No faith in the enforceability of agreements to negotiate in good faith

Finance brief - October 2012

• Proposed changes to the registration of charges with Companies House
• Key Issues to be aware of when enforcing against Personal Guarantors
• Non-UK borrowers and issues of security, COMI, administrators and receivers
• Can a private banker witness a customer's deed?
• No faith in the enforceability of agreements to negotiate in good faith

It has long been a principle of English law that an agreement to agree will be unenforceable (Walford v Miles (1992)), however what has been less clear is whether an agreement to negotiate in good faith would be considered within this category or not.

The recent case of Barbudev v Eurocom Management Bulgaria EOOD & Ors (2011) involved a side letter to a Share Purchase Agreement which purported to offer the purchaser (Mr Barbudev) the opportunity to invest in the newly merged entity on terms to be agreed in an Investment and Shareholders Agreement. The side letter provided that the seller would "negotiate in good faith" and it also set out some of the key terms of the investment (including setting a minimum figure for the consideration as "not less than €1.65m"). Of course, no agreement was ever actually reached and Mr Barbudev was not given the chance to invest, leading him to seek to rely upon the side letter as an enforceable contract.

The High Court held that the side letter was not a legally enforceable contract. Crucially, the conclusion reached was that there should be no distinction between an agreement to agree and an agreement to negotiate in good faith. A determining factor in reaching this decision appears to be that the key terms of the agreement had not in fact been fixed in the side letter – the side letter referred to consideration of not less than €1.65m, which was not certain enough to allow the courts to enforce the agreement.