Side letters are commonly used as ancillary agreements to Cayman exempted limited partnership agreements and often form an important part of the documents reviewed in subscription financing transactions. They can serve to affect the economic relationship between an investor and the partnership and supplement the obligations or grant exemptions as between the partnership and a particular partner. But are they enforceable?

Although it is usually intended that side letters will give rise to legally enforceable rights and obligations, unless carefully drafted, they may have no more than moral effect. The recent English case of Barbudev v. Eurocom Cable Management Bulgaria EOOD and others [2011] EWHC 1560 illustrates this problem and provides some useful guidance as to what the English courts will consider when deciding whether, and to what extent, to enforce the terms of a side letter. Although not binding, the Babudev case would serve as persuasive authority before the Cayman courts.

Four key factors were identified as follows:

  1. Has there been offer and acceptance as between the partnership and the investor? This is generally easy to establish and does not typically cause problems.
  2. Is there a clear intention to create legal relations? Following Barbudev, this depends not on the parties' subjective opinions but on "a consideration of what was communicated between them by words or conduct, and whether that leads objectively [to the appropriate conclusion]" (RTS Flexible Systems Ltd. v. Molkerei Alois Muller GmbH & Co KG [2010] 1 WLR 753). There is a strong presumption that parties to a commercial transaction intend to create legal relations (Esso v. Courts of Customs and Excise [1976] 1 WLR 1). However, the court will look to all the circumstances of the case, including to provisions in the side letter and whether it is signed by both parties, in determining whether the relevant intention exists.
  3. Is there certainty? The side letter must be sufficiently complete and amount to more than an "agreement to agree", and the language must be certain. The courts will interpret a contract but cannot go so far as to create one.
  4. Is the side letter supported by consideration? This means that sufficient consideration must move from the person to whom the promise is made. It need not move to the person making the promise.

As such, the courts treat the enforceability of side letters like any other contract. The fundamentals of offer and acceptance, intent, certainty and consideration remain essential elements to the enforceability of the side letter. The Cayman Islands provides an excellent legal framework for the formation of private equity structures.

Nevertheless, it is important to bear in mind that as a common law jurisdiction the fundamentals of contract law still apply, before one simply assumes that the side letters being reviewed are enforceable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.