A side letter to a commercial contract can be fully binding under English law — or worth nothing — depending on four things: whether it satisfies the requirements for a valid contract, how the main agreement is drafted, what the side letter itself says about its own status, and whether it conflicts with the main deal in a way the courts would not permit. Getting this wrong costs money.
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What a side letter actually is
A side letter is a separate, standalone document signed alongside (or after) a principal commercial agreement. Parties use them to record terms they want to keep off the face of the main contract — price adjustments, deferred obligations, informal waivers, acknowledgements of side arrangements. In M&A, property, lending, and financial services transactions, side letters appear regularly.
The label "side letter" has no special legal meaning in England and Wales. Courts treat the document according to its contents and the circumstances in which it was made. If it contains an offer, acceptance, consideration, and certainty of terms — and the parties intended to be legally bound — it is a contract.
Binding vs non-binding: the actual test
English law applies ordinary contractual principles. The leading analysis remains that of the Court of Appeal in Baird Textile Holdings Ltd v Marks and Spencer plc [2001] EWCA Civ 274, which restated that an agreement is only enforceable if the parties intended legal relations and the terms are sufficiently certain. A side letter that uses language like "we intend to work towards" or "it is our expectation that" is likely to be read as aspirational rather than binding.
Three factors courts examine in practice:
1. Is there consideration? A side letter that merely records a concession already made by one party, without any fresh consideration moving from the other, may fail as a gratuitous promise. The Contracts (Rights of Third Parties) Act 1999 does not fix this problem. If the side letter grants a benefit to Party A, Party A should give something in return — even a nominal sum will usually suffice if documented properly.
2. Are the terms certain? Courts will not fill in essential terms. A side letter that says "Seller agrees to rebate a reasonable amount if volumes fall short" will be unenforceable for uncertainty. Specific figures, mechanisms, and trigger events are required.
3. Did both parties sign with authority? A side letter signed by an employee who lacked authority to commit the company is voidable. Check the signatory's authorised limit and, for regulated entities, whether the side letter itself required board or regulatory sign-off.
Side letter vs variation agreement vs comfort letter
These three documents are routinely confused, and the confusion has consequences.
A variation agreement formally amends the terms of the main contract. Where the main contract contains a "no oral modification" clause — a clause confirmed to be effective by the Supreme Court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 — any variation must be in writing and comply with the clause's formalities. A side letter that purports to vary the main contract without meeting those formalities may be ineffective.
A comfort letter sits at the other end of the spectrum. Comfort letters from parent companies or financial sponsors are typically expressed as statements of intent or policy, not promises of payment. The Court of Appeal in Kleinwort Benson Ltd v Malaysia Mining Corporation [1989] 1 WLR 379 held that a comfort letter stating "it is our policy to ensure" repayment was not a legally binding guarantee. Parties who want a binding commitment must use guarantee or indemnity language — and comply with the requirements under the Statute of Frauds 1677, which still requires written evidence and signature for contracts of guarantee.
A side letter can fall anywhere between these poles. The drafting determines which end of the spectrum it occupies.
The entire agreement clause problem
Most well-drafted commercial contracts contain an entire agreement clause, typically in the form: "This Agreement constitutes the entire agreement between the parties and supersedes all prior representations, agreements, and understandings." Under section 3 of the Misrepresentation Act 1967, such clauses must satisfy the reasonableness test in the Unfair Contract Terms Act 1977 to exclude liability for misrepresentation.
The core risk is this: if the main contract's entire agreement clause is not carved out for the side letter, the side letter may be treated as superseded by the main agreement. The fix is mechanical: the main contract should specifically identify the side letter by date and parties in its recitals or schedules, and the side letter should state that it is supplemental to the main contract and does not merge with it.
Where the main contract was signed first and the side letter comes later, the same issue arises in reverse — the side letter may be read as a variation that the main contract's "no oral modification" clause prohibits. Draft the side letter as a deed if there is any doubt about consideration, or ensure fresh consideration is clearly articulated.
Confidentiality when the main contract is public
Property transactions involving public registers and financial transactions involving published filings create a common scenario: the main contract is registerable or disclosable, but the side letter contains commercially sensitive terms that neither party wants on the public record.
This is a legitimate use of a side letter — provided it is not used to deceive third parties or regulators. HMRC takes a specific interest here. Under the Finance Act 2003, Schedule 4, the effective chargeable consideration for Stamp Duty Land Tax purposes includes any consideration given directly or indirectly in connection with the land transaction, whether or not it forms part of the main contract. A side letter that adjusts the price, grants rent-free periods, or provides inducements is caught. Failure to include the correct figure in the SDLT return is a compliance offence carrying penalties and interest.
HMRC's position is that side letters connected to property transactions must be considered when calculating SDLT. The point applies even where the side letter purports to be non-binding — HMRC looks at the economic substance of the arrangement, not its label.
In the lending market, side letters that alter the economic terms of a facility agreement may also trigger disclosure obligations under FCA rules for regulated firms, or under the Companies Act 2006 for transactions requiring shareholder approval.
What a binding side letter must say
Beyond the general contractual requirements, a side letter intended to be binding should address:
Relationship to the main contract. State explicitly whether the side letter supplements, varies, or is independent of the main agreement. Identify the main contract by name, date, and parties.
Governing law and jurisdiction. Do not assume the main contract's governing law clause applies. Specify it in the side letter.
Termination. State whether the side letter terminates automatically when the main contract ends, or whether it survives.
Confidentiality. If the side letter contains sensitive terms, include a standalone confidentiality obligation — do not rely on the main contract's confidentiality clause if the side letter is intended to be read separately from it.
Entire agreement within the side letter itself. A short entire agreement clause within the side letter, stating that it supersedes any prior oral discussions on the subject matter of the side letter, prevents later disputes about what was agreed in negotiations.
Deed or signed counterpart. Where consideration is thin or absent, execute as a deed. Deeds require writing, signature, and attestation by a witness under the Law of Property (Miscellaneous Provisions) Act 1989 (for interests in land) and the general law for other deeds.
Heads of agreement and letters of intent raise overlapping questions about binding effect — the forms-legal.com heads of agreement template for the UK provides a worked structure that addresses the binding/non-binding split across different clauses, which is a useful reference when calibrating side letter language.
Common mistakes
Treating a side letter as automatically non-binding. Some practitioners draft side letters on the assumption they create only moral, not legal, obligations. Courts do not share that assumption if the document satisfies the requirements for a contract.
Failing to update the main contract. A side letter that is kept entirely separate from the main contract creates a document management problem. When the main contract is assigned, renewed, or novated, the side letter may not follow unless it is expressly included in the relevant transfer documents.
Using comfort letter language but expecting enforceability. "We intend to ensure" is not the same as "we agree to pay." Pick one and draft accordingly.
Ignoring HMRC's anti-avoidance reach. In property transactions, any side arrangement affecting chargeable consideration — regardless of how it is labelled — must be factored into the SDLT calculation. The same principle applies to Land Transaction Tax in Wales under the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017.
No signatory authority check. A side letter signed by an operations director who had authority to sign service contracts may not bind the company on a side arrangement that effectively reduces the purchase price of a major asset. Check the signatory's authority before relying on the document.
A practical checklist
Before executing a side letter on any significant commercial transaction, verify:
- Does it meet the basic requirements for a binding contract, or is it deliberately non-binding? Make that choice explicit in the text.
- Does the main contract's entire agreement or no-oral-modification clause need to be carved out or amended?
- Is the consideration adequate and documented?
- Are the signatories authorised?
- Does it need to be filed with HMRC, Companies House, the FCA, or any other regulator?
- In property transactions: has SDLT or LTT chargeable consideration been recalculated to include the side letter terms?
- Is there a governing law clause, and does it match the parties' intentions?
A side letter drafted with these points in mind is a workable commercial tool. One drafted without them is a dispute waiting to happen.
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This article is general information, not legal advice — see our accuracy & editorial policy. Confirm the cited law is current before relying on it.