Are your side letters worth the paper they are written on?
Posted: Tuesday 27 September 2011
A side letter can be a useful tool in commercial transactions for a range of purposes: from providing non legally binding reassurance; to documenting last minute contractual amendments or supplemental terms without redrafting the parties’ main agreement. However, the fact that side letters can be used for differing purposes and are often drawn up relatively informally makes it risky to rely on one without ensuring that it contains legally binding obligations, as two recent cases illustrate.
In Barbudev v Eurocom and Others, a side letter entered into in the context of the sale of a Bulgarian cable tv and internet business which stated that the vendor (Bardudev) would be offered the opportunity to invest in a 10% stake in the purchasing company was found to be a non legally binding “agreement to agree” by the English High Court.
Although the side letter did contain some information about the proposed terms of Barbudev’s investment (such as the percentage of equity to be acquired and the minimum aggregate price to be paid), it left the detailed terms of that investment to subsequent good faith negotiation between the parties, which amounted to no more than an agreement to agree under English law.
In Regus (Maxim) Limited v The Bank of Scotland PLC, a letter from the Bank of Scotland confirming that the bank held sums on behalf of the owners of a development to meet their contribution to fit-out costs was held to be a non-binding letter of comfort by the Scottish Court of Session.
Looking at the terms of the letter, there were no clear words expressing an intention by the Bank to accept a legally binding undertaking to pay such sums to a tenant who had undertaken the fit out works. The letter was also addressed to the solicitors of the owners and not to the party who was seeking to rely upon it. All taken together, it was no more than a letter of comfort and might impose a moral responsibility but not a legal one, said the Court.
Comment
Parties wishing to rely on a side letter should not assume that they have legal force merely because they are provided with a view to addressing their concerns – this does not mean that they can be relied on in the legal sense . Side letters which are intended to be legally enforceable must meet the same requirements as any other contract: there must be a clear unambiguous intention to enter into a contract (lacking in Regus); and agreement as to the essential terms or an objective means for achieving agreement of those terms (lacking in Barbudev).
It would be equally unwise to assume that a document will be non-legally binding merely because it is described as a letter of comfort or similar. The judge in Barbudev made it clear that such terms are not determinative and the Court of Appeal has previously held that a document incorrectly described as a letter of comfort will give rise to a contractual liability despite the wrong label having been attached to it.
To discuss this in more detail contact Austin Flynn.
