Barbudev v Eurocom Cable Management Bulgaria EOOD & Ors

This claim arises out of the acquisition of a Bulgarian cable television and internet business by the first defendant, which was then owned by the third defendant, which is a member of the Warburg Pincus private equity group. 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. There is also an issue as to which of the defendants were parties. The defendants further argue that the terms of the side letter were in any case performed, alternatively that any claim has been settled, both of which the claimant denies. Pursuant to an order made earlier in the proceedings, and except for one point, the trial has been on liability only.

The oral evidence came from eight witnesses including the claimant himself. I shall deal with my assessment of the witnesses in the course of my factual findings. There was a considerable amount of evidence given as to the course of negotiations, which was said by the claimant to be admissible on various grounds, including the claimant’s case that the side letter agreement was part oral, and part written, and that it bound parties other than the signatories. Admissibility also turned on claims in respect of estoppel and rectification. Counsel for the defendants took the position at the outset of the trial that the only realistic approach was for the court to hear the evidence adduced by the claimant, and for admissibility questions determined in the light of it, and the trial proceeded on that basis. In the event, there are relatively few issues that turn on admissibility. The facts as I find them are as follows.

The claimant, Mr Barbudev, has a degree in mathematics, and before 1991 (the time of Bulgaria’s transition from the Communist system) he was a teacher. In 1995, he founded a cable television and internet business called Eurocom Plovdiv EOOD (“EP”). He was chairman of the Association of Bulgarian Cable Operators from 2001 to 2008. As its name suggests, EP was based in Plovdiv, Bulgaria’s second largest city, which is about 130 km from Sofia. Mr Barbudev was the CEO, and owned 40% of EP. Another 40% was owned by Mr Stefan Neytchev, with the remaining 20% split equally between ten individuals, including Mr Svetlin Kapitanov, who gave evidence for the claimant at trial. By 2004, EP had become the second largest cable company in Bulgaria, and Mr Barbudev and the other owners of EP were minded to sell the business, and it is plain that there was interest in such a sale from various sources.

One prospective purchaser was the largest cable company in Bulgaria, CableTEL AD, which was owned by an American company called Rumford Alliance Ltd (itself part of an investment group). Mr Barbudev says, and I accept, that CableTEL wanted to get into the Plovdiv region, and in late 2004, Rumford approached EP with an offer to acquire its shares for €17.5 million together with the right to acquire stock options worth €2 million. He was willing to accept this deal and to recommend it to his fellow shareholders. A preliminary agreement was entered into on 9 January 2005. After negotiations were underway, he says it was agreed that he would receive a 9% shareholding in the new business. He relies on this to support his case that the defendants entered into a similar agreement with him. This is in dispute, and I will return to the issue.

Mr Barbudev says that because there were twelve owners of EP, and for reasons of tax efficiency, Rumford wanted the purchase to be effected through a Dutch company. To accommodate this, over the course of 2005, and with the assistance of a Swiss law firm, Dietrich Baumgartner & Partner (“DB & P”), the prospective sellers formed a Belize company called Edmondson Property SA, whose bearer shares were held by Mr Barbudev and the other EP shareholders in the appropriate proportions. Edmondson acquired an off-the-shelf Dutch company called Tracer (Software) Europe BV, and the shareholders sold their shares in EP to Tracer. The individuals then assigned to Edmondson their right to receive the proceeds of the sale from Tracer which would materialise on the sale of the business to Rumford. Mr Barbudev says that these arrangements were not put in place to avoid paying tax in Bulgaria, and it appears that he has been upheld by the Administrative Court in Plovdiv in this regard.

The Warburg Pincus Group is the well-known private equity investment firm. All three defendants are (or at the material times were) members of the group. Around this time, the Warburg Pincus Group was also interested in investing in the Bulgarian cable market. Its first acquisition was a Sofia based operator called Eurocom Cable EAD. The first defendant, Eurocom Cable Management Bulgaria EOOD (”ECMB”), is a Bulgarian company incorporated in March 2005. It agreed to acquire Eurocom Cable on 9 March 2005 (doubtless following negotiations over a period of time conducted by Warburg Pincus). Completion under the agreement took place on 27 June 2005.

The second defendant, Warburg Pincus International LLC, is a Delaware company that carries on the Group’s business in the UK. The third defendant is a holding company within the group which at the material times held the shares in ECMB. The two individuals at Warburg Pincus most concerned with the present matter are Mr Joseph Schull, a senior figure within the Group who was (and is) a Managing Director with Warburg Pincus International, and Mr Robert Feuer, who was an Associate (later a Principal and now a Partner) with the company, and who handled much of the day to day dealings under Mr Schull’s supervision. Mr Feuer’s family has telecommunications interests in Hungary. Both men are based in London, having worked together on various acquisitions in Eastern Europe, and both gave evidence at trial.

On 7 July 2005, Mr Barbudev had a meeting with Mr Feuer and Mr Petyo Staykov (the CEO of ECMB) in Plovdiv, and negotiations for the sale of EP to Warburg Pincus then ensued, with a view to merging the company with its Eurocom Cable business (now held by the newly incorporated ECMB). To set the scene for what follows, it is Mr Barbudev’s case that he made it clear to Mr Feuer during their negotiations that any deal would have to be on the basis of his retaining an investment in the merged business. He says that Mr Feuer was aware of the fact that, under the proposed deal with Rumford, he was to receive a 9% interest in the combined EP/CableTEL business. On the defendants’ case, however, it was only towards the end of 2005 that discussions first began about Mr Barbudev being given an opportunity to reinvest some of the proceeds of sale of EP into the merged business.

The three key witnesses in this case have been Mr Barbudev, Mr Feuer and Mr Schull. In general, I have no doubt that Mr Barbudev and his fellow shareholders were, as they were entitled, trying to get the best terms possible for the sale of their shares from one or other of their suitors. Equally, Mr Schull and Mr Feuer were doubtless intent on paying as little as possible, and both of them are very experienced in this kind of deal. What has given rise to this litigation is a perception on the part of Mr Barbudev that he has been tricked out of a share in the resale of the business which he founded, and a perception on the defendants’ part that his claim is purely opportunistic.

In their closing submissions, the parties made considerable criticisms of the other’s witnesses, but in general, little in this case has turned on credibility issues, because there is ample contemporaneous documentation. Mr Barbudev was careful and generally reliable, even though I have not accepted his evidence in every respect. It is clear that a difficult relationship developed between him and the defendants, but although I can see that he may not always have been easy to deal with, I consider that the defendants have exaggerated the degree to which he was responsible for delays in the share purchase transaction (though they may have thought this at the time). Again, I regarded Mr Feuer as a generally satisfactory witness, though in one respect (explained below) contradictions in his evidence mean that I cannot give much weight to part of it. The claimant strongly criticised Mr Schull’s evidence, but whilst some of his complaints about Mr Barbudev did not match the facts, I was generally able to accept his evidence. Since criticism was also made of Mr Doris (the defendants’ solicitor), I should add that I regard this criticism as groundless.

I should also say something about the form of the witness statements, since Mr John Wardell QC criticised that of Mr Schull in that respect, on the grounds that he had not gone through the documents so as to provide a full and chronological account. The form of witness statements is specified in Practice Direction 32, and is the subject of important guidance in Section H of the Admiralty & Commercial Courts Guide (9th edition 2011). This emphasises that witness statements should be as concise as the circumstances of the case allow. The function of a witness statement is to set out in writing the evidence in chief of the witness, so far as possible in the witness’s own words. Excessive detail is unhelpful, and the content should be restricted to significant matters necessary for the resolution of the issues to be decided at trial. In the present case, there was no onus on Mr Schull (who had an overview role in the transaction) to give a detailed account of the history. It was up to the defendants to decide what he covered in his evidence in chief, though once called as a witness he was subject to cross-examination in the usual way. I reject the criticism that has been made in this regard.

Apart from the question of which prospective buyer was offering the best terms, Mr Barbudev says that he was concerned about the ability of Rumford to finance the CableTEL deal, and both Mr Schull and Mr Feuer in their oral evidence laid some emphasis on the same point, saying that Warburg Pincus was in much the better position to deliver financially. In the result, there was a period during which I infer that what amounted to parallel negotiations were going on. (Probably both prospective purchasers were aware of this though naturally each wanted to keep their respective negotiations confidential.) It is not altogether easy to follow the course of these negotiations, particularly over the October – December 2005 period, but in essence what happened was as follows.

By a subject to contract letter dated 29 July 2005, Warburg Pincus made a confidential “preliminary non-binding offer” to acquire 100% of the assets of EP for €18.5 million for its Eurocom Cable business. The letter was signed by Mr Schull as managing director of Warburg Pincus International LLC (the second defendant). It was expressed to be governed by English law. Clearly (so far as this was the claimant’s case) it did not envisage that Warburg Pincus International would itself make the purchase. It envisaged that the acquisition would be made via a holding company and that any required external funding would be fully underwritten by funds managed by Warburg Pincus. It also envisaged that Mr Barbudev would have an ongoing role in the enlarged business that would be created by merging EP with ECMB.

During September and October 2005, Mr Barbudev conducted negotiations with both prospective purchasers to see who could come up with a better offer. On or about 12 October 2005, Rumford and Edmondson entered into a “Preliminary Agreement” which provided for the sale of Tracer by Edmondson to Rumford for (on the claimant’s calculation) a consideration up to €21,130,000. The agreement recites that the purchaser had paid the seller a non-refundable deposit of €500,000. This had in fact been paid following the 9 January 2005 agreement (by this time the corporate structure of the EP shareholdings described above involving Edmondson and Tracer was in place). The purchaser had to show by 17 October 2005 that it had available the funds necessary to close the deal.

It appears that this deadline was not met, but for whatever reason Mr Barbudev and the owners of EP decided that they preferred to deal with Warburg Pincus. Given the issue at trial as to which entities were bound by the side letter, I should make it clear that at this stage I am using the term “Warburg Pincus” in a generic sense. Mr Feuer says, and I accept, that there was never any prospect of Warburg Pincus International LLC itself acting as purchaser if the acquisition went ahead. He says that the Group’s practice was to incorporate an acquisition vehicle for this purpose. (Initially the third defendant was contemplated in this case but ultimately the first defendant ECMB was used.) I do not consider that Mr Barbudev was under any misapprehensions in this respect. By now, (on the claimant’s calculation) a total of €22.5m was on offer from Warburg Pincus (inclusive of €500,000 which would be used to repay the Rumford deposit).

Mr Barbudev says, and I accept, that Mr Staykov (ECMB’s CEO) offered to provide assistance in drafting the termination letters that had to be sent to Rumford to call the CableTEL deal off. This was to be by way of help from Freshfields (Warburg Pincus’ London lawyers) and Borislav Boyanov & Co (their Bulgarian lawyers). The relevant letter was dated 1 November 2005 and signed on behalf of Edmondson by Dr Baumgartner of Dietrich Baumgartner & Partner (DB&P). Mr Barbudev says that Warburg Pincus was keen to bring that deal to an end as quickly as possible, and says that Mr Feuer has downplayed the significance of the CableTEL issue in his witness statement. Mr Feuer says that he did not see CableTEL as a real competitor, because he was aware that it lacked financial resources, the implication being that he had no pressing motive to agree Mr Barbudev’s demand for a share of the merged business. I find that explanation unconvincing. It is clear that (to use Mr Horvath’s words) EP had been identified as one of Warburg Pincus’ key acquisition targets, and I am satisfied that the firm was determined to acquire it if it could do so on acceptable terms. (Mr Horvath was CFO of the third defendant and became manager of ECMB. He gave evidence at trial for the defendants.) As he says, no deal could be done without Mr Barbudev being on board. To anticipate, as late as 12 December 2005 a counter offer was made by the interests standing behind Rumford. The breaking off of the negotiations with Rumford led to what I infer was an acrimonious dispute that was not resolved until June 2007.

A few days after the termination letters were sent (8 November 2005 is the date given in the claimant’s chronology), a Term Sheet dated 27 October 2005 was executed agreeing the sale of EP to the third defendant F.N. Cable Holdings B.V. (“FNCH”). With some exceptions, the terms were stated not to be legally binding. An exception related to the exclusivity period during which in effect the sellers agreed only to deal with Warburg Pincus. The effect of this document and a further Term Sheet dated 22 November 2005 was that this period expired at latest on 15 April 2006. (Both Term Sheets were expressed to be governed by English law.) I need not determine the precise position as to when the exclusivity period began under the Term Sheets, or the dispute at trial as to whether Mr Barbudev continued to negotiate in breach of these terms (which is academic). It is however necessary to note that the further Term Sheet provided that the terms expressed to be binding would come into force only upon the provision by the sellers of a declaration in writing supported by reasonable evidence that they were not prevented by any contract from fulfilling the relevant conditions. The reason, Mr Feuer says, was his concern about any commitments that the sellers might have entered into with Rumford. I am satisfied that the declaration was an important step in the acquisition from the buyers’ point of view.

It is around this time that the documents begin to refer to the issue at the heart of the present dispute, namely the question of Mr Barbudev’s stake in the merged business. So far as the CableTEL deal was concerned, emails and attachments dating from 10-12 December 2005 make reference to a 9% shareholding.

So far as the Warburg Pincus deal was concerned, the first reference is in an email of 8 December 2005. By email of 11 December 2005, Mr Feuer emailed Mr Barbudev “in relation to what a potential transaction might look like, should you wish to re-invest in the Bulgarian cable business alongside Warburg Pincus”. He proposed that Mr Barbudev would remain manager in Plovdiv. ECMB would acquire the company for a cash consideration of €20m, a further deferred consideration of €2m payable a year later. Mr Barbudev would re-invest €4m million, being half his immediate cash proceeds, in return for a 10% holding in the combined Bulgarian business. The parties would enter into call and put options arrangements by which a quarter of Mr Barbudev’s shares could be bought out on the anniversary of the sale over a four year period. The parties would enter into “customary tag along and drag along arrangements, which would regulate the process of exit from the investment”.

There was a meeting in Sofia the following day (12 December 2005) between Mr Feuer and Mr Barbudev. It is the claimant’s case that agreement in principle was reached between them to the effect that Mr Barbudev was to have a 10% participation in the combined business, and as to the fair approach to valuation. The defendants point out that the meeting is not referred to in his witness statement, but there is some support for the claimant’s case in the contemporary documents in the form of an email from Mr Yordan Naydenov, who was the Borislav Boyanev & Co lawyer in Sofia acting for Warburg Pincus. On 13 December 2005, he emailed Mr Barbudev to the effect that he was “glad that you reached an agreement with Rob [Feuer] concerning the future of the deal and your participation”. The claimant’s case is that this was what broke the log jam and triggered execution of the declaration referred to in the Term Sheet. Mr Barbudev signed this on 14 December 2005.

For his part, Mr Feuer denied that he had reached any such agreement in principle with Mr Barbudev at this point about reinvesting. His position was that the claimant’s stake in the merged business was not perceived as a fundamental point. In his oral evidence, he said that they would have discussed what a potential deal would look like, but it was also “pretty obvious that there would have been lots of details that would have not have been agreed on his re-investment”.

It is not easy to reach a conclusion on this point based on the evidence of either Mr Barbudev or Mr Feuer. My conclusions are based on the documents, the sequence of events and the inherent probabilities. In the absence of any support in the documents, I reject Mr Barbudev’s account that a stake in the merged business had been a pre-condition of the CableTEL deal from the outset, or that he made it clear from the outset of his negotiations with Warburg Pincus that this was equally a pre-condition to a deal with them. Towards the end of 2005, Mr Barbudev potentially had two deals on the table. The reasonable inference (as indicated in the documents) is that around December 2005 he asked Warburg Pincus for a stake in the merged business. However, I do not accept the defendants’ case that this was an issue of little importance. In my view, Mr Barbudev made it an issue of importance. The defendants say that they agreed to offer him a stake because they welcomed the further financial support. An obvious alternative explanation is that CableTEL offered him 9%, and to get the deal Mr Feuer offered him 10%, but I need not decide the point. What did happen is that Mr Barbudev signed the declaration on or about 14 December 2005. Thereafter, he was in practice tied into the deal. I am not however persuaded (as submitted in the claimant’s closing submissions) that the agreement extended to the approach to valuation.

The way was now clear for the Warburg Pincus sale to go forward and (doubtless among many other things) discussions ensued as to how Mr Barbudev’s stake was to be valued and how much he was to pay for it. Although Dietrich Baumgartner & Partner were advising in relation to the sale, Dr Thomas Winkler who is a lawyer with the firm and who gave evidence for the claimant at trial, said that the firm regarded Tracer and Edmondson as its clients, not Mr Barbudev. In any case, as Dr Winkler pointed out, his firm are Swiss lawyers, not qualified to advise as to English law (which governed the various agreements). This point is of limited significance, save for the submission on the merits made on his behalf by Mr Wardell QC that when it came to dealing with the Warburg Pincus professionals, Mr Barbudev was “an innocent abroad”. I accept Dr Winkler’s evidence as to who were his firm’s clients, whilst noting that (as he said) in practice advice and assistance was given by the firm to Mr Barbudev at various points and in varying measures. It is in any case common ground that it was reasonable for the defendants to believe that Mr Barbudev was being advised by DB&P.

In order to give context to what follows, I should explain that the claimant’s case is that the two key aspects of his reinvestment in the merged business were agreed (Mr Wardell QC described them as “set in stone”) as to percentage and price. On 20 January 2006, Mr Barbudev met Mr Feuer in London. On 23 January 2006, Mr Feuer emailed him to the effect that once the combined entity was valued, it would be possible to calculate the value of 10% of that equity.

On 31 January 2006 Mr Feuer sent a detailed email to Mr Barbudev setting out his proposal, which was to the effect that Mr Barbudev should acquire 10% of the joint business for €3.67 million. This was unacceptable to Mr Barbudev as he made clear in a detailed counter-proposal made on 8 February 2006. In his view the value of 10% of the joint business would be no more than €3 million. However, this was before any discount to allow for the fact that (contrary to what had been suggested in the Warburg Pincus offer letter of 29 July 2005) the acquisition was to be funded in part with bank debt which would reduce the value of the combined businesses. Consequently, he deducted 10% of the debt from his valuation and made a counter-offer of €1 million, which Mr Feuer in turn rejected.

The annual Congress of the European Cable Communications Association was held in Vienna at the end of February 2006. Mr Barbudev attended as Chairman of the Association of Bulgarian Cable Operators, and Mr Schull and Mr Feuer were there as well. According to Mr Barbudev, he had dinner with them in Vienna. The date he gave in his first witness statement was 28 February 2006, but he accepts that this is impossible in the light of evidence which proves that Mr Schull and Mr Feuer returned to London that day. He does however maintain that a dinner meeting took place on 27 February. He says that discussions centred around his personal investment and involvement in the new business. During the course of the evening he says (to quote his opening submissions) that it was agreed that:

For their part, the evidence of both Mr Schull and Mr Feuer is that no such dinner meeting took place. They accept that they may have met with Mr Barbudev during the course of the Congress but maintain that any such meeting was brief, and that nothing was negotiated.

In the absence of any details (for example) as to where it took place, and in the absence of supporting evidence, I am not satisfied that a dinner meeting took place in Vienna as asserted by Mr Barbudev. However, I do accept that the parties met at the Congress, and that (albeit perhaps briefly) discussions took place between them. This is consistent with an exchange of emails between Mr Barbudev and Mr Feuer in early March 2006. I do not accept the claimant’s case that the price was agreed at €1.65 million on that occasion, for the simple reason that this number appears earlier in an attachment to an email sent by Ernst & Young (the defendants’ tax advisers) on 22 February 2006. It is unclear on the evidence precisely how and when that number emerged, nor is it material.

Dr Winkler explains that there were extensive negotiations as to the Share Purchase Agreement (SPA). Mr Paul Doris of Freshfields acting for the purchasers (who gave evidence at trial for the defendants) circulated various drafts. As regards the parties, it appears that the advice Warburg Pincus received from Ernst & Young was that for reasons connected with Dutch law as to financial assistance, FNCH should not proceed with an acquisition of Tracer (as had been envisaged in the Term Sheet), but that the purchase should be by ECMB of the entire share capital of EP from Tracer. For their part, the sellers were concerned about the tax implications of this, and wanted FNCH to remain as purchaser. By this time, the end of the exclusivity period (15 April 2006) was approaching, and it is clear that Warburg Pincus was pressing for the execution of the SPA. A solution was found by giving the sellers the right to negotiate an alternative structure. In the result, the parties to the SPA were to be Tracer as seller and ECMB as purchaser, along with Mr Barbudev, Mr Neytchev and Edmondson as warrantors.

On 5 March 2006, Mr Barbudev emailed Mr Feuer asking for a draft of the contract for his purchasing 10% of the shares. By email of 7 March 2006, Mr Feuer replied to the effect that an Investment and Shareholders Agreement would be prepared once they had agreed and signed the Share Purchase Agreement. He said that as Mr Barbudev would have seen from the draft Share Purchase Agreement by then in circulation, agreement on the ISA was a condition precedent to the closing of the transaction. However, though formally correct, this was not a complete explanation.

The draft Share Purchase Agreement (I take this from the agreement as executed) provided for a closing date. This was dependent on the “Conditions to Closing” set out in clause 6 being fulfilled. One such condition, as Mr Feuer indicated, was that an Investment Agreement would be entered into with Mr Barbudev. Clause 6.1(e) stipulated that closing was conditional on “the Purchaser, [Mr Barbudev] (and if applicable any entity nominated by [Mr Barbudev] which is acceptable to the Purchaser) having legally, duly and validly executed the Investment Agreement, conditional only on Closing”. The term “Investment Agreement” was defined as “the investment and shareholder’s agreement to be entered into between the Purchaser and [Mr Barbudev] in relation to the Investment”. The term “Investment” was defined as meaning “the €1,650,000 investment by George Barbudev in consideration for a combination of shareholder debt and registered shares in the Purchaser which shall represent ten (10) per cent of the registered share capital of the Purchaser as at the date of the Investment Agreement”. As Mr Feuer and Mr Schull acknowledged in their oral evidence therefore, it is clear that at some point the figure of €1,650,000 and the percentage of 10% must have been agreed between Warburg Pincus and Mr Barbudev.

A further condition in clause 6.1(f) was that a Management Agreement had been executed, which envisaged a contract to be entered into between Mr Barbudev and Eurocom Plovdiv Eood (i.e. EP). This also ended up as a bone of contention between the parties, but it does not play a role in the issues which I have to decide, and I need say no more about it.

Notwithstanding these conditions, clause 6.5 provided that “the Conditions in clauses 6.1(e) and 6.1(f) may be waived by written notice from either the Seller or the Purchaser. The other Conditions set out in clause 6.1 may be waived by notice in writing from the Purchaser”. Since clause 6.5 of the Share Purchase Agreement gave a right to waive the condition as to the Investment Agreement to the sellers or the purchasers, it was, as is submitted for the claimant, rendered effectively meaningless. Mr Barbudev says, and I accept, that this was unacceptable to him.

The precise sequence of events now becomes important. The record shows that by email of 5 April 2006, Mr Naydenov (the defendants’ Bulgarian lawyer) emailed Mr Feuer to the effect that Mr Barbudev had told him that he had agreed with Mr Feuer on four points, of which the first two were as follows: (i) the percentage of his future participation in ECMB, which Mr Naydenov believed was 10%, and (ii) the price at which such percentage was to be acquired. The email says: “he [that is Mr Barbudev] wanted the … four points listed above incorporated in a side letter/additional agreement which is to be signed together with the SPA”.

Mr Feuer and Mr Barbudev presumably spoke, and later that day, Mr Naydenov emailed Mr Barbudev (the original is the Bulgarian language) saying that he had been asked by Mr Feuer to tell him that the signing of the investment agreement was a condition to closing the deal, not of the signing (i.e. of the SPA). For that reason, he said, Warburg Pincus was ready to deliver the draft right after the signing. Mr Feuer, the email says, would prefer that they focus on the signing process, and could afterwards work without pressure on the other elements of the deal.

These email exchanges were only recently disclosed. In his witness statement, Mr Barbudev denied that he was the one who requested the side letter. He added a rider in his evidence in chief to the effect that having seen the email from Mr Naydenov, he accepted that he told Mr Feuer that he “was concerned that his right to a shareholding should be recorded in writing”, which is not quite what the email suggests. The defendants say that the court should find that it was Mr Barbudev who requested the production of the Side Letter during the call with Mr Naydenov on 5 April 2006. They say that initially, Mr Feuer was not amenable to Mr Barbudev’s request, but that on 10 April 2006 he instructed Mr Doris (who confirmed this in his evidence) to draft the Side Letter.

In an email of 7 April 2006, Dr Winkler identified as one of a number of issues which he described as “fundamental and crucial for our clients”, clause 6.5. He said that the condition as to the Investment Agreement “should only be waived by the Seller but not the Purchaser”. In his evidence, Mr Doris explains that the purchasers would not agree to this, because they were concerned that the seller could use it to prevent closing taking place at all. By this time, the meeting to execute the Share Purchase Agreement had been fixed for 12 April 2006 at DB& P’s offices in Zurich.

The claimant relies on the email from Dr Winkler of 7 April 2006 as showing that the Side Letter was intended to resolve the “fundamental and crucial” “impasse” as to who was entitled to waive the Investment Agreement condition. A central part of his case (to quote his closing submissions) is that the “evidence about the impasse reinforces the conclusion that the commercial purpose of the Side Letter was to confirm that Mr Barbudev had a right to purchase a 10% stake in the combined business in return for €1.65 million. It was intended to be binding and enforceable and to record the fact that Mr Barbudev’s percentage stake in the combined business and the amount he was to pay for it were not up for negotiation but were set in stone. A mere comfort letter accompanied by words of reassurance would not have been sufficient to persuade Mr Barbudev to withdraw his opposition to clause 6.5”.

The defendants, on the other hand, refer to references in Mr Barbudev’s witness statement to the Side Letter as “a means of providing me with the necessary comfort that the Personal Agreements would be executed”: and that it “gave me the necessary comfort I needed”. The Court should find, it is submitted, that both Mr Feuer and Mr Barbudev saw the Side Letter as providing comfort, or reassurance, on the reinvestment issue, but not as a legally binding agreement.

I will return to the question of admissibility, but my factual conclusions in this regard are as follows. I do not consider that the Side Letter was specifically requested by Mr Barbudev as the defendants have suggested. It is unclear where the idea originated from, but most likely it emerged in the course of discussions between Mr Barbudev, Mr Naydenov and Mr Feuer around 5 April 2006 (by which time they understood that no ISA would be ready for signing at the same time as the SPA). Contrary to the submissions that have been made by the parties, there is no firm evidence that any of these individuals gave any particular thought to the legal effect of the proposed document, the drafting of which was left to Mr Doris. I reject the suggestion that the references to “comfort” in Mr Barbudev’s witness statement show that he saw the document as providing comfort, but not as a legally binding agreement. This is not a fair reading of his evidence as a whole. I do not accept the claimant’s case that the Side Letter was specifically conceived to resolve the “impasse” as to the waiver issue. On the other hand, I do accept that this was an important issue for both parties at this time, and that the Side Letter was seen as part of it. I am satisfied that Warburg Pincus was concerned that unless it could unilaterally waive the ISA condition, Mr Barbudev could use it to scupper the deal. Equally, I am satisfied that Mr Barbudev was concerned that the result could be that closing might occur without his participation having been settled (as indeed happened). I draw the inference that the Side Letter was intended to provide Mr Barbudev with reassurance that his 10% stake in the merged business would be forthcoming despite the terms of the waiver clause. As I shall explain in due course, however, I consider that as a matter of law the legal effect of the Side Letter is to be determined on a construction of the terms of the document itself.

Mr Doris says that Mr Feuer instructed him to draft the Side Letter on 10 April 2006. Once he had approved it, a draft along with other documents was circulated by email by Mr Doris very early in the morning of 12 April 2006. It was contained in an attachment entitled “Comfort Letter re ISA” (I shall deal later with the significance if any of that wording). Dr Winkler said that the draft was waiting for him when he got to his office, but he had not been told about it in advance by Mr Barbudev. The meeting in Zurich started later that day and was attended by Mr Barbudev, Mr Neytchev, Dr Winkler, Mr Feuer, Mr Horvath and Mr Doris. Dr Baumgartner periodically attended. The primary purpose, as Mr Doris explains, was to sign the SPA and a disclosure letter. The oral evidence was to the effect that the three main topics of discussion were the alternative structure bringing FNCH back into the picture, the tax permit relating to withholding tax, and waiver of the conditions concerning the ISA.

There is an important issue between the parties as to the admissibility of what happened in the course of the negotiations, but for the moment I am concerned to find the facts. It is worth stating that these proceedings were begun over three years after the signing meeting on 12 April 2006, and it is not surprising if recollections have faded, or differ. The first thing to note is that the terms of Mr Doris’ draft Side Letter were amended. The draft as circulated read, “the Purchaser [that is to say ECMB] hereby agrees that, as soon as reasonably practicable after the signing of the Agreement [that is to say the SPA] by all Parties, we shall offer you [that is to say Mr Barbudev] the opportunity to invest in the Purchaser on the terms to be agreed between us which shall be set out in the Investment Agreement”. (As stated above, the term “Investment Agreement” was defined in the SPA as the Investment and Shareholder’s agreement to be entered into between the ECMB and Mr Barbudev.)

At some point, the Side Letter was amended to include at the end of the passage quoted the following words: “… and we agree to negotiate the Investment Agreement in good faith with you”. Mr Doris thinks that this was suggested by Dr Winkler, which seems not unlikely, but Dr Winkler has no recollection of doing so. I need not resolve this issue, save to say that Dr Winkler said (and I accept) that his primary concern was with the position of the sellers. The Side Letter concerned Mr Barbudev only who, though a key player, was not the only shareholder in the business that was being sold (as stated above, he had a 40% shareholding). What this amendment does show, however, is that the terms of the Side Letter were the subject of discussion.

The crucial factual issue is as follows. Mr Barbudev’s case is that the Side Letter was presented to him at the signing meeting as a solution to his concerns about the ability of ECMB, under clause 6.5 of the draft SPA, to waive the ISA as a condition precedent to closing. In his witness statement, Mr Barbudev says that in a separate room around 4.30 – 5.00 pm Mr Feuer and Mr Horvath assured him that the Side Letter was like a separate contract the purpose of which was to protect his right to invest in the combined business, and that Mr Feuer assured him that everything with his investment would be okay. In his oral evidence, he says he was told, “Georgi, this is alternative for your waiving of this clause, please, this is additional agreement, with this agreement, this is valid even after the closing”. He then indicated, Mr Barbudev says, that he was prepared to sign the SPA. The claimant’s pleaded case is that the oral assurance to the effect that the Side Letter was to be treated as a separate contract means that the agreement was a part-written, part-oral agreement, alternatively that it gave rise to a binding collateral contract (both being relevant to admissibility).

In his witness statement, Mr Feuer denies Mr Barbudev’s account, saying that he did not say that the Side Letter was like a separate contract, and he confirmed this in his oral evidence.

In his witness statement, Mr Feuer also says he did “not recall any discussion with Mr Barbudev, or his legal advisers, as to whether the side letter was to be legally binding but it was very clear from the nature and wording of the side letter that it was not intended to be legally enforceable”. In his oral evidence however, he did appear to recall such a discussion. He said that “it was really clear from the nature of these discussions in the meeting that this letter was never binding”. He said that he had “a recollection of being said at that meeting, that there was a discussion about what it actually really means with his lawyers being present in the room, and I remember his lawyers have asked for an insertion to be made to the letter which said … we will have a good faith undertaking, and then there was a discussion as to what that actually meant under English law, and I seem to recall that his lawyers explained that to him”. I agree with the claimant’s submission that these accounts are significantly inconsistent, and the consequence is that I cannot place much weight on this part of Mr Feuer’s evidence.

The third signatory of the Side Letter was Mr Horvath. In his witness statement, he recalls that “it was mentioned at the meeting that the Side Letter was not intended to be legally binding. The purpose of the side letter was just to provide some comfort to Mr Barbudev that we would continue to negotiate with him regarding a possible reinvestment. At no time during the meeting did I say to Mr Barbudev that the Side Letter was to be treated as a separate contract or that its purpose was to protect Mr Barbudev’s reinvestment. I have no recollection of Mr Feuer saying anything similar”.

His oral evidence however was more nuanced. This was a shareholder issue, he said, and it was not his responsibility to review the Side Letter. He could recall it being discussed in a side room. He accepted that it was “heavily discussed” between Mr Feuer and Mr Barbudev, because it was an important issue. He was asked:

The claimant accepted in his closing submissions that Mr Horvath was an honest and credible witness. I agree, noting that he was prepared to engage with the obvious commercial realities of the situation (his evidence as to EP being a key acquisition target being an example). For that reason, and also because it appears to me more consistent with the overall probabilities, I prefer his account in oral evidence as set out above to that of Mr Barbudev. I find that there was no assurance by Mr Feuer (or Mr Horvath) that the Side Letter was like a separate contract the purpose of which was to protect his right to invest in the combined business. However I do not believe that Mr Barbudev would have pursued this claim if he had been told at the time that the Side Letter was not intended to be legally binding—I am not satisfied that anything was said to him one way or the other as to its binding nature. I find that Mr Feuer used the Side Letter to reassure him that the intention was that his investment would go ahead, and in the light of that, Mr Barbudev signed the SPA, even though ECMB retained the unilateral right to waive the requirement that the execution of the ISA was a precondition to the closing.

The Side Letter is the central document in this case, and I must now set it out. It is dated 12 April 2006 on ECMB headed paper and addressed to Mr Barbudev. After referring to the SPA, and providing that words and expressions in that agreement should have the same meanings in the letter, it goes on as follows:

The crucial question is whether the Side Letter constituted a legally enforceable contract, which I will return to. There is also an issue as to the parties to it. Although the Side Letter was on ECMB’s headed paper, the claimant’s case is that at all times after the meeting on 12 April 2006 until they fell out, the parties proceeded on the basis that the obligation to execute the Investment Agreement (that is, the ISA) was owed by Warburg Pincus International and FNCH (that is, the second and third defendants) and not just ECMB. I will set out my findings in this respect below.

There is a further, and much less significant, factual dispute as to whether Mr Barbudev agreed to pledge any shares he obtained to ING Bank. This was necessary because the acquisition was to be partly financed with lending from ING, and the evidence was that the bank would require his shares to be pledged along with those held by the purchaser. (The putative pledge is referred to in the amended Particulars of Claim in support of the assertion that the parties’ agreement was not just as set out in the Side Letter, but was part oral, part written, but the point did not feature prominently in the claimant’s case at trial.) Mr Barbudev’s evidence has not been consistent in this regard. In his first witness statement, he says that he agreed to pledge his shares. In his second witness statement, he accepts that the request seemed reasonable, but that he could not formally agree until he had checked the position. I find that this later version was the substance of what were probably brief discussions on this subject at or about this time. A week or so later on 21 April 2006, Mr Winkler of DB&P informed Mr Doris of Freshfields that Mr Barbudev was willing to pledge his shares to ING Bank.

There were a number of issues to be resolved following the signing of the SPA, including whether the alternative structure with FNCH as purchaser would be pursued. On 27 April 2006, Mr Winkler confirmed on behalf of the sellers the retention of the existing, ECMB-based structure.

The way was now open for the terms of the Investment Agreement referred to in the Side Letter to be agreed. Freshfields circulated a draft ISA on 9 May 2006. It was one of several circulated by the firm over the next two months. It has been suggested that the fact that drafts of an investment and shareholders’ agreement were circulated in this way shows that the defendants regarded the Side Letter as binding. I do not accept this. Whether or not they were bound to engage in negotiations with Mr Barbudev, which is a matter of law that I will address subsequently, the purchasers had promised to do so, and proceeded accordingly. Contrary to the claimant’s closing submissions, it is not the case (in my judgment) that “at all times after the signing of the Side Letter, Mr Schull and Mr Feuer (acting together or alone on behalf of all three defendants) proceeded on the assumption that the two key terms were ‘set in stone’ and would be enforceable by Mr Barbudev whatever the final structure”. In my view, what followed the signing of the Side Letter was a negotiation.

The Freshfields draft envisaged Mr Barbudev paying €1,000,271 for shares and lending €649,729. As appears from Schedules 2 and 3, the registered capital of ECMB was BGN 17,607,470 divided into 1,760,747 shares of BGN 10 each (BGN is a reference to the Bulgarian Lev). To enable Mr Barbudev to participate, this was to be increased to 1,956,386 shares of which ten per cent, that is 195,639, were to be allotted to him. The €649,729 represented ten per cent of the shareholder’s loan that was to be provided by FNCH to ECMB to enable it to complete the purchase (the balance being borrowed from ING Bank). The draft ISA also contained put and call options exercisable in equal tranches each year over four years, the effect of which would be broadly to enable Mr Barbudev to come out, or be bought out. These were to start on the first anniversary of the signing of the ISA. Mr Barbudev made it clear through Dr Winkler that he was not happy with this arrangement, but otherwise no comments on the draft were forthcoming.

On 5 June 2006, Mr Barbudev met with Mr Feuer and Mr Doris at the offices of Warburg Pincus International in London. According to Mr Barbudev, most of the time was taken up considering the SPA, and the ISA was discussed only briefly, though an email from Dr Winkler of 30 May 2006 suggests that this was the purpose of the meeting. The claimant’s case is that at this meeting there was agreement as to all outstanding commercial terms. With regard to the proposed put and call options, Mr Barbudev was concerned to ensure that he could not be bought out too early and he wanted a two year delay before the options could be exercised. It is common ground that both sides were happy for the draft ISA to be amended such that Mr Barbudev could not be required to sell his shares in ECMB during the first two years of the ISA. Mr Barbudev had the impression that, from June 2009 onwards, there would be call options exercisable as to 25% each year for four years thereafter. Mr Doris understood that it had been agreed that, while the call options would not be exercisable until June 2009, they would then be exercisable as to 50% in June 2009 and 50% in June 2010. In my view, the parties did not reach agreement on this point then, or subsequently.

One of the points raised by Warburg Pincus at the June meeting (so far as Mr Barbudev was concerned for the first time) was the possibility of interposing a Dutch holding company as the vehicle holding the ECMB shares. It would be into this company that Mr Barbudev would have to invest. Not surprisingly, he needed time to consider this possibility, including the domicile of the entity which would hold the shareholding on his behalf. I reject the criticism made by the defendants that he dragged his feet in this respect. At that time, I am satisfied that both parties expected an ISA to be signed imminently. As it was, following the meeting, DB&P were initially minded to use a company domiciled in the Dutch Antilles to hold Mr Barbudev’s investment, but subsequently there was a concern that this might give rise to a withholding tax liability in the Netherlands.

Mr Doris said in an email the following day (7 June 2006) to Dr Winkler that he had amended the Investment Agreement “to reflect the commercial terms agreed” between Mr Feuer and Mr Barbudev at the meeting. However, an amended draft was not circulated immediately. Mr Doris thinks he may have sent a draft to Mr Feuer at that time, or it may be simply, as the claimant suggests, that some more time was needed to accommodate the changes required by the interposition of a Dutch holding company (not least because a consequence would be that the ISA would be governed by Dutch, not English, law). A number of other issues were raised by this change, as Mr Doris made clear to Mr Feuer in an email of 19 June 2006.

I accept, as he says, that Mr Barbudev was not comfortable about the new structure. There is an issue on the evidence as to whether DB & P indicated on 20 June 2006 that Mr Barbudev was at that stage “happy” with it, which I need not resolve. If he was, that position changed within a few days, though he seems in the end to have accepted it at a meeting with Mr Staykov and Mr Naydenov on 27 June 2006. In any case, Warburg Pincus had decided to go this route, and on 25 June 2006 Mr Doris circulated a draft ISA amended up accordingly. On 26 June 2006, he circulated a further draft amended to incorporate comments received from Warburg Pincus’ Dutch advisers. He said that Warburg Pincus intended for the parties to sign the agreement at the closing meeting, which at that point was apparently to be held on 28 June 2006. The Dutch holding company had not yet been incorporated, but I accept the evidence of Mr Doris that it could have been set up very quickly if Mr Barbudev had been prepared to sign this draft of the ISA. The draft enabled him to establish his own investment vehicle within forty days after the closing.

The drafts were sent to (among others) DB & P in Zurich, and Mr Barbudev himself. There was, however, no response to them at this time. Mr Barbudev says that the emails were directed by his computer into his spam folder, and he did not see them until September 2006. The defendants do not accept his explanation, but in the light of the terms of a later email he sent to Mr Feuer on 1 September 2006 I accept it, whilst noting that, since the drafts had gone to DB & P, this was not in fact a reason why they could not have been engaged with. To quote the claimant’s opening submissions, “No doubt the reason why he was not pressing for the final version was that a row had broken out over whether his investment should be in a Bulgarian company or a Dutch holding company. This had led to Mr Schull and Mr Barbudev agreeing that the ISA should not be executed at the same time as Closing and that its execution should await finalisation of the identity of the vehicle that was to be used by Mr Barbudev”.

This last sentence is a reference to a phone call which Mr Barbudev received at home about this time from Mr Schull. Originally, Mr Barbudev’s case was that this happened on 5 July 2006, the day before closing, and that he was persuaded not to hold things up because his investment agreement would be executed within days. However an internal email from Mr Schull to Mr Feuer of 27 June 2006 which was recently disclosed places the discussion earlier, saying that, “…we agreed to go ahead with closing and work to find an acceptable solution for his re-investment”. Mr Barbudev accepts that the conversation took place about this time. He says that Mr Schull was persuasive in this conversation, and allayed his concerns. He says he took his word as his potential future partner, and decided not to lose time discussing his investment, but to proceed instead as soon as possible to closing, and try to find the appropriate solution for the structuring of his investment then or immediately afterwards.

Mr Schull recalls the conversation, but does not recall the date. It was, he says, a “crunch call”, and the “issue of whether Mr Barbudev wanted to do the deal in the first place dominated the discussion”. In his oral evidence he said it was a “come to Jesus” call—“do you want to do this deal or not?” His email to Mr Feuer says that they “… did not discuss specific vehicles or structuring options”, though he accepted in cross-examination that it was entirely possible that Mr Barbudev’s re-investment was discussed during the call, but that they didn’t get into the specifics of it. As Mr Schull put it, “we wanted to close the transaction, we were impatient”, and that I have no doubt is correct. I accept Mr Barbudev’s evidence that Mr Schull was persuasive, and encouraged him in the belief that his investment would be dealt with as soon as possible after closing, but I do not think that the call went any further than the email suggests, or amounted (as Mr Barbudev put it in his oral evidence) to a “definitive promise”.

In the event, the closing took place at a meeting in EP’s offices in Plovdiv on 6 and 7 July 2006. The shares of EP were transferred by Tracer to ECMB, and the company duly changed hands. Following the conversations I have described, it was understood that the ISA would not be signed at this time. Consequently, a waiver of the relevant condition to Closing was signed by ECMB and counter-signed by Mr Barbudev. The waiver in relation to clause 6.1(e) provided that “[ECMB] and [Mr Barbudev] shall continue their negotiations for the determination of the structure and the entering into an investment agreement immediately after the Closing with a view of having the said agreement executed as soon as reasonably possible”.

Had this occurred, the present litigation would not have happened—but it did not occur. Mr Barbudev believes that at the latest before the end of 2006, Mr Feuer and Mr Schull decided that they no longer wanted to allow Mr Barbudev to invest. In their oral evidence, they accepted that they did come to the conclusion that a reinvestment by Mr Barbudev in the business was not desirable, though they did not put any particular time on it. So far as it is relevant to make any findings in this respect, after the enthusiasm of the initial phase of the negotiations, I doubt that the relationship between Mr Barbudev and Warburg Pincus had ever been good, and it deteriorated over time. A further clue to the firm’s attitude came from the evidence of Mr Horvath, who said that after acquisition the business did not do as well as the purchasers had hoped. Mr Barbudev remained nominally in a management position for about a year (for which he was paid a relatively modest sum) but he says (and I accept) that he was effectively sidelined.

That is the background, but so far as the record is concerned, the main obstacle to the conclusion of an ISA appears to have related to the issue of withholding tax. One of the points agreed at closing concerned the retention of part of the purchase monies in respect of a possible liability in this respect. The perceived problem stemmed from the fact that Tracer was a Dutch company, and the concern was tax should not be payable in Bulgaria. The parties entered into a Payment Procedure Agreement at closing, which provided that 15% of the consideration (€2,925,000) would be withheld by ECMB pending the receipt by Tracer of a withholding tax permit from the Bulgarian tax authorities. This agreement provided amongst other things that Tracer would initiate a procedure for the issuance of a permit from the Bulgarian Tax Authorities, and that the retained sum would be paid to Tracer on delivery of the permit. The buyers were concerned that liability for withholding tax might be incurred by ECMB. Obtaining the permit from the authorities turned out to be far from straightforward. Mr Barbudev says the fault lies on the defendants’ part, and they say that it was he who mishandled it. It is not necessary to decide who was to blame, but as the claimant’s opening submissions put it, the dispute that subsequently developed about withholding tax led to further delays in finalising the ISA. The evidence suggests that there were also investigations by the authorities into the personal tax affairs of the claimant and his fellow shareholders later in the year.

In terms of timing, after the closing at the beginning of July, Mr Barbudev did not raise the question of his investment again until the beginning of September 2006, when he realised that he had been in error in overlooking the drafts in his spam folder. Mr Feuer made it clear that the ball was in his court. Over the next few weeks there were a few email exchanges between Mr Doris and Ms Merker who was the lawyer at DB&P who was at time dealing with the matter, and who referred to “some minor points that still have to be discussed”.

There were, however, substantive exchanges between the lawyers on the withholding tax issue at this time, since the buyers had still not received 15% of the price. There were also sharp email exchanges in which Mr Barbudev expressed his frustration at the way in which the transaction had been handled by Warburg Pincus, which Mr Feuer refuted in his reply, though stating that he would like to find a solution to the issues between them.

On 1 November 2006, Ms Merker sent Mr Barbudev’s comments on the draft ISA circulated in June to Freshfields (Mr Doris was on sabbatical leave at the time). She identified the Dutch entity through which Mr Barbudev had decided to invest. However there was no substantive reply. In fact, by emails exchanged at the end of October 2006 (in a more conciliatory tone to what had gone a few days earlier) Mr Feuer and Mr Barbudev agreed that that resolution of the withholding tax issue should take priority over the finalisation of the ISA. From this time on, the drafting of the ISA essentially went to sleep, though other outstanding matters continued to be discussed.

It was not until the following year (15 October 2007) that the audit by the Bulgarian Tax Authority concluded that Tracer had no liability for withholding tax. However the evidence of Mr Naydenov was that the authorities then started an audit of ECMB, so that to that extent the defendants say that the matter was still not closed. On 8 November 2007, Mr Barbudev emailed Mr Feuer asking for a meeting to discuss all pending issues. This could not be arranged immediately, but was eventually scheduled for 29 January 2008 when Mr Barbudev met Mr Feuer at the offices of Warburg Pincus International in London. Mr Feuer told him that they were taking Bulgarian law advice on the outcome of the Bulgarian Tax Authority’s audit to see whether the withholding tax issue really was resolved. Mr Barbudev says that he was confident that it had been resolved, and so he was happy to wait before dealing with the execution of the ISA.

Mr Horvath says in his witness statement that some time in 2008 he was instructed by Mr Feuer to finalise the transaction. However, other than that, Mr Feuer was not much involved in this process (Mr Schull was not involved at all). On 16 April 2008, Mr Horvath emailed Dr Baumgartner (copying in Mr Barbudev) saying, “Following certain discussions and developments that have taken place during the last couple of months we would like to invite you to a meeting in Sofia to finalise all of the outstanding relations” relating to Tracer and ECMB under the SPA and the Payment Procedure Agreement. (He did not mention the ISA.) They would need, he said, to enter into a binding final document to confirm “the proper settlement of all of the open issues between us”. He attached a number of drafts including a proposed Final Protocol. By clause 5, the seller (Tracer) confirmed that once the payments identified earlier in the document had been paid, Tracer would have no claims against ECMB. No reference was made to the ISA. Mr Barbudev was named as a party in his capacity as warrantor under the SPA. Both the email and the draft Final Protocol were drafted by Mr Naydenov.

Dr Baumgartner responded on 18 April 2008 saying that he would be absent from work the following week and that the matter would be handled in his absence by Dr Winkler and Ms Merker. Dr Winkler was to attend the signing of all settlement documents. Mr Barbudev said that he wondered whether the Final Protocol might be relied upon as extinguishing any rights he may have had under the Side Letter, and relayed his concerns to Ms Merker by email (this has not been disclosed on privilege grounds).

On 24 April 2008, the meeting took place at the offices of ECMB in Sofia. In attendance at the meeting were Mr Barbudev, Mr Neytchev (who as I have explained was the other former substantial shareholder of EP and also a warrantor under the SPA) and his lawyer, Mr Kapitanov, Dr Winkler, Mr Horvath, Mr Staykov (the CEO of ECMB), Mr Naydenov and Mr Alexander Kolev (the CFO of ECMB). Mr Schull and Mr Feuer were not present. (Mr Doris was not involved in any substantial way at this time and was not present either.)

The claimant’s case is that as a matter of construction, the Final Protocol did not release the defendants from their obligation to allow Mr Barbudev to invest in the combined entity. Until the close of the evidence at trial, he had an alternative case to the effect that the defendants were estopped by the silence of their representative at the meeting when the document was signed from contending that this was its true construction, alternatively that the Final Protocol should be rectified. The alternative case is no longer pursued, and my findings of fact as to the circumstances in which the document came to be signed can be correspondingly briefer.

Mr Barbudev says, and I accept, that the meeting was conducted largely in Bulgarian with people constantly entering and leaving the meeting room. English must also have been spoken, since neither Mr Horvath nor Dr Winkler spoke Bulgarian. Mr Barbudev says that at one point during the discussions, he mentioned to Mr Horvath that his personal agreements had still to be executed. He says that Mr Horvath’s reply was something along the lines that he had no responsibility for dealing with Mr Barbudev’s personal investment and that was something he should pursue with Warburg Pincus. Mr Horvath gives a slightly different version of the conversation, saying that Mr Barbudev told him that he was not entirely happy with the terms of the Final Protocol because he had been offered an opportunity to reinvest in ECMB and had missed his chance to do so. He agrees that he told Mr Barbudev that he should discuss any issue about his reinvestment with Warburg Pincus (i.e. Mr Schull and Mr Feuer).

The negotiations were focused on the outstanding payments under the SPA and, after two to three hours, agreement was reached as to the sums payable including an adjustment in respect of the sums payable in respect of the settlement with Rumford.

It is common ground that, in the course of the negotiations, wording was added to draft clause 5. The final version (headed “Final Settlement” as in the original draft) provided that, “The Seller [i.e. Tracer] confirms that once the payments identified in the preceding clauses 1-3 have been made all of the obligations (of payment or otherwise) of the Purchaser [i.e. ECMB] towards the Seller under the [Sale and Purchase] Agreement shall be fully performed and neither the Seller nor any other Party shall have any claim of any nature against the Purchaser whatsoever under the Agreement or otherwise;”.

Mr Barbudev says that he was alarmed that the width of the language might impact on his rights to a shareholding under the ISA, and I accept that he was alarmed. He did not however ask Dr Winkler about it. He says that he stated expressly to Mr Horvath and Mr Naydenov (first in Bulgarian and then in English as Mr Horvath is Hungarian and does not speak Bulgarian) that the wording was unacceptable and that he would not sign it in its current form, if it was intended that it would extinguish his rights. He says that they said nothing in response, and his case is that he understood from the silence of Mr Horvath and Mr Naydenov that they agreed with him that the Final Protocol was not intended to impact on his rights under the Side Letter. He then proceeded to sign the Final Protocol.

A case based on estoppel arising from this course of events is no longer pursued. This became inevitable in the light of Mr Barbudev’s oral evidence which accepted that it was for him to decide what to do, and that he read the wording of clause 5 for himself and decided that it did not extinguish his rights. So far as it remains of relevance, I prefer the defendants’ case on the facts to that of the claimant on this issue. Whilst he was supported by Mr Kapitanov, his case was not supported by Mr Naydenov or Mr Horvath, neither of whom was particularly partisan in giving their evidence. Further, Dr Winkler said that he had “no recollection of hearing Mr Barbudev making these comments”. I find that whilst Mr Barbudev made it clear that he was not happy about signing the Final Protocol, there was nothing done by Mr Naydenov or Mr Horvath which could reasonably be taken as giving the impression that that they “agreed with him that the Final Protocol was not intended to impact on his rights under the Side Letter” (to quote the claimant’s opening submissions).

The signing of the Final Protocol was on 24 April 2008. Little of relevance happened thereafter for some time. Towards the end of the year, Mr Barbudev says (and I accept) that he tried to reach Mr Feuer by phone, though he did not send any emails to him until May 2009. By then, he had heard that Warburg Pincus intended to sell ECMB, and I infer that that this spurred him to renew the subject of his investment in the business. By arrangement, he met both Mr Schull and Mr Feuer at the offices of Warburg Pincus International in London on 19 May 2009, but it was made clear to him that he would get nothing. His solicitors wrote making a claim the following month. In the event, Mr Barbudev understands that ECMB was sold around October 2009. These proceedings were issued in January 2010.

In broad terms the issues for decision are as follows. (1) Did the Side Letter constitute a legally enforceable contract? (2) If it did, are the second and third defendants bound by it? Alternatively, are the second and third defendants estopped from denying that they were bound? (3) Was the Side Letter in any case subsequently performed? (4) Did the Final Protocol release the defendants from their obligation to allow Mr Barbudev to invest in the combined entity? (As mentioned, the claimant’s alternative case as to estoppel and/or rectification was abandoned at the close of the evidence.) (5) If liability is determined in his favour, is Mr Barbudev entitled to 10% of the proceeds of sale and/or other consideration received for the shares of ECMB, as pleaded in paragraph 63.2 of the Amended Particulars of Claim? (This arises as an issue because by order of 12 April 2011 it was ordered to be tried, the trial otherwise being a trial of liability only.)

The rival contentions are as follows. The claimant submits that it is clear that the Side Letter was intended by the parties to be binding. His right to have an ongoing investment in the combined entity was for him fundamental to proceeding to execute the SPA. The Side Letter was proffered as the solution to the impasse that had developed with regard to the right to waive the ISA condition, and was not meant to be a mere comfort letter. It recorded in writing that there was a binding agreement in place with regard to the two key terms relating to the price and the amount of the shareholding. It gave Mr Barbudev an enforceable right to acquire a 10% share of the registered shares and debt in ECMB (or whatever business was ultimately chosen to hold the shares in the business formed on the combination of EP and ECMB). This conclusion is reinforced by the section which deals with governing law and the like. The fact that it was signed is a cogent indicator that the parties intended to be bound. The conclusion that the parties intended to be bound is strongly supported, it is submitted, by the oral assurance allegedly given to Mr Barbudev prior to signing to the effect that it was intended to protect his right to invest in the new combined entity. It probably does not matter, it is submitted, whether this is regarded as a term of a contract which was partly oral and partly in writing (which remains Mr Barbudev’s primary case) or a collateral warranty: see J Evans & Son Ltd v Merzario Ltd [1976] 1 WLR 1078. What is important is that it confirms what is already clear from the language of the Side Letter itself, namely that the parties intended to create legal relations. In conclusion, a reasonable businessman would have understood the Side Letter to be legally binding, and the court should so hold. There was no uncertainty. The parties had agreed on the price and the percentage shareholding. The right to have 10% of the shares of the combined entity in return for €1.65 million could be exercised without the need to have agreement on additional matters. The parties had reached a binding interim agreement. Any uncertainty was removed at the meeting on 5 June 2006 when all the other commercial terms were agreed.

The defendants’ case is that Side Letter was not partly oral and partly in writing, but was a purely written agreement. They maintain that it did not constitute a legally enforceable contract on three grounds. The first is that, as a matter of its construction, it was never intended to create legal relations, being at most a letter of comfort, pending the conclusion of an ISA. If, contrary to the defendants’ primary case, regard should be had to other material in determining whether there was an intention to create legal relations, the conclusion remains the same. The words used indicate that the Side Letter was not intended to be legally enforceable, and the surrounding circumstances are entirely consistent with the absence of an intention to create legal relations. The parties proceeded on the basis that a right to reinvest would only arise upon the execution of an agreed ISA. Even if the parties intended to create legally binding relations, the defendants’ second ground is that the Side Letter is an unenforceable agreement to agree. Alternatively, their third ground is that Side Letter was not a sufficiently complete and certain contractual agreement.

As I have said, the claimant’s “primary case” is that the agreement between the parties was part oral, and part written. This did not feature greatly in argument, but it is necessary to deal with it, since it may impact on questions of admissibility. The claimants’ position at trial has been that the court can have regard to all the evidence (though not the parties’ subjective opinions) in deciding whether the Side Letter was a binding contract. The defendants, on the other hand, maintain that the agreement was reduced to writing, and that this question has to be decided solely upon the construction of its terms. Only if the agreement was part oral, and partly in writing, they say, is extrinsic evidence admissible. The same issue arises as regards the question of the parties to the agreement, since the defendants’ position is that extrinsic evidence is not admissible for the purpose of identifying the parties to the agreement if it is purely written.

It is of some relevance to see how this issue emerged. The claimant’s originally pleaded case used the term “the Side Letter Agreement” to describe the agreement. Since the only signatory to the Side Letter is the first defendant, this led to an application to strike out the claim so far as it applied to the second and third defendants. The application did not go ahead, but the Particulars of Claim were amended to delete the word “Agreement” from the term “the Side Letter Agreement”. By amendment, it was pleaded that “the agreement entered into on 12 April 2006 in relation to Mr Barbudev’s investment in the combined business was not just as set out in the Side Letter, but was partly oral, and partly in writing”. As the defendants say, the obvious explanation for the change was the desire to widen the material admissible in determining the identity of the parties.

The matters pleaded as constituting the oral part of the agreement are:

On the facts, as explained above I have rejected the first allegation, finding that though Mr Feuer used the Side Letter to reassure Mr Barbudev that the intention was that his investment would go ahead, there was no assurance by Mr Feuer (or Mr Horvath) that the Side Letter was like a separate contract the purpose of which was to protect his right to invest in the combined business. In any case, I agree with Mr Conall Patton, counsel for the defendants, that even if Mr Barbudev’s evidence were accepted, this would not affect the proper characterisation of the agreement. A written contract does not become a part-written, part-oral contract merely because the promisor orally assures the promisee that it is to be treated as a contract or makes statements about its purpose. The terms of the contract remain those in the written document. For the same reasons, I reject the claimant’s pleaded case that these matters gave rise to a binding collateral contract (or warranty).

I have found the second allegation as regards the pledge proved on the facts. But again, I agree with the defendants that this does not show that the agreement was partly oral. It is not now alleged that an agreement was reached at the time on the question of pledging the shares. Mr Barbudev’s case is that a pledge seemed reasonable but that he could not formally agree until he had had an opportunity to check how such a pledge would affect him, and whether there was any reason which would prevent him from giving it. That agreement (as I have explained) came on 21 April 2006, over a week later, in an email from Dr Winkler. As at 12 April 2006, the question of a share pledge did not form part of any concluded agreement.

These were not points which the claimant pressed in submissions at trial. On the facts, I am satisfied that the Side Letter was produced as a document recording what the parties had agreed on 12 April 2006 as to Mr Barbudev’s proposed investment in the merged business. It was important to each party that the document should record such agreement carefully and accurately. The parties had their lawyers at the Zurich meeting (albeit DB&P was acting for the sellers rather than Mr Barbudev as I have explained above). The document was amended during the course of negotiations, and once its terms had been finalised, it was sent by Freshfields’ document specialist in London via Mr Doris to Dr Winkler, and it was printed off, and signed by Mr Feuer, Mr Horvath and Mr Barbudev. There is nothing in either the evidence or the circumstances to suggest that there were further oral terms as pleaded by the claimant, or at all. I am satisfied, as the defendants submit, that the parties reduced their agreement into writing in the Side Letter, and that this is not a case of a part written, part oral agreement.

Did the Side Letter constitute a legally enforceable contract?

I have set out the terms of the Side Letter above. The first and most important issue in the case is whether it constituted a legally enforceable contract. In their challenge, the defendants distinguished between three questions—whether the Side Letter was intended to create legal relations, whether it was an agreement to agree, and whether it was a sufficiently complete and certain contractual agreement, on each of which, they submitted, they were entitled to succeed. These are, no doubt in principle, distinct questions, but at least in this case, they are hard to disentangle from each other. The ultimate issue is whether, as the claimant put it in his closing submissions, the parties reached an enforceable interim agreement, or whether as the defendants say, this was no more than an agreement to agree, with the terms necessary for an enforceable agreement to be worked out by negotiation.

The issue is one that not uncommonly arises in different guises in commercial transactions. Parties may reach a binding agreement as to essentials, on the basis that other terms are to be agreed later. Or a letter of intent, however described, may simply mark a point in their negotiations or, as in the case of a letter of comfort, be provided on the understanding that it is not to be legally binding. Sometimes the issue turns on a single document, sometimes on a series of documents. The agreement may have been acted upon, or it may remain unperformed. Within certain established principles, English law adapts a pragmatic approach to such issues. The parties are to be regarded, to quote Bingham J in a well known passage in Pagnan SpA v Feed Products Ltd [1987] 2 Ll Rep 601 at 611, “as masters of their contractual fate. It is their intentions which matter and to which the court must strive to give effect”. Where their agreement is reduced to writing, it is to the document that the court must look to ascertain their intentions, construed against the factual matrix. Negotiations are inadmissible in that exercise. What the parties believed they were agreeing is irrelevant. One party may have thought that he was giving nothing more than comfort, the other may have believed that he had obtained a binding agreement. Or they may have given no thought to the legal consequences, content simply to have agreed a form of words. It is what they agreed in writing that matters.

In deciding whether parties have agreed to create legal relations, the approach appears from RTS Flexible Systems Limited v Molkerei Alois Müller GmbH & Co KG [2010] 1 WLR 753, in which Lord Clarke, giving the judgment of the Supreme Court, said at [45]:

“The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”

The defendants’ first submission is that the Side Letter was a comfort letter in the usual sense, namely a document which was intended to provide reassurance but not to be legally binding. It is common ground that it is the objective intentions of the parties that matter for these purposes, not their subjective intentions. For that reason, nothing turns on the fact that the Side Letter was prepared by Freshfields in a Microsoft Word document entitled “Comfort Letter re ISA”. This is merely a subjective characterisation by the lawyer who prepared the document, and is neither relevant nor admissible.

The document is not expressed to be a “letter of comfort”, though that is not conclusive since it may amount to such in substance. That does however distinguish this case from Associated British Ports v Ferryways NV [2009] EWCA Civ 189, [2009] 1 Lloyd’s Rep 595 at [27] where Maurice Kay LJ said (to quote the passage relied on by the defendants) that “… the position remains that a document expressed to be a letter of comfort will usually not give rise to legal obligations…”.

In closing submissions, the defendants sought to rely on the parties’ subjective intentions, suggesting that the “common subjective intent” on the part of both parties justifies the conclusion that there was no intention to create legal relations (see Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] 1 Lloyd’s Rep 475 at [223], approving a passage in Chitty on Contracts, 30^th edn, at 2-004 dealing with the state of mind of an alleged offeree). I have already rejected the factual basis for this suggestion. There is no firm evidence that any of the individuals concerned gave any particular thought to the legal effect of the proposed document, the drafting of which was left to Mr Doris. For reasons already given, I do not accept the submission that the references to “comfort” in Mr Barbudev’s witness statement show that he saw the document as providing comfort, but not as a legally binding agreement. There is nothing in this point in my view.

In his submissions, the claimant relies on the fact that the Side Letter refers to both the amount to be invested (not less than €1,650,000) and the consideration for the investment (shareholder debt and registered shares representing 10 % of the purchaser’s registered share capital). He points in particular to the last part of the letter headed “General”, which he says contains the language of legal obligation. It states that “no person who is not a party to this letter shall have any rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms”. The letter is stated to be governed by English law, and the English courts are to have exclusive jurisdiction. It is agreed that all the counterparts of the letter “together will constitute a single agreement”. The Side Letter was signed by Mr Feuer and Mr Horvath “for and on behalf” of ECMB. It is “acknowledged and agreed” by Mr Barbudev, who also signed it. I agree that all these matters support the view that the Side Letter was intended to create legal relations.

In my opinion, the most compelling point made by the defendants on this issue is that as a matter of construction, the language of the section headed “Investment Agreement” shows that the Side Letter was not intended to be legally binding, and that only a concluded ISA was to be legally enforceable. As Teare J put it in Dhanani v Crasnianski [2011] EWHC 926 (Comm) at [75], “the circumstance that an agreement is no more than [an] agreement to negotiate and agree may show objectively that the parties to it cannot objectively have intended it to be legally binding, notwithstanding that it had certain characteristics which otherwise might have evinced an intention to agree, for example, that it was signed by each party”. I cannot myself see that an agreement can be intended to create legal relations if it is unenforceable in its entirety. But this point depends on whether the defendants are correct on their second and third grounds of challenge, namely whether the Side Letter was only agreement to agree, with insufficient certainty to give rise to a binding contract. My conclusions on intent to create legal relations issue therefore depend on my conclusions on those issues (which are themselves linked).

There is no dispute as to the applicable principles. As was established Walford v Miles [1992] 2 AC 128, an agreement to agree is legally unenforceable. The question has often arisen in the context of an agreement by parties to negotiate in good faith, which some legal systems recognise as binding. But in English law, the rule applies with full force. As it was put by Edwin Peel in Contract Formation and Parties (ed Burrows and Peel, OUP 2010) at p.50: “an agreement to negotiate in good faith is unenforceable and is no more enforceable when it is couched in terms of an agreement to use best or reasonable endeavours to agree. When the parties have entered into an agreement which is otherwise enforceable, it will not become unenforceable simply because the parties have agreed to negotiate any outstanding terms, but the agreement to negotiate is not itself enforceable. Such an agreement may be ‘enforceable’ where the parties have set out objective criteria, or machinery for resolving any disagreement, but the reality is that the agreement to negotiate is then irrelevant and the court simply completes the agreement by reference to such objective criteria or the machinery stipulated. In sum, for all the emphasis in some cases that Walford v Miles … only involved a ‘bare’ agreement to negotiate, the fact remains that no agreement to negotiate in good faith is enforceable as a matter of English law.”

The underlying rationale for the rule (in the context of an express obligation to negotiate in good faith) was summarised by Longmore LJ in Petromec Inc v Petroleo Brasileiro SA [2005] EWCA Civ 891 at [116]:

“The traditional objections to enforcing an obligation to negotiate in good faith are (1) that the obligation is an agreement to agree and thus too uncertain to enforce, (2) that it is difficult, if not impossible, to say whether, if negotiations are brought to an end, the termination is brought about in good or in bad faith, and (3) that, since it can never be known whether good faith negotiations would have produced an agreement at all or what the terms of any agreement would have been if it would have been reached, it is impossible to assess any loss caused by breach of the obligation.”

The issue is one of construction of the agreement, the terms of which I have set out in full above. To recap, under the heading “Investment Agreement” (the definitions section of the Share Purchase Agreement (SPA) applying to the Side Letter), Mr Barbudev and ECMB agreed as follows:

“In consideration for you agreeing to enter into the Proposed Transaction [i.e. for the purchase of the shares in EP by ECMB] and to sign the Transaction Documents, the Purchaser hereby agrees that, as soon as reasonably practicable after the signing of the Agreement by all Parties, we shall offer you the opportunity to invest in the Purchaser on the terms to be agreed between us which shall be set out in the Investment Agreement and we agree to negotiate the Investment Agreement in good faith with you.”

The term “Investment Agreement” was defined in the SPA as “the investment and shareholders’ agreement to be entered into between the Purchaser and [Mr Barbudev] in relation to the Investment”. The term “Investment” was defined as meaning “the €1,650,000 investment by George Barbudev in consideration for a combination of shareholder debt and registered shares in the Purchaser which shall represent ten (10) per cent of the registered share capital of the Purchaser as at the date of the Investment Agreement”.

The Side Letter went on to provide that, “Such terms shall include, without limitation, the following: 1. you shall invest an aggregate amount of not less than €1,650,000 in consideration for a combination of shareholder debt and registered shares which shall represent ten (10) per cent. of the registered share capital of the Purchaser on the date of the Investment Agreement; 2. we shall use reasonable commercial endeavours to obtain debt financing where practicable, for the purpose of making further acquisitions and, in turn, to enable the shareholders of the Purchaser from time to time to make financial savings; 3. tag along and drag along provisions which are customary for a transaction of this nature shall be included in the Investment Agreement.”

In essence, the claimant submits that by the Side Letter, the parties recorded in an enforceable agreement the key points as to the amount of his investment, and what he was to pay for it. These points were “set in stone” and not covered by the obligation to negotiate in good faith. The defendants’ response is that the obligation to negotiate in good faith applies to the entirety of the terms of the “Investment Agreement” envisaged by the Side Letter. No points were irrevocably fixed, as shown by the fact that the investment was to be for “not less” than €1.65 million. Evidence of previous negotiations to show that these terms were in fact “set in stone” is not, it is submitted, admissible.

The matter must be determined (for reasons I have given above) upon the construction of the terms of the Side Letter itself. It is plain, in my view, that the agreement between the parties was to the effect that the claimant was to have the opportunity to invest on terms to be agreed which would be set out in an investment and shareholders’ agreement which the defendants agreed to negotiate with the claimant in good faith. That, in my judgment, constitutes an agreement to agree, which is unenforceable on the principles set out above. As a matter of construction of the document, I consider that the agreement to negotiate in good faith extends not merely to the proposed Investment Agreement, but to the price to be paid by Mr Barbudev and the percentage to be acquired as well. The reason is that the terms of the letter (“not less than”) allowed for negotiation of an amount of more than €1.65 million, and did not settle how the combination of shareholder debt and shares representing 10% of the share capital was to be made up. Even on these key terms, therefore, although the parties had agreed in principle, there was no finality. Although it is impermissible to have regard to the negotiations in construing the agreement, even if one adopts a wider approach as advocated by the claimant, it makes no difference. It is correct that (as the factual account set out above shows) the parties had reached agreement in principle on the key terms as to price and percentage, not (as submitted by the claimant) at a dinner meeting in Vienna on 27 February 2006, but (as the documents show) some time before then. That was reflected in the relevant definitions in the SPA. There is nothing in any way conclusive about such prior agreement in principle one way or the other. By 12 April 2006 when the Side Letter came to be signed, the parties were, it is reasonable to infer, close to agreement, but the terms of the document as well as the surrounding circumstances make it clear that they had not actually reached agreement. That was to come following the negotiation of the “Investment Agreement” provided for in the Side Letter. The document was expressed to be subject to English law, and under English law, it was in my judgment unenforceable as an agreement to agree.

Again, there is no dispute as to the applicable principles. In order for an agreement to be enforceable, there must be a sufficiently complete and certain agreement on all essential terms. Equally, it may be possible to conclude that, although certain terms of economic significance to the parties were not agreed, neither party intended agreement of those terms to be a precondition to a concluded agreement (Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601). Ultimately, as Mr Wardell QC put it, it is for the parties to decide at what stage they wish to be bound, and they can agree to be bound even though there are terms that remain to be agreed. In such event, their interim agreement is not invalidated unless what remains outstanding is not merely important but essential in the sense that without it the contract is too uncertain or incomplete to be enforced (Bear Sterns Bank plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm) at [155], Andrew Smith J).

A central point made by the defendants in this regard is that ECMB and Mr Barbudev were not seeking to effect a simple sale of a certain number of shares for a certain price, as might be appropriate in the case of an open-market sale of publicly listed shares. They were seeking to reach agreement on all the terms that would be necessary to govern the relationship between the majority 90% shareholder and the minority 10% shareholder in a private Bulgarian joint stock company: hence, the term “Investment Agreement” (the expression used in the Side Letter and the SPA) is defined as an “investment and shareholders’ agreement” (see above for the incorporation into the Side Letter of the definitions from the SPA).

The claimant’s response is to point out (correctly) that the courts are reluctant to conclude that what the parties intended to be a binding contractual agreement fails for uncertainty. It is submitted that there is no uncertainty here, because the parties had agreed on the price and percentage shareholding. It was a matter of indifference to him, it is said, whether part of his payment was allocated to debt or not. The right to have 10% of the combined entity in return for €1.65m was one that could be exercised without the need to have agreement as to such additional matters as put and call options, and tag along and drag along provisions. It is not, he says, his case that the Side Letter must be treated as a share transfer. The fact that the parties contemplated an “all-singing and all-dancing” ISA which dealt with such matters does not provide an answer to the question of whether the two key terms in the Side Letter are sufficiently certain to be enforceable. The shareholding could, it is submitted, have been transferred in return for payment without the need for further agreement.

The latter point may well be correct, but although it is not his case that his claim amounts to a claim to enforce a share transfer, in substance that is what the claimant seeks. His claim (now transmuted into a damages claim following the onward sale of the business by ECMB) is essentially a claim for a 10% share in the company for €1.65m. In my view, the defendants correctly submit that this was not the nature of the agreement which the parties proposed to enter into. They agreed to negotiate an “Investment Agreement”, in other words an investment and shareholders agreement, or ISA. The Side Letter refers to particular terms of the Investment Agreement as to price and percentage and others (see above), but makes it clear that these are not comprehensive: “Such terms shall include, without limitation, the following …”. I agree with the defendants that the Side Letter does not contain essential terms that would be required for a shareholders’ agreement of this kind.

The defendants identify the following (which so far as this is relevant or admissible were covered in the draft ISAs which were circulated after the signing of the Side Letter). The parties were going to have to agree about the circumstances in which Mr Barbudev could be bought out, or could come out, of his investment in the company. This would be achieved by put and call options. The date of exercise of such options would have to be agreed, and as the factual account set out above shows, this was never in fact finalised in subsequent negotiations. It would also have been necessary for the parties to agree an option price, based on the EBITDA of the company. Provisions restricting the dilution of the shares to the disadvantage of the incoming investor would be expected, as would the mechanism for the customary “tag along and drag along rights” referred to in the Side Letter. The defendants also plausibly refer to such provisions as those relating to compulsory transfer under “Bad Leaver” conditions, restrictive covenants, and corporate governance provisions such as shareholder rights to appoint board members and the like. Not surprisingly, the draft ISAs circulated by Freshfields after the assigning of the Side Letter are lengthy agreements. It is true to say that subsequent events show that most of these matters would not, in practice, have presented particular difficulties in reaching agreement. By September 2006 when negotiations resumed after the summer, the items outstanding were minor, though the timing of the options had to be agreed. But I am satisfied that both parties understood that the relationship that would follow from Mr Barbudev’s participation in the merged business was not simply a matter of fixing his share and the amount he would have to pay for it. A participation by Mr Barbudev in the merged business meant that the parties would be entering into an ongoing relationship with each other. The terms of that relationship had to be agreed, and the Side Letter is explicit that this would be by way of the “Investment Agreement” which was to be negotiated. In my judgment, the defendants are correct to submit that in the absence of an ISA, Mr Barbudev cannot invoke the Side Letter as a complete and enforceable agreement, because essential terms for an ISA are not addressed by it. I agree with the defendants that the legal analysis does not change on the basis of the claimant’s contention that uncertainty was resolved at the subsequent 5 June 2006 meeting, but in any case I find that resolution was not achieved at that meeting.

For the above reasons, I am satisfied that the Side Letter did not constitute a legally enforceable contract. I appreciate that this finding will come as a disappointment to Mr Barbudev. But even if he is right that towards the end of 2006 the defendants decided that they no longer wanted him involved (which is not unlikely), and that throughout his dealings with them he was outmanoeuvred by professional investors in negotiations which he conducted in good faith (which the defendants strongly deny), the fact is that he never managed to secure an agreement on his investment. That is sufficient to decide the case in the defendants’ favour, but I should express my conclusions on the other issues that have been raised.

Are the second and third defendants bound?

The claimant’s case is that the second and third defendants, that is Warburg Pincus International LLC and FNCH, were bound by the terms of the Side Letter, notwithstanding that it was on ECMB’s headed paper, and signed by Mr Feuer and Mr Horvath for and on behalf of ECMB. This is said to follow from the factual background leading up to the execution of the Side Letter, the language of the Side Letter itself, commercial efficacy, and the subsequent conduct of the parties. The factual issues in this regard are relevant to the claimant’s case on estoppel by convention. He contends that at all times after 12 April 2006 he and the second and third defendants all acted on the common assumption that the second and third defendants were bound by the terms of the Side Letter.

The defendants’ case is that since the agreement was reduced to writing, extrinsic evidence is not admissible to identify the parties. In any case, they submit that the only party on the defendants’ side which was a party to the Side Letter was the signatory, namely the first defendant. On the facts, they submit that no assumption that the other two companies were legally bound was made on either side.

To recap, all defendants were broadly speaking members of the Warburg Pincus Group. The first defendant (ECMB) was the purchaser of the claimant’s business. The second defendant is the company that carries on that part of the Group’s business that is relevant for this claim. The third defendant was the company which held the shares in ECMB. The claimant has subjected references to “Warburg Pincus” in emails and the like to an exegesis from which, it is said, he was right to regard Warburg Pincus International as his counterparty. In my view, this exercise was misplaced. In substance, Mr Barbudev was no doubt dealing with Warburg Pincus, and the emails reflect this. However, there was never any doubt in his mind that the legal arrangements were to be concluded with legal entities established for the purpose (indeed this is accepted on his behalf). At this time, he himself held his shares in EP through a Belize and Dutch company, and to that extent was familiar with the kind of corporate structure that might be put in place. The defendants’ evidence (which I accept) was that there was no prospect of Warburg Pincus International LLC becoming a party to this transaction. That applied equally to the Side Letter, and I am satisfied that Mr Barbudev was under no misapprehensions in that respect, and that there is no factual basis for his case against the second defendant.

So far as FNCH is concerned, the factual position is different, because although the Side Letter was signed only by ECMB, it related to the acquisition of shares in that company itself. It is common ground that the grant of such an investment to the claimant would require the cooperation of FNCH, with which Mr Barbudev would become co-shareholder. The draft ISAs circulated after the signing of the Side Letter reflects this, and show FNCH as a party.

My findings in this regard are as follows. First, I reject the claimant’s submission on the construction of the document, which turns on the distinction between the reference to “the Purchaser” and “we”. I accept the defendants’ submission that the term “we” has clearly been used interchangeably with “the Purchaser”, and does not thereby introduce FNCH as a further party. More fundamentally, having held that the agreement was contained in the Side Letter (and was not partly oral), I also accept their submission that since ECMB was specifically identified as the party in the document, oral or extrinsic evidence is not admissible to show that others were the parties (Shogun Finance Ltd v Hudson [2004] 1 AC 919 at [49], Lord Hobhouse, and at [178] Lord Phillips). If FNCH (or Warburg Pincus International) is to be treated as a party to the Side Letter, that can only be, in my view, on the basis of a shared mutual assumption sufficient to give rise to an estoppel by convention (as the requirements for which see Republic of India v India Steamship Co [1998] AC 878, 913-4, Lord Steyn).

In my view, the evidence is inconsistent with the proposition that Mr Barbudev assumed that FNCH (or Warburg Pincus International) was a party to the Side Letter. Following the meeting in London on 18 May 2009 when his request for a share in the company was turned down, he instructed solicitors in London, who sent a lengthy letter before action dated 18 June 2009, which was clearly based on detailed instructions from Mr Barbudev. Reference was made to the “Investment Agreement Side Letter dated 12 April 2006 between (1) ECMB and (2) Mr Barbudev (the ‘Side Letter Agreement’)”. It was said, “It is clear from its wording that the Side Letter Agreement is contractually binding on the parties to it (ECMB and Mr Barbudev)”. Later, “Accordingly, ECMB and Mr Barbudev entered into the Side Letter Agreement, the terms of which are clearly binding on ECMB. ECMB is in breach of its obligations under the Side Letter Agreement …”. References to potential claims Mr Barbudev had against FNCH and Warburg Pincus International LLC make it clear that he did not regard these companies as parties to the Side Letter: “We also reserve our client’s right to make claims against Warburg Pincus and FNCH for procuring a breach of the Side Letter Agreement and/or interference with contractual relations and/or negligent/ fraudulent misrepresentation or misstatement and/or other economic torts”.

I see the force of the point made by Mr Wardell QC that too much weight should not be given to a legal analysis at an early stage in a claim which on reflection turns out to be wrong. However, the letter is significant not for its legal analysis but because of what it shows about the factual basis for the asserted estoppel by convention. It shows that Mr Barbudev understood that ECMB was the only party to the Side Letter, and I am satisfied that he did so understand. As to the defendants’ witnesses, there is no evidence that any potentially relevant individual believed at any stage that FNCH (or Warburg Pincus International) were bound by the Side Letter, and I am satisfied that they did not. Despite the case that has been advanced, it made (in my judgment) little practical difference. It has never been contended by the defendants that an ISA would not have been entered into because FNCH was not a party to the Side Letter. Had the negotiations produced an agreement, FNCH would have been a party to it, but they did not. I need not in the circumstances determine a further point raised by the defendants as to lack of authority on the part of Mr Feuer and to commit the second and third defendants.

Was the Side Letter subsequently performed?

The defendants have an alternative argument which is that, if (which they deny) the Side Letter is legally enforceable, ECMB’s obligation was, to quote the document, to “offer you [Mr Barbudev] the opportunity to invest in the Purchaser on the terms to be agreed between us which shall be set out in the Investment Agreement…”. It is said that ECMB’s obligation was only to make an offer, not to transfer the shares, and that it did so by sending draft ISAs to Mr Barbudev in May and June 2006. If the Side Letter imposed an enforceable obligation on ECMB to offer Mr Barbudev the opportunity to invest in ECMB, that obligation, it submitted, was discharged at the latest on 27 June 2006.

The claimant on the other hand submits first that the obligation was one to give him a shareholding, which could not be discharged by making an offer. Even if it could, he submits secondly that the sending of a draft agreement with a company that had not yet been incorporated in circumstances where Mr Barbudev was asked, and had agreed, to defer his reinvestment until after closing cannot constitute performance.

Neither party developed its case at length at trial. As to the facts, I do not accept the premise of the claimant’s submission. There was no obligation to give Mr Barbudev a shareholding. For reasons set out above, that is not an accurate summary of what was agreed in the Side Letter. His second point is a reference to the fact that on 5 June 2006, Warburg Pincus told Mr Barbudev that a Dutch holding company would be interposed into the corporate structure as the vehicle for holding the ECMB shares, and that it would be into this company that Mr Barbudev would have to invest. I have accepted the evidence of Mr Doris (of Freshfields) that a Dutch holding company could have been set up very quickly if Mr Barbudev had been prepared to sign the draft circulated at the end of June 2006. I have also accepted Mr Barbudev’s evidence that he was encouraged in the belief that his investment would be dealt with as soon as possible after closing, and was prepared to leave agreement of the ISA over on that basis.

I do not however see this submission by the defendants as a distinct point, but rather as an aspect of the unenforceable nature of the Side Letter as an agreement to agree. Because it lacked the necessary certainty to be enforced (Walford v Miles [1992] 2 AC 128, at 138C, Lord Ackner) it is not meaningful to ask whether the agreement was performed in a legal sense. I think that the defendants implicitly recognised this in their opening submissions, and I need say no more about it.

Did the Final Protocol release the defendants?

The defendants’ case is that if (which they deny) they were liable under the Side Letter, the Final Protocol entered into on 24 April 2008 released them from any obligation they may have had to allow Mr Barbudev to invest in the combined entity. I have set out the facts as regards the making of this agreement above. The claimant says that the Final Protocol did not cover his personal claims—his alternative case that the defendants are estopped from contending that this was the true construction of the Final Protocol, and/or that the Final Protocol should be rectified was abandoned at the close of the evidence. It is now common ground that whether or not Mr Barbudev’s claims were settled by the Final Protocol is a matter of construction of the document, under ordinary principles of construction.

The claimant’s submissions are as follows. The commercial aim to be achieved by the Final Protocol was the resolution of matters under the SPA and the Payment Procedure Agreement. This conclusion is supported by the language. First, Mr Barbudev is made a party “as Warrantor”, that is, as warrantor under the SPA only, and there is no mention of him being a party in his personal capacity. Second, recitals A to G make no mention at all of Mr Barbudev’s right to invest, their focus being exclusively on monies due under the SPA. This sets the context for the declaration at the end of the recitals to the effect that the parties wish to finally settle all of the outstanding relations between them. Whilst taken by itself, this is capable of being interpreted broadly, it is obvious that it was not intended to be an oblique reference to the ISA and that, if the parties had intended the ISA to be included, they would have said so expressly. Similarly, clauses 1 to 4 of the Final Protocol deal exclusively with rights under the SPA and the related Payment Procedure Agreement. There is no mention of Mr Barbudev and his personal rights.

In the circumstances, the claimant submits that the words “or otherwise” in clause 5 should not be construed so as to extinguish Mr Barbudev’s claim, and that they mean “otherwise arising in respect of the sale of shares”. On this analysis, Mr Barbudev’s rights arise under the Side Letter and are not derived from the sale. Two further points are made in favour of a construction that does not extend to his personal rights: first, the term “Party” clause 5 must mean Mr Barbudev in his capacity as warrantor and not otherwise. Second, the second half of clause 5 is governed by the introductory words, “The Seller confirms …” with the result that it is to be read as a warranty and not an extinguishment of claims. Of greater importance perhaps, a construction that Mr Barbudev was prepared to abandon his right to reinvest for no consideration makes, it is said, no commercial sense. No explanation has been proffered as to why he might have been prepared to do this. It is obvious that he had no such intention.

The defendants submit that as underlined by the side-heading, “Final Settlement”, the intention was that all claims should be extinguished. This conclusion is reinforced by the recitals, which record that the parties “wish to finally settle all of the outstanding relations between them”. The words “as Warrantor” appears next to Mr Barbudev’s name in the list of parties for definitional reasons, in order to make clear that references to “Warrantors” elsewhere in the Final Protocol (e.g. recital G, clause 3.02 etc) include Mr Barbudev. This does not cut down the scope of clause 5. If clause 5 were confined to Mr Barbudev’s claims qua Warrantor, this would deprive the words “under the Agreement or otherwise” of meaning (since Mr Barbudev’s claims, if any, qua Warrantor could arise only under the Agreement itself).

As regards the claimant’s reliance on the opening words of clause 5.01 (“The Seller confirms …”), the defendants say that these words cannot govern the second half of clause 5.01 (“and neither the Seller nor any other Party”), since the Seller would have no business confirming that parties other than itself had given up their claims. As to the contention that if the Final Protocol had been intended to extinguish Mr Barbudev’s rights under the Side Letter it would have said so expressly, it is seldom helpful to ask why the parties did not adopt one of two rival meanings in the contract (Lewison’s The Interpretation of Contracts at paragraph 2.13). In the present case, there was no need to refer expressly to the Side Letter because the language of the Final Protocol was already broad enough to cover it. The claimant’s contention that the words “or otherwise” should be read as “or otherwise arising in respect of the sale of shares” is not the meaning that the words “or otherwise” would have conveyed to the reasonable reader. In any event, the suggested interpolation does not assist the claimant. Even this narrower formulation still encompasses Mr Barbudev’s claims under the Side Letter. The expression “in respect of” has the widest possible meaning of any expression intended to convey some connection or relation in between the two subject-matters to which the words refer (Trustees and Executors Company v Reilly [1941] VLR 110, 111). The Side Letter formed part of the sale transaction, and so any claims Mr Barbudev may have had under the Side Letter undoubtedly arose “in respect of” the sale. It follows, the defendants submit, that on the plain language of the Final Protocol any claims that Mr Barbudev may have had relating to an interest in ECMB were thereby extinguished. It cannot be suggested that this produces a result which flouts commonsense or which is irrational. On the contrary, there is a great deal of sense in seeking to draw a line under a transaction and avoid future dispute. As the expressions “Final Protocol” and “Final Settlement” both indicate, there was a strong desire for finality. That is precisely what the extinction of Mr Barbudev’s purported rights under the Side Letter achieved.

My conclusions are as follows. The parties to the Final Protocol were Tracer, ECMB, Mr Barbudev, Mr Neytchev and Edmondson. Mr Barbudev is stated to be a party “as Warrantor”. The recitals refer to the SPA dated 12 April 2006 and the Payment Procedure Agreement, and various amounts payable and deferred. It is relevant to note, as has been pointed out, that the agreement continues, “Now therefore the Parties wish to finally settle all of the outstanding relations between them, including but not limited to the payment of all of the amounts due from the Purchaser to the Seller under the [SPA]”. This reflects the fact (which I do not believe it to be in dispute) that some of the consideration for the sale of the shares had been deferred at closing because of unresolved issues. The Final Protocol provided for the payment and adjustment of the outstanding sums.

Under the heading “Final settlement”, clause 5.01, which is the most significant clause for present purposes, provided as follows:

“The Seller [i.e. Tracer] confirms that once the payments identified in the preceding clauses 1-3 have been made all of the obligations (of payment or otherwise) of the Purchaser [i.e. ECMB] towards the Seller under the [Sale and Purchase] Agreement shall be fully performed and neither the Seller nor any other Party shall have any claim of any nature against the Purchaser whatsoever under the Agreement or otherwise;”

The construction question is finely balanced. The defendants’ strongest argument is that the words “or otherwise” appear on their face to be wide enough to include the claim of Mr Barbudev [as “any other Party”] under the Side Letter. As against that, I consider that the claimant is right to emphasise that Mr Barbudev is a party to the agreement as warrantor under the SPA. I am not convinced by the argument that Mr Barbudev is described as warrantor in the list of parties so as to make it clear that references to “Warrantors” elsewhere in the agreement include him. Mr Barbudev’s rights and obligations under the SPA as warrantor are entirely distinct from his rights and obligations under the Side Letter (the same applies in the case of ECMB). The Final Protocol is clearly concerned with finalising payments due under the SPA and the Payment Procedure Agreement, and as a matter of construction, I do not consider that the words “or otherwise” should be construed so as to include (and thereby shut out) Mr Barbudev’s rights under a different agreement, and in a different capacity. So far as it is necessary, I would accept the claimant’s submission that the words “or otherwise” mean “or otherwise arising in respect of the sale of the shares”. I do not think that is wide enough to cover his personal claims for a reinvestment in the merged business. Though in view of my earlier findings it makes no difference to the outcome, it follows that on this point I find for the claimant.

In the circumstances, issue (5) (whether Mr Barbudev is entitled to 10% of the proceeds of sale and/or other consideration received for the shares of ECMB as pleaded in paragraph 63.2 of the Amended Particulars of Claim) does not arise for decision. For the reasons given above, this claim must be dismissed. I am grateful to the parties for their assistance, and will hear them as to any consequential matters which arise.