This article is written by Aakriti Bansal pursuing a Diploma program in Advanced Contract Drafting and Negotiation and Dispute Resolution from Lawsikho.
Table of Contents
What is a side letter agreement?
It is conventional practice for parties engaging in a contractual relationship to enter into “side letter agreements”, usually in corporate and commercial dealings. As the name suggests, side letters are instruments that are supplemental and auxiliary to the main principal contract. It can be used for clarifying, supplementing, varying, or as a detailed extension to some of the terms of the main contract. There are plenty of reasons for parties to enter into a side letter agreement pursuant to the primary contract, instead of including the contents of the side letter in the principal document. These are versatile and useful in cases where the parties aspire to complete their transactions without actually finalizing the terms of certain aspects of the business operation, the underlying broad aspects of which can be included in the side letter agreement, for ratification after closing. They can prove beneficial for further clarifying the relationship and other private engagements between the parties to the main contract. Since contracts as such can be available in the public domain, there might be some information related to the transaction which might be highly private, confidential, or sensitive information, between the parties and if made available in the primary contract, might prove detrimental to the interest of the parties and is therefore preferred to be put in a side letter agreement.
What side letter agreements are used for?
The primary uses for side letter agreements can comprise of the following:
- Clarification
In commercial and corporate transactions, the agreements between parties relating to their business dealings can be very elaborate and run into a number of pages, and it might be possible that there exist certain terms and clauses which require in depth enumeration. A side letter may be used in such scenarios to clarify some of these terms of the principal contract. It is also usually used were, at the time of the finalization of the contract, some of the details and information were unknown or doubtful and became known thereafter, for confirming such additional details. For example, it can be used to enumerate what would constitute “all reasonable endeavors”, wherein there is a clause in the contract relating to the same.
- Supplementation
As stated above, commercial and corporate transactions and agreements in pursuant to those transactions are complex and are often multi-party transactions, in such situations, side letters serve as evidence for a binding contract between two parties to a multi-party transaction, even in situations when it has not been disclosed to other parties. Thus, the serves the purpose of being a supplementary document. Side letters are usually expended in the formation of investment funds, generating several surplus obligations or permitting exemptions between the fund and a specifically limited partner.
- Variation
Once the primary contract has been drafted and initiated for legal formalization, there may arise a need for incorporating last-minute changes. In such scenarios, it is preferable to draft a side letter agreement, instead of amending the principal contract altogether. If a situation arises wherein the parties wanted to make changes to the main contract, before it is finalized or even after finalization, making changes to the main contract could require redrafting the entire agreement or major clauses, which could be time and resource inefficient and this problem can be resolved by a side letter varying and incorporating the desired changes.
- Maintaining confidentiality
When parties engage in commercial and corporate transactions, there is always some information that is so sensitive and confidential in nature, that any leak of such information could prove detrimental to the entire business of the parties. It may be possible that such confidential information cannot be disclosed in the principal contract, given that the contract is available in the public domain, in such situations, a side letter agreement incorporating all such details of the sensitive information can be drafted.
Types and forms of side letter agreements
Side letter agreements can take many forms and may be known by various other terms, depending upon the nature of the transaction and engagement between the parties to a principal contract. A side letter agreement can be in the form of an MOU drafted before the finalization of the primary contract, it can be a letter of intent, a term sheet, comfort letter, or it can also be in the form of a letter of appointment pursuant to a principal contract of employment, it can be in the form of a document giving out details for investment in an investment agreement. Therefore, irrespective of the term used to connote a side letter agreement, they fall within the same category of side letters.
Legal enforceability of Side Letter Agreements
Regardless of the fact that side letter agreements are extremely useful, they give rise to a variety of legal issues with respect to their enforceability. Questions like, whether a side letter is a legally binding contractual agreement between parties that could be enforced by a court of law arise. Although there is no forthright answer to these questions, the courts in different countries have tried dwelling into such questions and discussing and deliberating on the same, on the basis of which some clarity can be gained. In the case of Barbudev v. Eurocom Cable Management Bulgaria, the English Court decided upon the enforceability of a side letter agreement and laid down certain principles. The main points of discussion were:
- Intention to create legal relations
One of the requirements that determine the enforceability of contracts is the intention of the parties to create legal relations. The court in this case examined the language of the side letter to infer the intention of the parties. Through the language of the side letter, it was concluded that the side letter was not intended to be legally binding. The court held that the side letter made a reference to the principal Investment Agreement (which was to be entered between the parties), and was reflective of the fact that the side letter was not to be binding and only the Investment Agreement would be binding.
- Agreement to Agree
Under English law, there is a principle that “an agreement to agree is legally unenforceable.” The court emphasized this principle and although the broad terms of the investment were set out in the side letter, the court couldn’t be convinced of its certainty and sufficiency and concluded that it was merely an agreement to agree.
- Certainty of terms
The court was of the view that in order for a side letter to be legally enforceable, all the essential terms should be certain as they would be in a principal contract. It could be understood as the side letter should be self-sufficient and self-effectuating. If it lacks to contain the terms which are crucial for its implementation, then it would be invalid as it would be too incomplete or uncertain to be enforceable by law.
Thus, it can be inferred from the above that in order for a side letter to become binding and have the force of law, it should satisfy the identical standards and requirements that all contracts have to fulfill: (i) offer; (ii) acceptance; (iii) consideration (iv) certainty; and (v) the intention to create legal relations. With respect to the question of intention of parties to create legal relations, if clear wording is used in the contract, the court will interpret the same to carve out the intent of the parties, as was held in the case of Rose & Frank Co v JR Crompton and Bros Ltd. With respect to the question of certainty of language, the court generally draws a distinction between “interpreting” and “making” a contract and the role of the court is confined to the interpretation of the contract and not make the contract for the parties as was held in the case of Scammell and Nephew Ltd v Ouston. Consideration is also an important aspect to look into to give the side letter agreement a binding force of law. It was held in the case of British Nuclear Group Sellafield Ltd v Kernkraftwerk Brokdorf GmbH & C, that where a side letter constitutes a legally binding contract, normal rules of interpretation will apply, including the law of mistake and misrepresentation. Thus, on the basis of the above discussion, it can be culled out that the basic requirements that apply to a principal contract should also apply to side letter agreements in order for it to be enforceable. 
Indian scenario with respect to legal enforcement of Side Letter Agreements
In order to determine the enforceability of side letter agreements, the facts of each case have to be analyzed individually with respect to the provisions of the Indian Contract Act, 1872 and no straightjacket formula can be devised for the same. The conditions for a valid side letter agreement as laid down under the Indian Contract, 1872 read with the judicial pronouncements of the common law countries can be summarized as under:
- The clear intention of the parties to create legal relations
- The agreement shouldn’t merely be an agreement to agree
- The terms should be clear and unambiguous
- The subject matter is certain
- There is some form of consideration
In order to understand the Indian position with regard to the enforceability of side letter agreements, we have to look at some case laws in that context.
In the case of Kollipara Sriramulu (dead) by L.R. v T. Aswatha Narayana (dead) by L.R, it was held by the court that in relation to a side letter agreement that “Where the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of a further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will, in fact, go through. In the former case, there is no enforceable contract, while in the latter there is a binding contract.” In the case of Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag, the Delhi High Court held that in a situation where the essential and important terms have already been agreed upon between the parties and have further been formalized into writing, and the agreement indicates no reference or mention of another formal agreement that is to be executed by the parties, the Court will not regard the agreement as an incomplete agreement. In the case of Rickmers Verwaltung Gmbh. v. Indian Oil Corporation Ltd., the court giving regard to the facts and circumstances of the case and analyzing the evidence on record came to the conclusion that the correspondences between the parties are indicative of the fact that they were merely negotiating and there was no agreement and the negotiates on the side didn’t imply an intention to enter into a legal relation, therefore no binding contract exists.
On the basis of the decision of the Indian courts, it can be understood that the court would look into the unique facts and circumstances of each case to determine the legal enforceability of each side letter agreement to analyze whether the basic requirements of a valid contract are fulfilled or not.
Conclusion
From the above discussion, one striking conclusion that can be made is that the legal enforceability of a side letter agreement to a substantive extent depends upon the language of the side letter agreement, and therefore it is necessary to draft such side letter agreements with utmost diligence. The courts construe the nature of the relation of parties through the document itself, and hence, it is compelling that attention is paid to make the terms of the side letter as clear, comprehensive, and coherent as possible. If from the very beginning, the parties wish to give the side letter agreement a binding force, they could insert a clause to that extent and clearly lay it down in the side letter agreement in order to evade any future dispute. On the other hand, if the parties don’t want the side letter to be binding, they can do this by inserting a clause in the agreement. Hence, the language and the structure of the agreement need to be taken into consideration while drafting a side letter agreement.
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