INTRODUCTION
Side letters are peripheral to the investment transaction. The Side letters are used for negotiating the essential terms and conditions of the agreement. Side letters are useful when parties wish to complete the transaction without finalizing the terms of certain aspects of the deal, the broad contours of which may be included in a side letter for formalization post-closing. Side letters are commonly used to interpret, establish rights under, alter, or supplement terms in fund documents.
INDIAN JUDICIAL PRONOUNCEMENT ON ENFORCING SIDE LETTERS
1) Kollipara Sriramulu (dead) by LR vs T.Aswatha Narayana (dead) by LR – The court held 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.”
2) Nanak Builders and Investors Pvt Ltd vs Vinod Kumar Alag – The court held that when the essential terms have been agreed between the parties and have been reduced to writing and the agreement indicates no reference to formal agreement than the agreement cannot be said to be incomplete.
3) Rickmers werwaltung GMBH vs Indian Oil Corporation Limited – The court after considering the evidence on record stated that if there is no agreement and the intention is not to negotiate, it does not imply to enter into legal relationship. But if there is consensus-ad-idem than even the non-binding contract can be binding.
ENGLISH COURTS JUDICIAL PRONOUNCEMENT ON ENFORCING SIDE LETTERS.
a) United Kingdom
In Re lancelot Investors Fund (2008) The Court held that where the beneficial owner seeks to rely on ancillary terms and contained to modify any existing rights may be enforced notwithstanding the custodian who is the registered shareholder of the beneficial owner shares is not a party to it. In “Barbudev vs Eurocom Cable Management Bulgaria [2011]” Barbudev had been the CEO and 40% shareholder of a Bulgarian cable television and internet company (target company). The target company was acquired by ECMB, which was a part of the Warburg Pincus group. During the negotiations for the acquisition, Barbudev expressed his keenness on taking a stake in the purchaser company. However, the parties were unable to agree upon the terms of Barbudev’s investment in the purchaser before the acquisition for the target company was complete. Hence, the parties agreed to enter into a side letter. The court ruled in favour of EMCB and refused to enforce side letter. The court in this case enunciated the principle that the side letter to be valid and enforceable must have intention to create legal relationship, must have consideration and should be concise. Moreover the Cayman court in ”Lansdowne Limited & Silex Trust Company Limited v. Matador Investments Limited (In Liquidation) & Ors (23 August 2012)” held that No agreement was made between Matador and either Lansdowne or Silex. It was made between A and B. Applying the principles in the Barbudey case, it could not be contended that the agreement was binding on Matador or the liquidator. As per FSA “Firms will be required to disclose the existence of side letters which contains material terms and the nature of such terms ,where a firm is a party to the side letters or is aware that a fund of which the firm or an affiliated entity is an investment manager is a party to them. Firms will not be required to disclose the existence of side letter which contains no material terms.
b) United States
In “ESG Capital Partners II, LP v. Passport Special Opportunities Master Fund, LP, Delaware court will enforce a side letter, interested parties should take three steps :-
First, integration clauses should be carefully examined so that they do not nullify side letters. Sources of integration clauses that should be analyzed include partnership agreements, subscription agreements, and other fund documents.
Second, fund documents should also explicitly provide general partners with the authority to grant special additional rights. When fund documents are silent as to side letters, courts can invalidate rights granted in such side letters.
Finally, side letters should not contain terms that harm other investors in the fund unless (which would not be typical) the granting of such preferential rights is specifically provided for in the fund documents. Also, according to U.S Security Exchange Commission Side letters raises few concerns such as ability to make additional investments, receive treatment as favourable, limit management fees and incentives.
c) Australia
In “Adicho vs Dankeith Homes Ply Ltd, the facts observed was that Dankeith Homes Ply Lt was the the developer and owner of eight units in a development at Ingleburn, NSW. In August,2007 it entered in a contract of sale with Mr. Adicho for the sale of all eight units . Each contract provided for payment on exchange of a deposit equal to ten percent of the sale price. As it turned out that no deposit was in fact paid on exchange on any of the contracts. The trial judge found that this was primarily because an oral agreement was executed between Dankeith and Mr.Adicho to reduce the amount of deposit to only $500. Therefore the court held that side arrangement was unenforceable because it was inconsistent with the express terms of the main transaction document.
REFERENCES
https://www.hedgeweek.com/2012/09/03/172424/cayman-court-lays-down-more-guidelines-enforceability-side-letters.
https://www.omm.com/resources/alerts-and-publications/alerts/enforceability-of-preferential-rights-in-side-letters/
https://indiacorplaw.in/2011/07/enforceability-of-side-letters-2.html
https://vazilegal.com/are-side-letters-legally-binding/
https://blog.ipleaders.in/side-letter-agreement/
https://www.omm.com/resources/alerts-and-publications/alerts/enforceability-of-preferential-rights-in-side-letters/
https://www.mondaq.com/australia/contracts-and-commercial-law/205438/side-letters-and-collateral-contracts-are-they-enforceable
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