Side letter
Side letter
/saɪd/ /ˈlɛtə/ (n.)
Another great canard in the pantheon of ludicrous approaches to reaching consensus ad idem, the side letter is an agreement appended to the “side” of another agreement, the theory being that since it is somewhat out of sight, or pointing a slightly different direction, that people can get themselves comfortable pretending it is not, formally, there, while at the same time understanding that, substantially, it totally is there, and in fact probably operates to totally undermine the economic intention of the main razzle-dazzle agreement that everyone feels comfortable pretending is there.
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Negotiation Anatomy™
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Sensible uses for side letters, and things that are a bit like side lettters
Side letters have some sensible applications, but they are far fewer and further between than the number of side letters one encounters in real-life. As best as I can figure out, they are these:
- Arrangements to cover multiple contracts: If, say, you have a cash trading arrangement and a synthetic trading arrangement, and they are governed by different masdter contracts (terms of business for trh former, an ISDA Master Agreement fo rht latter) and you want to agree, say, a commission-sharing arrangement that would apply to both of them, then a side letter — really a completely separate agreement, truth be told — isd the best way of doing that. But this isn’t really a side letter.
- Arrangements between some but not all parties to a contract: If you are lucky enough to be a party to a multilateral contract — an inter-creditor agreement, or a principal paying agency agreement or something — you may wish to make private arrangements with one or other counterparty but not all of them.
- Arrangements struck after the original contract: you may agree to change or update the terms of an original contract sometime after its execution. amongst ISDA ninjas, for example, there is a curious reluctance to “reopen” the terms of a concluded contract – personally I have never understood this, but the fear seems to be you that in doing so may unwittingly open Pandora's box or the unleash the hounds of hell somehow – and if you are of such a fragile constitution you may wish to include updated terms in a separate “amendment agreement”. However, again, this isn’t really a “side letter” in its purest, absurdest form. But for the record an amendment and restatement of the original agreement is a much smarter thing to do. This is just my opinion.