Risky communications during commercial negotiations

26 September, 2012

When entering into any commercial arrangement, it is important to carefully consider the legal effect of any communications at all stages of the negotiation.  If written communications are intended to be non-binding, the parties should make this sufficiently clear from the outset.  The two recent Court of Appeal decisions discussed below demonstrate the potential unintended effects of written communications during commercial negotiations.

 

Creating an enforceable guarantee agreement by email

Section 4 of the Statute of Frauds Act 1677 (Statute of Frauds) provides that a guarantee agreement must be in writing and signed by either the guarantor themselves or a person authorised by them.  In Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd and another the court held that a sequence of emails signed informally by the parties during negotiations were capable of creating an enforceable guarantee agreement.

 

The facts

SMI agreed to enter into negotiations with Ocean Group to charter a vessel through SMI’s chartering arm, Trustworth Pte Ltd (Trustworth). The email negotiations referred to the contract being “fully guaranteed by SMI”.  It was anticipated that a final agreement would be drawn up, but this was never produced.  Eventually Trustworth and SMI refused to take delivery of the vessel, claiming that there was no enforceable contract or guarantee in place.

 

The decision

The court held that an “agreement in writing” pursuant to section 4 of the Statute of Frauds could be set out in a series of documents or e-mails, provided that the parties intended to be bound by the agreement.  In this case, it did not matter that the parties intended that a formal agreement would be drawn up in the future. The court also found that a first name, initials or nickname could constitute a valid signature.

Although the facts of this case are specific to the shipping industry, the decision acts as a warning to anyone entering into a commercial arrangement where contractual negotiations are mainly conducted by email.  In order to minimise the risk of unwittingly creating enforceable obligations, the parties should always state that negotiations are ‘subject to contract’, and ensure that any subsequent behaviour does not suggest otherwise.  If terms are agreed via an exchange of communications, the parties should ensure that a final version of the agreement is drawn up and signed before performance of the contract commences.

Can the terms of a side letter be legally enforceable?

When determining whether an enforceable contract exists between two commercial parties, there is a rebuttable presumption they intended to create legal relations.  In Barbudev v Eurocom Cable Management Bulgaria EOOD and other the court found that a side letter, despite being an unenforceable ‘agreement to agree’, still evidenced the parties’ intention to create legal relations.

 

The facts

Mr Barbudev had been in negotiations with Warburg Pincus to sell them his company, Eurocom. Warburg Pincus intended to merge Eurocom with another company it had acquired.  It was envisaged that Mr Barbudev would have the right to purchase up to 10% of the company following the merger.  A side letter was prepared to give Mr Barbudev assurance that he would have the opportunity to invest in the company.  Following the execution of both the share purchase agreement and the side letter, Warburg exercised its right to waive the condition to enter into the investment and shareholders’ agreement meaning that Mr Barbudev lost the opportunity to invest in the merged company.  Mr Barbudev issued proceedings for damages.  The issue in dispute was whether the terms of the side letter constituted a legally enforceable contract.

 

The decision

The Court of Appeal found that the parties did intend to create legal relations (which is one of the requirements for a legally binding contract).  Aikens LJ referred to the fact that the letter: was drafted by lawyers; contained the language of legal relations, such as “in consideration of”; referred to boilerplate clauses, such as the Contract (Rights of Third Parties) Act 1999; and contained confidentiality provisions. Despite this, the court held that the side letter was an unenforceable ‘agreement to agree’, as many terms of the investment were still to be negotiated.

The decision demonstrates the need for caution when drafting documents such as heads of terms or letters of intent, as the courts appear to be willing to find an intention to create legal relations.  The parties should ensure that documents of this nature, which contain provisions which are intended to be non-binding, make it clear on the face of the document which provisions are still to be negotiated (and are as such ‘subject to contract’) and which terms are intended to be legally enforceable (such as the confidentiality provisions).  Also, where a side letter or other document is intending to form a binding contract, the parties should ensure that the terms are sufficiently precise to avoid the document being an unenforceable ‘agreement to agree’.

 

Reviewed in 2015