What is a side letter?
A side letter is a document generally used as supplementary to a contract.
The problem with a side letter is that its validity as a binding document can easily be questioned even where the parties’ intention at the time of execution is for it to be legally binding and this was highlighted in the case of Barbudev v Eurocom Cable Management Bulgaria EOOD and others ( EWHC 1560).
A side letter should create legally enforceable rights and obligations; however in some circumstances it may simply have a moral effect.
When are side letters used?
Side letters are quite common in property transactions principally because leases and property interests will often be contractually sold on (assigned) and the parties may not intend certain aspects of the contract to apply to successors. They may also be used for contingent situations where the main contract is not yet concluded. Other common uses are as follows:
Clarification of issues in contract
A side letter will often be used to clarify some of the terms of the main contract and is usually used where, at the time of finalising the contract, some of details remain unknown.
For variation of contracts
Without a side letter, if you wanted to make changes to the contract either before it is finalised or thereafter, the amendments to the contract could result in the redrafting of other clauses and therefore the parties’ may find themselves in a position where lots of terms have to be redrafted which could turn out to be time consuming and very expensive.
It may be easier (and cheaper) to set out the amendments in a side letter which will also save the parties the need to initial every change in the original contract.
Supplementary points for main contract or for confidentiality
Side letters are also used to evidence a binding contract between two of the parties to a multi-party transaction, even where it has not been disclosed to the other parties.
When does a side letter become binding?
In order for a side letter to become binding it must satisfy the same criteria that all contracts have to satisfy: (i) offer; (ii) acceptance; (iii) consideration (iv) certainty; and (v) the intention to create legal relations.
Offer and acceptance are relatively simple to satisfy, however the other three are not. An intention to create legal relations will always be presumed, in the absence of any evidence to the contrary. In order for there to be certainty there is a requirement for both a reasonable degree of certainty to the language and a reasonable degree of certainty that the document is complete.
The final criteria and arguably the most important is consideration (a form of payment). Consideration does not have to take monetary form and can simply be a reciprocal benefit (or detriment). Usually a side letter is used to clarify the details of the contract and therefore the need for consideration is satisfied as there is a benefit to both parties. In the absence of any benefit or payment a side letter can only become legally binding if it is executed as a deed, which means, amongst other things, that it must state that the side letter is a deed and the parties’ signatures must be witnessed.
Because a court cannot make a contract (it can only interpret it) it is for the parties to ensure that it contains the appropriate legal language, obligations and standard clauses. The courts can however use their discretion to uphold a particular document to be a contract.
Finally, it should be noted that a side letter will be unenforceable until such time as all the terms have been negotiated.
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