This came up recently in the case of Barbudev v Eurocom Cable Management Bulgaria EOOD and others (2011).
Although the usual intention is that side letters will give rise to legally binding and enforceable rights and obligations, this is by no means guaranteed. Sometimes they can have nothing more than moral effect, so careful drafting is crucial.
Use of side letters
– Clarification – used to confirm additional details to the primary agreement;
– Supplementation – they may also evidence a binding contract between two of the parties to a multi-party transaction; or
– Variation – when dealing with any last minute changes, it is often easier to set out the relevant details in a side letter than to make manuscript changes and have them initialled.
Whether a side letter is binding or not depends on the four basic principles of contract law. For a contract to be formed, there must be 1) offer and acceptance, 2) the intention to create legal relations, 3) certainty, and 4) consideration.
The latter three are always the trickiest to establish.
Intention – this was dealt with in Barbudev – whether the parties have decided to create legal relations depends on “a consideration of what was communicated between them by words or conduct, and whether that leads objectively to the appropriate conclusion”;
Certainty – looked at from two angles – certainty of language, and whether the document is sufficiently complete; and
Consideration – to be binding, a side letter must, like all other contracts, be supported by some form of consideration, usually expressed along the lines of reciprocity i.e a promisee cannot enforce a promise unless it has been promised something in return.
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