It can sometimes be tempting to agree to negotiate in good faith an issue that could not be resolved before a deal closing. The problem, however, is that such an agreement may not be legally enforceable in English courts without taking great care.
For example, during negotiations for the sale of Georgi Velichkov Barbudev's Bulgarian cable company, Eurocom Plovdiv EOOD, to Warburg Pincus, it was anticipated that Barbudev would be given an opportunity to invest in the new business. The parties agreed in an English-law side letter drafted by Warburg Pincus' lawyers that the terms of an investment agreement would be reached in good faith shortly after the closing. The investment would be "not less than €1.65 million [$2.04 million] ... which would represent 10% of the share capital [of the merged company]."
The investment terms, however, were not agreed to and the matter went to court. In its decision, the Court of Appeal required answers in the affirmative to the following questions, from which emerged certain legal principles.
Do the parties intend to be legally bound? The court said it will look at the language used in the agreement to decide what a reasonable person (one with the background knowledge reasonably available to those in their situation) would have understood the parties to have meant. All circumstances are considered within a commercial context.
It is possible for parties to intend to enter into a legally binding contract even if there are still further terms to be agreed upon between them. It does not necessarily follow that because an agreement is merely an "agreement to agree" that the parties cannot have intended to create a legally binding contract. In the Plovdiv situation, the side letter was drafted by lawyers and contained standard boilerplate provisions, and the court concluded that the parties intended to create legal relations.
Is the agreement merely an agreement to agree or an enforceable contract? This is largely a question of fact. The court ruled against Barbudev on this question since it was very clear that key commercial terms had not been documented but left by the parties to be negotiated later. Thus, the side letter was held to be no more than an agreement to agree and so was unenforceable.
Had Barbudev succeeded in showing that it was more than an agreement to agree, he would still have had a final hurdle to surmount.
Are the terms of the agreement sufficiently certain? The court will consider what the parties contemplated at the time the agreement was entered into to decide what needs to have been agreed upon for the contract to be sufficiently certain. In this case, the parties clearly contemplated the need for an agreement that involved more than just giving Barbudev an "opportunity to invest in the purchaser." But they were unable to reach a consensus on a myriad of issues that a sponsor would normally negotiate with a future manager and minority shareholder, and so the agreement also failed on grounds of uncertainty.
There are several lessons to be drawn from this case. If you have no choice but to "park" an issue for later negotiation, take significant precautions. Decide whether you intend to be legally bound. If that is your intention, the agreement should say so, should contain boilerplate content and should include a governing law and jurisdiction clause -- although whether parties intend to be legally bound will be judged against an objective standard. If you do not intend to be legally bound, the agreement should clearly say so and spell out that it is "subject to contract" and "nonbinding."
Also, set out all necessary heads of terms required for the particular subject matter so that the contract should not be construed as a mere agreement to agree. Finally, ensure that those heads of terms are clear, detailed and unambiguous such that the contract should not fail for uncertainty.
A practical tip is to use an additional incentive to ensure that the agreement is complied with. For example, a lender might add an event of default to its loan agreement that would trigger if the matter in question has not been satisfactorily resolved by a specified date. n
Susan Whitehead is a senior consultant at Hogan Lovells in London.