Side letter; obligation to negotiate in good faith

Barbudev v Eurocom Cable Management Bulgaria

Side letter

Here the seller of shares was given a side letter by the buyer entitling him to have an investment stake in the purchasing company and the seller proceeded to sell on the basis of a share sale and purchase agreement. The buyer declined to honour the side letter and the question arose as to its enforceability.

The Court found that the side letter did not amount to a legally enforceable contact. On the facts, the letter constituted only an agreement to agree, which was unenforceable. Even though some key terms had been included in the letter, and although the parties had agreed in principle, there was no finality. Further, some essential terms had not been addressed by the side letter.

Duty to negotiate in good faith

The court went on to comment about purported obligations to negotiate in good faith saying:

  • an agreement to negotiate in good faith without more is always unenforceable in English law;
  • an agreement to negotiate in good faith may be enforceable if the parties have set out objective criteria, or machinery for resolving any disagreement, but in those circumstances the reality is that the court enforces the prescribed resolution and is not enforcing the agreement to negotiate; and
  • an otherwise enforceable agreement that contains an agreement to negotiate in good faith over additional terms does not become unenforceable as a whole because of the agreement to negotiate, but the agreement to negotiate is not enforceable.

In a Court of Appeal case in 2005 the court considered that if the parties had taken the trouble to include an obligation to negotiate in good faith in a contract drafted by lawyers, the courts should be slow to conclude that the obligation was without legal substance.

The comments in this case and the earlier CA case were both unnecessary to the decision (obiter) so the law is uncertain in this area, even if this type of obligation is relatively common.

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