The judgment of the English Court of Appeal in the case of Barbudev -v- Eurocom Cable Management Bulgaria EOOD (reported at  2 All ER (Comm) 963) has recently revisited the legal treatment of the contractual concept of "agreement to agree" in English law and to that extent has been responsible for making English legal history.
The case pitted the Warburg Pincus private equity group ("WPG") (represented by Freshfields Bruckhaus Deringer and an up-and-coming commercial barrister, Conall Patton of One Essex Court against Mr Georgi Barbudev, who in the words of the Court had "built up a successful cable television and internet business in the Plovdiv area of south central Bulgaria in the years 1995-2004", called Eurocom Plovdiv EOOD ("EP"), which became Bulgaria's second largest cable television business. In November 2005, Mr Barbudev concluded two Term Sheets with WPG which gave the latter approximately 6 months of exclusivity of negotiation for the acquisition of Mr Barbudev's stake in EP. The Term Sheets were said to be governed by English law and other than for the exclusivity clause, were not intended as binding.
The acquisition of EP was part of a strategy for the private equity acquirer of consolidating a number of cable TV assets, and Mr Barbudev became interested in remaining invested in the enlarged business to which EP would have played the role of a bolt-on. The parties discussed his investing some €1.65 million for what was mooted as a 10% stake of the enlarged company.
In the period up to April 2006, Mr Barbudev and WPG exchanged draft Share Purchase Agreements (SPAs) but the problem for Mr Barbudev was that a clause had been inserted in the draft SPA, under which WPG was to be given the unconditional right to waive the execution of (in the language used between the parties, an Investment and Shareholders' Agreement (ISA)) as a condition precedent to a closing on the SPA.
As, several days before the intended closing date it became clear that an agreed draft of the intended ISA would not be produced by the intended date for signing, the idea emerged in discussions between Mr Barbudev, WPG's representative and WPG's Bulgarian lawyer of a "Side Letter" which would provide some comfort to Mr Barbudev in the intervening period between execution of the SPA and the possible execution of an ISA.
At the date of execution, WPG and Mr Barbudev executed also the Side Letter, which had been drafted at WPG's request by Freshfields. It appears that at the time Mr Barbudev was not represented by a lawyer versed in English law.
In the course of time, Mr Barbudev was disappointed in his expectation that he would be allowed to invest in the consolidated cable TV entity on the terms discussed in November 2005-May 2006 or indeed on any others.
Following an onward sale by WPG of the merged entity, of which Mr Barbudev heard in May 2009, and following also the settlement of various outstanding matters between Purchaser and Seller in a Final Protocol in 2008, which appeared to contain a comprehensive waiver of claims by Mr Barbudev against the WPG entities. It appears that Mr Barbudev was once again not assisted by anyone acquainted with English law, though the question of the effect of the release was not ultimately central to the Court of Appeal decision.
Once Mr Barbudev had found of the intended disposal by WPG of their Bulgarian asset, and that he was accordingly not likely to have the opportunity to treat further with the group and hope on a possible commercial advantage, he perhaps felt that he had nothing more to lose since he issued proceedings in the English High Court, alleging that the Side Letter had created a valid contractual agreement, and that its breach had resulted in compensable losses to him.
Following a 7 day Commercial Court hearing before Mr Justice Blair at which Mr Barbudev testified and was found to be a mostly reliable witness, a judgment followed in favour of WPG.
On appeal, the Court of Appeal (in the speech of Lord Justice Aikens, at para , summarised the issues before it as follows:
Logically the first issue is whether the judge erred in concluding that Mr Feuer did not give Mr Barbudev an oral assurance before Mr Barbudev signed the Side Letter. The appellant's case was that this assurance was to the effect that the Side Letter was a solution to Mr Barbudev's concerns about clause 6.5 of the SPA terms and that the Side Letter was like a separate contract to protect his right to invest in the new merged business. If that issue succeeds, then it would amount to a collateral contract and could be relied on by Mr Barbudev. If it fails then the second issue is whether the parties intended to create legal relations by virtue of the Side Letter, set in its commercial surroundings. The third issue concerns the nature of the Side Letter, in its context: was it an "agreement to agree" or was it an enforceable contract giving Mr Barbudev rights to purchase a stake in the merged ECMB? Fourthly, if the Side Letter was, in principle, a binding contract giving Mr Barbudev such rights, was it nevertheless unenforceable because of uncertainty of terms?
Unfortunately for Mr Barbudev, he failed on the first issue. The Court of Appeal found that the question of whether there had been an oral assurance and therefore a collateral contract had been a matter of a primary finding of fact and that none of the possible grounds for overturning the finding of the trial judge had been established ("To overturn it the appellant has to demonstrate that the judge's conclusion resulted from a fundamental error concerning the evidence; that his conclusion was not possible on the evidence or that it was unreasonable." (paragraph ).
However, the Court also disagreed with Blair J. in part: the parties had intended to create legal relations through the Side Letter (this was an overall conclusion based on the existence of clauses both parties clearly intended as binding (eg, the confidentiality provisions); the hiring of a law firm to draft; the use of the language of legal relations and the dealing with specific legal questions which would be typical of a binding contract (rights of third parties and choice of law language) (para. ).
However, at the same time, the Side Letter's core terms had been phrased in such a way that Mr Barbudev had obtained no more than a mere agreement to agree, which English law had long taken to be unenforceable. Its operative clauses, cited at para. of the Court of Appeal judgment referred to "...terms to be agreed between us...", "...we agree to [...] negotiate in good faith with you..." and "...agree to invest an aggregate amount of not less than..." fatally undermined Mr Barbudev's position.
Although the Court of Appeal had no doubt that the commercial context and Mr Barbudev's aims were such that he had intended to extract from WPG a binding promise to be allowed to invest, he had failed to and had instead signed up to a document of no effective legal value. This was somewhat strange given the finding that the parties had intended contractual relations: it would seem to follow that they had intended contractual legal relations but not (or at least not both parties) ones which could take the form of a form of contract recognisable in English law (ie, an "agreement to negotiate in good faith" or an "agreement to agree"). It is difficult to conceive what other form of legal relations the parties might have intended and if they had intended no specific species recognisable by the law, what they had intended.
Nevertheless, it is clear that the Court of Appeal felt constrained by the House of Lords authority (in Walford -v- Miles  2 AC 128) and related cases, and by the need to maintain certainty in the relations between commercial parties.
It also seems clear that Mr Barbudev would have done well to draft in appropriate legal advice at the time of negotiation. The law in the area which was eventually litigated is well-established, and the Court of Appeal was merely confirming and restating the position.
Had he been advised, Mr Barbudev (whose surname's Bulgarian etymology, as fate would have it, appears to derive from the name of a game of chance involving dice), probably would not have engaged in quite such a leap of faith. On the other hand, and even though one may feel sorry for Mr Barbudev who may have been outgunned, it seems that he had engaged in an exercise of wishful thinking to have attributed the force of a binding and meaningful agreement to a text which on its face merely promised negotiations (without, as the Court went on to find, fixing even some of the key goalposts, of which only the share Mr Barbudev was to hold and the minimum price he was to pay for it, were likely agreed).
The case did nothing to undermine the reputation which the English Court of Appeal has with commercial parties as a forum which gives a fair chance at having one's case heard and examined on its merits, but on the contrary - only strengthens it, including presumably with Bulgarian businesses. It does however underscore the importance of receiving appropriate professional advice which at its best can help commercial parties account properly for the implications of at least those - the majority - of legal issues which are well-settled in English commercial law.
Acquisition of City Center Sofia by Heitman Investment fund for €101.5m Acquisition of CCS
NBLO advised the investment fund Heitman European Property III on the €101.5m acquisition from Equest of the 'City Center Sofia', the most established and profitable urban shopping centre in Bulgaria. Since then, NBLO has been the sole provider of ongoing legal services to the Center, involving a variety of largely commercial property issues.
© New Balkans Law Office 2019