Side letters and obligations to negotiate in good faith: are they binding?

A recent English High Court case revisits some familiar legal questions: are side letters legally binding, and are obligations to negotiate in good faith legally binding?

Barbudev v Eurocom Cable Managements Bulgaria EOOD and others [2011] EWHC 1560 (Comm) was decided on 17 June 2011 by Blair J.  The case is factually complex, and concerns investments in a Bulgarian cable TV company.  The interesting issues for this blog relate to a side letter, drafted by Freshfields (a leading UK law firm), that promised to give the claimant “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 with you.”

As Blair J pointed out, the side letter included standard contractual language that pointed to it being a binding contract, including references to consideration, choice of law, exclusion of third party rights, execution in counterparts, and so on.  He decided that the document did indicate an intention to create legal relations, which is an essential element of a binding contract.  He regarded the fact that the electronic document name (in Microsoft Word) was “comfort letter re ISA” (a name chosen by the Freshfields lawyer who drafted it), and that comfort letters are often not intended to be legally binding, was not relevant or admissible in this analysis.  (History does not relate whether the Freshfields lawyer concerned breathed a big sigh of relief on reading this part of the judgment.)

Despite the parties’ intention to create legal relations, the obligation quoted above was not enforceable, as it was an “agreement to agree”.  As was established in Walford v Miles [1992] AC 128, an agreement to agree is not legally enforceable.  Subsequent cases (notably Petromec Inc v Petroleo Brasileiro SA [2005] EWCA 891) indicated that the courts might be prepared to enforce an obligation to negotiate in good faith in limited situations, including in situations where the parties had already entered into a binding agreement.  In the Petromec case, Longmore LJ made several comments in favour of obligations to negotiate in good faith being enforceable.  These comments, which were obiter dicta and therefore not binding on subsequent courts, included the following:

“It is not irrelevant that [the obligation to negotiate in good faith in this case]  is an express obligation which is part of a complex agreement drafted by City of London solicitors and issued under the imprint of Linklater & Paines (as Linklaters were then known). It would be a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered. I have already observed that it is of comparatively narrow scope.”

Although he doesn’t quite say this, Blair J appears (eg by quoting the words of Edwin Peel, author of Contract Formation and Parties, at paragraph 97 of his judgment) to be rejecting Longmore LJ’s approach and siding with the traditional view as stated in Walford v Miles that “no agreement to negotiate in good faith is enforceable as a matter of English law”.

Conclusions:

  1. This is a High Court case, and therefore not as influential as a decision by the Court of Appeal or Supreme Court.  Having said that, Blair J is a highly respected commercial judge.
  2. Blair J confirms that there is no prior assumption as to whether a side letter or comfort letter is legally binding.  It is necessary to look at its terms and determine the legal effect in each case.
  3. Blair J confirms that agreements to negotiate in good faith are not binding under English law.

Good Faith, by Rene Magritte

Anecdote alert: when IP Draughts was a pupil barrister in 1983-4, his pupil master had a trial in which William Blair (now Blair J) was the barrister on the other side.  William Blair was described to IP Draughts as “the brother of Tony Blair, who is active in Labour Party politics”.  IP Draughts had never heard of Tony Blair, so this didn’t mean much to him.

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Filed under Contract drafting, General Commercial

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