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As a business owner, you will already know that business deals involve significant paperwork. Whilst a signed commercial contract usually signals the end of negotiations, various other legal documents can emerge during the journey. One such document is a side letter, which can aid negotiations if used correctly. This article will explore the purpose of a side letter and how your business can effectively use one to assist its commercial contract negotiations.
What is a Side Letter?
Many businesses use a side letter to provide extra information regarding certain aspects of the potential business deal. In effect, the document aims to document the general intentions and motivations of the parties.
Why not put this additional detail in the contract? A commercial contract contains legally binding wording. Accordingly, written agreements should be clear, concise and avoid ambiguity. Detailing general intentions and motivations on paper can be vague. Thus, it is best kept in a separate document.
A helpful way of looking at a side letter is to view it as a confirmation of the principles behind the agreement, whilst the legally enforceable contract contains the rules of the deal. This is similar to a government department deciding to pursue the principle of ‘crime prevention’, so passing a formal law against burglary. The side letter can demonstrate the moral effect of the deal, whilst the actual contract confirms its exact boundaries.
Is a Side Letter Mandatory?
Side letters are not mandatory, and because of this, some businesses never use them. However, many organisations view side letters as a helpful step in setting the foundation for the written agreement.
This can include a situation where the parties wish to set a non-legally binding foundation for the contract negotiations. For example, the side letter may contain ‘MFC provisions’ (otherwise known as most-favoured-customer wording or ‘MFC clauses’). This could put forward the informal arrangement that your business will attempt to finalise commercial transactions with that party in good faith before any other organisation.
Other situations include rent review wording within side letters accompanying commercial leases or side letters confirming the role of a private fund manager.
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Why is a Side Letter Useful?
Because there is no set format for a side letter, it can simply record helpful information to the relevant parties involved. As a result, all businesses can use side letters, from SMEs to limited partnerships.
A side letter can act as a postscript and put meat on the bone of contractual clauses. In essence, the letter can serve as confirmation of the intended meaning of certain pieces of wording within the written agreement. To explore this further, let us study the example below.
Example
Your business wants a company to provide complimentary coffees to staff during the working week to record excellent sales last year. So you reach out to a local coffee van company which puts forward a contract promising three visits to your premises per week for a fixed weekly fee of £400 (plus 50p per hot drink).
The coffee van company states that the main contract is ‘standard’, and they will not amend it.
In this instance, a side letter could help confirm the following:
- the exact times in the week to visit your premises (for example, you may want it outside peak operating times, so maybe early in the morning between 9.30 am and 10 am);
- the purpose of the contract (to reward staff for good work and act as a perk);
- clarify any material terms of the agreement (i.e. confirm that reference to ‘hot drink’ within the contract includes coffees, teas and decaffeinated versions of each);
- confirm what the contract does not cover (e.g. to confirm that cold drinks are not included and, if a staff member requests the same, they should pay the van directly); and
- help understanding and goodwill between businesses by clarifying the mutual aims of the policy (to provide subsidised hot drinks to staff three times per week as a reward).
The side letter can serve as a written confirmation of the reasons behind the deal and the parties’ understanding. Whilst most side letters are not legally binding, they can help interpret the content of any preferential terms within the written contract.
What is the Value of a Side Letter to My Business?
A side letter can confirm the primary intent of a written contract, so if there is any debate or uncertainty between the parties regarding the meaning of the legally enforceable rights within the agreement, it can assist. As such, it acts as more of a discreet safety net between the parties as it gives them an additional document to discuss before consideration of legal action.
Key Takeaways
The main takeaway is that side letters are not usually legally binding, as this is the job of the contract itself. As such, they can contain additional (and slightly vaguer) details about the parties’ expectations rather than formal clauses. However, their primary purpose is to help the parties fully understand each other’s motivations and aims within the commercial deal to minimise future misunderstandings.
If you need advice on the use of side letters, our experienced 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
Yes, many business owners detail their aims and ambitions to their legal representative, who drafts a side letter to send to the other company.
This is a crucial question. Whilst most parties draft side letters with no intention of being legally binding, it is possible for the letter terms to create legal relations, albeit it is relatively unusual. A High Court judge is only likely to consider side letter provisions to have legal effect if it acts to insert specific terms into the binding contract and contains the parties’ signatures.
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