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As a business owner negotiating commercial contracts, you should consider using a side letter as part of the negotiating process. Most commercial negotiations take place with the end goal of signing a legally binding contract. However, parties may require additional documentation before agreeing to the written agreement. One such document is a side letter. This article will explain the main purposes of using a side letter, so your company can determine whether it will benefit your commercial contract negotiations.
What is a Side Letter?
A side letter is a legal document seeking to provide additional background to any commercial deal. Its primary purpose is to add detail and context to the contract wording rather than replace it.
Some practical uses of side letters include:
- recording last-minute alterations;
- clarifying contractual wording; and
- building goodwill between parties.
These are discussed in detail below.
1. Recording Last-Minute Alterations
A side letter is an invaluable way of adding further detail and context to the wording of a commercial contract. For example, your company may use it to record any last-minute alterations to the written agreement.
Suppose your company supplies ten computer monitors per month to an expanding IT business. The contract states that your organisation will send ten ‘HP-branded’ monitors. However, in the last week (just before signing the contract), you receive better-quality monitors from another brand. The parties may prefer to have the side letter mention that any references to ‘HP-branded’ monitors should now be treated as the brand with the newer offering.
2. Clarifying Contractual Wording
Side letters can also provide background and context rather than recording amendments to contractual wording.
For example, suppose your company is due to start providing daily lunch to a local sports club. The written agreement addresses the main concerns such as payment details, the start date of the service and how much notice is needed to end the contract. However, it lacks details about the club’s lunch expectations.
In this way, a side letter may confirm:
- the purpose of the lunch package, which is to promote healthy eating amongst players and staff;
- what time to deliver lunch to the premises at; and
- any days you should package the food in ‘take-out’ containers (for example, when the team is travelling to away games and will take the food on the team coach).
3. Building Goodwill Between Parties
While some commercial deals may be straightforward, others require more careful consideration of the morale and thoughts of the other party. Where this is the case, sensible and reasonable notification of a neutrally worded side letter can help persuade a party with reservations to sign a commercial agreement.
This is because the negotiation and agreement of a side letter can help show that your organisation is interested in setting sensible expectations upfront and ensuring the small details are right.
Agreeing to a Side Letter
It is usually easier to agree to the terms of a side letter than the contract terms within a legally binding agreement. This is for several reasons, which include:
- the side letter tends to be more factual as it seeks to set the background for the deal;
- most side letters are considerably shorter than the full business contract; and
- one purpose of a side letter is to demonstrate trust and good faith between the parties, so negotiating them too much defeats the purpose.
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Key Takeaways
Side letters provide the parties with a chance to improve their business relationship with each other by clarifying the aim of their commercial agreement. Many business owners view them as helpful in furthering negotiations and securing a final contract. While there is no legal right to receipt of a side letter when negotiating business agreements, it is a useful written document clarifying the party’s obligations to each other. A well-drafted side letter can also offer some legal protection by giving the parties evidence of their intentions at the time of signing.
If you need help with side letters, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
No, the use of side letters is entirely optional. However, many businesses use them to experience the advantages listed above.
As the purpose of a side letter is to complement, rather than replace, a written commercial contract, the starting point is to presume they are probably not legally binding. However, if a court believes that the side letter introduces new terms rather than clarifying existing ones, they are likely to hold that the side letter is also legally binding. Because of this, it is a good idea to get legal advice and assistance with the wording.
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