Comfort letter: Court of Appeal analyses its legal effect

Interesting fact: With the accession of Bulgaria to the European Union on January 1, 2007, Cyrillic became the third official alphabet of the EU.

Last Summer, we commented on an English High Court case, Barbudev v Eurocom Cable Management Bulgaria Eood and Others [2011] EWHC 1560 (Comm)  in which a “comfort letter” was held not be legally binding.  The High Court’s decision was appealed, and the judgment of the Court of Appeal ([2012] EWCA Civ 548) has now been published.

The Court of Appeal has confirmed the substance of Blair J’s judgment at first instance, while quibbling with one of his comments.  Blair J had commented that:

I cannot myself see that an agreement can be intended to create legal relations if it is unenforceable in its entirety.

The Court of Appeal disagreed with this comment, but agreed with the rest of Blair J’s analysis and his conclusions.

To recap briefly on the facts of the case, Blair J summarised them as follows:

This claim arises out of the acquisition of a Bulgarian cable television and internet business… In summary, the claimant, Mr Georgi Barbudev, who founded the business, claims that the group failed to honour a side letter which he says promised him a ten percent share in the combined business formed by the acquisition. The central issue in the case is whether the side letter created a binding contract. He says it did. The defendants say that it was a non-binding agreement to agree.

The Court of Appeal confirmed Blair J’s judgment that, in order to decide whether the letter created a legally binding contract, it was necessary to analyse the matter in several stages:

  1. Is there an intention to create legal relations (one of the required elements of a binding contract under English law)?  In this case, the Court of Appeal said there was such an intention, as could be seen partly from the formal legal language of the letter (the text of which is included as an appendix to the Court of Appeal’s judgment at the link above).
  2. Did the terms amount to an “agreement to agree”, which would mean they were unenforceable?  The Court of Appeal commented that “It is an agreement to offer Mr Barbudev “the opportunity to invest in the Purchaser on the terms to be agreed between us”. That is not the language of a binding commitment and no amount of taking account of the commercial context and Mr Barbudev’s concerns and aims can make it so.”
  3. As Mr Barbudev failed on item 2 above, it was not necessary for the Court to move on to the third point, which was whether the terms of the letter were sufficiently certain for them to be binding (another of the essential requirements for a binding contract under English law).  However, as the Court had heard argument on the point, it was prepared to give its view.  In the Court’s judgment, “…the essential terms for what the parties contemplated, viz. an investment and shareholder agreement, were not dealt with in the Side Letter. So even if, contrary to my view, the Side Letter was more than an “agreement to agree” it was not sufficiently certain to be an enforceable contract.”

IP Draughts cannot help thinking that commercial parties may be lulled into a false sense of security by an impressively legal-looking document that uses legal terminology such as “consideration”, and has many of the features of a binding contract, yet lacks other essential elements and so is not legally binding.  The obvious riposte to this thought is that parties who choose the law of country X for their contract should take advice from a lawyer who is qualified in the laws of country X.  In reality, this doesn’t always happen.

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Filed under Contract drafting, Legal Updates

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