Side letters are supplementary agreements that play a crucial role in commercial contracts by providing flexibility and addressing specific issues not covered in the main contract. This practice note explores the nature, enforceability, and practical considerations of side letters, helping clients understand when and how these instruments can be effectively used while managing associated risks.
- A side letter is a supplementary agreement entered into alongside a principal contract.
- It typically addresses specific issues not covered in the main contract, or clarifies/adjusts obligations in a flexible way.
- Common in joint ventures, financing, real estate, supply chain, and investment agreements.
2. Binding vs Non-Binding Nature
- Binding Side Letters:
- Contain clear contractual language (offer, acceptance, consideration, intention to create legal relations).
- Often enforceable as standalone contracts or as amendments to the main agreement.
- Example: rent concessions, pricing adjustments, confidentiality undertakings.
- Non-Binding Side Letters:
- Express intentions, understandings, or moral commitments without legal enforceability.
- Often framed as “letters of comfort” or “letters of intent.”
- Example: parties agreeing to “review pricing annually” without obligation to adjust.
3. Key Determinants of Enforceability
- Language Used: Words like “shall” or “must” indicate binding obligations; “may” or “intend” suggest non-binding.
- Integration Clauses: Entire Agreement clauses in the main contract may exclude side letters unless expressly carved out.
- Formality & Execution: Signed by authorized representatives, referencing the main contract, and sometimes requiring the same formalities (e.g., notarization).
- Jurisdictional Approach:
- UK: Courts often uphold side letters if contractual elements are present.
- US: Enforceability depends on state law and whether consideration exists.
- South Africa: Side letters can be binding if they meet contractual requirements, but risk being invalidated by non-variation clauses.
- Conflict with Main Contract: Risk of inconsistency or contradiction.
- Confidentiality vs Disclosure: Hidden side letters may breach regulatory or fiduciary duties.
- Regulatory Scrutiny: Competition authorities may view undisclosed side arrangements as anti-competitive.
- Litigation Exposure: Disputes often arise when one party treats a side letter as binding and the other does not.
- Checklist for Drafting:
- Confirm intention (binding vs non-binding).
- Align with Entire Agreement / Non-Variation clauses.
- Ensure consistency with the main contract.
- Include governing law and dispute resolution provisions.
- Diagnostic Tool:
- Use side letters for minor, flexible adjustments.
- Use formal amendments for material changes.
Side letters are powerful tools for flexibility and confidentiality, but their enforceability hinges on clear drafting, alignment with the main contract, and jurisdictional rules. Treat them with the same care as the principal agreement to avoid unintended disputes.
Disclaimer: This practice note is provided for general informational purposes only and does not constitute legal advice. Readers should consult qualified legal professionals for advice tailored to their specific circumstances.