Court decides a side letter was merely an agreement to agree

The High Court in Barbudev v Eurocom Cable Management Bulgaria EOOD & Others [2001] EWHC 1560 (Comm) has recently considered whether a side letter was a legally binding contract or an agreement to agree.

Side letters may range from non-binding comfort letters to binding collateral contracts. It is often the case in commercial transactions that non-binding side letters are used to “smooth-over” contentious areas, however this case illustrates that if parties to a side letter intend on it being binding they must be very clear about its wording and purpose.

The parties in this particular case entered into a corporate agreement and also drafted a side letter to that agreement. Relations broke down between the parties, and the Court was asked to consider whether the side letter constituted a legally enforceable contract, or if it was no more than an agreement to agree.

The judge ruled that the side letter in this case was not legally enforceable. In reaching his decision the judge said that there were three things to consider, namely:

• whether there had been intention to create legal relations;
• whether there was an agreement to agree; and
• whether there was sufficient certainty of terms.

The judge commented that although in principle these were distinct questions, in practice they were in fact interlinked. The judge held that there was insufficient certainty of terms in the side letter. Examples of this were that the terms lacked certainty as to how the combination of shareholder debt and shares was to be made up, and that it was deemed that the parties were looking to agree other terms later.

The judge also commented that the specific terms were not comprehensive given the presence of the words: “such terms shall include, without limitation, the following…” which further added to the uncertainty. The judge concluded that this particular side letter was nothing more an agreement to agree, as there was insufficient certainty of terms and the parties could not have intended to create legal relations on that basis.