Recent legal developments highlight the importance of making sure a side letter to a document has all of the elements it needs to be legally binding, otherwise you could find that you have an expensive extra piece of paper which has no more than a moral effect.
What are side letters?
A side letter is a legal document used to clarify, supplement or
vary an existing contract. Many people view them as simple
documents but you should be aware that preparing a side letter is
more complex than it seems and if not attended to correctly, could
be ineffective, as illustrated by a recent legal case.
Why are side letters useful?
The common uses for side letters include:
- Providing clarification, such as when details become available which were not known when the contract was originally entered into;
- Supplementing negotiations between parties by providing additional obligations or exemptions; or
- Confirming variations where last minute changes have been made, where it is not practical or cost-effective to re-draft a substantial document.
When will a side letter be binding?
A side letter must be properly drafted to be binding on both
parties and there must be a contract in existence, or the main
negotiations for such a contract must be complete at the time the
side letter is entered into. If there is no contract or
negotiations in relation to key terms are still underway, any
side letter in existence will fail.
To ensure a side letter is binding you must have:
- An offer made by one party and accepted by another;
- An intention to create legal relations – merely stating that a document is a 'side letter' is not sufficient;
- Clear provisions within the document to allow a court to decide how to interpret it;
- Some form of consideration, such a reciprocal benefit between the parties (this could be money paid for an exemption). Consideration cannot be for something in the past.
If any of the above four elements are missing, the side letter
will not be legally enforceable and will effectively be worthless.
It is, therefore, crucial to ensure that your side letters are
properly drafted to avoid costly disputes over what may at the time
appear to be minor "bits on the side".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
