This month’s Commercial Property update explains what a side letter is and the circumstances in which a side letter may be used.
What is a side letter?
- A side letter is a document that is ancillary to another contract. The key question whenever the content or effect of a side letter is disputed is whether or not the side letter is binding.
- Although the usual intention is that side letters will create legally enforceable rights and obligations, this is by no means guaranteed, even if the document is entitled “side letter”. In some cases, a side letter will have nothing more than moral effect.
When will a side letter be binding?
- If a side letter is drafted by lawyers and contains legal language (for example, “in consideration of …”), boilerplate and confidentiality obligations, it is likely that it will be legally binding. However, whatever the language used, a court will not enforce a side letter if the key commercial terms are still being negotiated. The courts cannot make a contract, they can only interpret one.
- A side letter is a contract and consideration (payment, in any form, under the contract) must be provided. Usually, if a side letter is made to clarify details relating to the main agreement, or to document agreed changes, the requirement for consideration is satisfied as the benefit to both parties is obvious.
- If consideration is not provided, the side letter will not be binding unless it is executed as a deed. A deed is a written document which is executed with the necessary formality (that is, more than a simple signature).
In what circumstances are side letters used?
Side letters are often used to confirm additional details that are not known when the principal documents are finalised or to clarify certain points.
When dealing with any last-minute changes, it is often easier to set out the relevant details in a side letter than to make changes to the contract and have them initialled. Side letters are also an efficient means of documenting any changes that have been agreed in relation to a party’s standard terms and conditions.
Side letters may also evidence a binding contract between two of the parties to a multi-party transaction, whether or not disclosed to all other parties.
If you have any queries about the content of this checklist, please contact Max Marrison.