Validity and Legal Enforce-ability of Side Letters in India

Posted: June 13, 2013 in Company Law, General Law, Legal, Legal Thoughts
Tags: , , , , , , , ,

The question of whether or not an Agreement is a Side Letter and whether such agreement meets the requirement of a valid, binding and enforceable contract or not, must be analyzed on facts from case to case and that the same must comply with the provisions of the Indian Contract Act 1872. The following broad conditions must be satisfied:

a. That there is a clear intention to create legal relations.
b. That it is not an agreement to agree into an agreement.
c. That the terms are clear and unambiguous.
d. That the subject matter is certain.
e. That there must be flow of consideration.

A Side Letter is a document that is ancillary to a contract, which may either clarify or supplement or vary the contract. A Side Letter much like a MoU or any other agreement, is capable of being treated as a contract by itself, which is capable of giving rise to rights and liabilities qua the parties to such Side Letter, which are binding and enforceable. The Side Letter and the Agreement must be read together for complete and proper construction of the contractual relationship between the parties to the contract in respect of their specific agreement.

Any First Party may enter into the Agreement with the Other Party and thereafter issue the Side Letter upon Other Party for setting up, running and operating specific items permissible in law. Both the Agreement and the Side Letter will give rise to legally enforceable rights and obligations.
That it is irrelevant, as to whether or not, the Agreement or the Side Letter are registered. As long as possession is not parted with there is no requirement for registration. Hence the enforceability of the Agreement and the Side Letter is not subject to registration under the Registration Act, 1908 nor are the provisions of Transfer of Property Act, 1882 attracted. No further document needs to be executed and/or registered between the parties as long as a simple license is granted without any transfer of ownership or absolute possession.
Both the Agreement and the Side Letter will be admissible as valid evidence before Court of Law.
The Agreement and the Side Letter can be specifically enforced under the Specific Relief Act, 1963.

However, the parties must make sure:

a. That terms and conditions are clear, unambiguous and certain.
b. That the First Party has exclusive possession, control and access of the contractual space.
c. That First Party is not creating any interest in the Contractual Space in favor of the Other Party.
d. That the Agreement and the Side Letter are legally binding and enforceable.
e. That the First Party is merely granting permission to Other Party to enter into the Contractual Space and run the same without creating any ownership rights.
f. That valid consideration forms the basis of the Agreement between the two parties.
g. That the validity of Agreement and the Side Letter are dependent upon each other. All the terms contained in the Agreement forms part and parcel of the Side Letter and vice-versa.
h. That the Agreement will survive the Side Letter because under the Agreement many Side Letters may be issued. However, when the Agreement is terminated then all Side Letters issued thereunder will automatically terminate.
i. That the Side Letter must be specific.

If such conditions are met then the Side Letter stands validated.

Further, although the usual intention is that side letters will give rise to legally enforceable rights and obligations, this is by no means guaranteed and, in some cases, they have nothing more than moral effect.

Patricia Wade and Sarah Stafford, Ashurst LLP

A side letter is a document that is ancillary to another contract: either clarifying, supplementing or varying the original contract. The key question wherever the content or effect of a side letter is disputed is whether or not the side letter is binding, as illustrated by the recent case of Barbudev v Eurocom Cable Management Bulgaria EOOD and others ([2011] EWHC 1560).

Important Judgments:

Kollipara Sriramulu (dead) by L.R. v T. Aswatha Narayana (dead) by L.R., AIR 1968 SC 1028

Currimbhoy and Company Limited v. L.A. Creet and Ors, AIR 1933 PC 29

Subimalchandra Chatterji v. Radhanath Ray, AIR 1934 Cal. 235

Millenia Realtors Private Limited v. SJR Infrastructure (Private) Limited, 2005 (6) KarLJ 36

Rickmers Verwaltung Gimb H. v. Indian Oil Corporation Ltd., (1999)1 SCC 1

Intelligence Decision System (India) Pvt. Ltd. V. Chief Election Commissioner, AIR 2006 Ker 229

P. Panneerselvan v. A. Baylis (Deceased through legal representatives) and Others (2006 AIR (Mad) 242

M/S. Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag (1991 AIR (Del) 315, 1991 RLR 87, 1991 ILR (Del) 303

Chairman cum Managing Director, Tamil Nadu Tea Plantation Corporation Ltd. v. Srinivasa Timbers, AIR 1999 Mad 111

Dhulipudi Namayya v. Union of India, AIR 1958 AP 533.

Mukherjee & Co. v. Chhaya Banarjee, AIR 1998 Cal 252

Prakash Chandra v. Angadlal, AIR 1979 SC 1241, (1979) 4 SCC 393

HIH Casualty & General Insurance Limited –Vs- New Hampshire Insurance Company & Independent Insurance Company Limited, [2001] EWCA Civ 735

Esso Petroleum Limited –Vs- Commissioners of Custom & Excise.

British Nuclear Group Sellafield Limited & Kernkraftwerk Brokdorf GMBH & Co OHG –Vs- Gemeinschaftskernkraftwerk Grohnde GMBH & Co OHG –Vs- E.ON Kernkraft GMBH, [2007] EWHC 2245 (Ch)

Georgi Velichkov Barbudev –Vs- Eurocom Cable Management Bulgaria Eood & Ors, [2012] EWCA Civ 548

Georgi Velichkov Barbudev –Vs- Eurocom Cable Management Bulgaria Eood & Ors, [2011] EWHC 1560 (Comm)

 RTS Flexible Systems Ltd –Vs- Molkerei Alois Müller GmbH & Co KG, [2009] EWCA Civ 26

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