which Mr Barbudev was a party, in order to acquire EP, intending to merge the business with another in its group. There were discussions in connection with Mr Barbudev reinvesting in the newly merged company, but during negotiations for the sale of the EP it was decided that it would not be plausible for the full terms of Mr Barbudev’s investment to be agreed and included in the SPA before the disposal of the EP was completed. The parties decided to address the reinvestment by entering into a side letter, which Mr Barbudev believed would “cast in stone” his opportunity to invest, albeit that the full terms were still to be finalised.
The side letter referred to the investment, stated that its full terms would be set out in a separate future agreement “on terms to be agreed” and that in determining those terms the parties would “act in good faith”. The number of shares which Mr Barbudev would be eligible to acquire was referred to, and the consideration which would be payable for those shares was expressed as “an aggregate amount of not less than £1.65 million”.
The form of agreement envisaged by the side letter had still not been finalised or entered into a number of years after its date, and Mr Barbudev brought proceedings to try to enforce what he believed were his rights under the side letter. The defendants however argued that the side letter was intended simply to provide comfort on what was then in discussion (in respect of a possible investment) and was not intended to be, nor could it be legally binding.
On the facts, the side letter was held to be unenforceable, being no more than an agreement to agree (it having long been established that such an agreement to agree is unenforceable). A commitment to pay a figure of 'not less than' a given amount and references to ‘terms to be agreed’, together with clearly absent key terms were all clear indications that, in respect of the investment, the certainty necessary for a binding contract, including the unambiguous intention to create legal relations was not in place when the side letter was completed.
The case provides a useful illustration of the paramount importance of certainty in all documents intended to have legal effect, and this is no less so in the case of side letters, which must set out clearly and definitely all essential terms if they are to be legally binding and enforceable. Whilst obligations to act in good faith are useful in a number of contexts they will not be construed as an obligation to reach agreement by negotiation in circumstances of uncertainty such as in this case.
If you would like more information about this topic, please contact John-Paul Martin