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  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
Four key factors were identified as follows:
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.
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  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  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.
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.
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
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
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
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.
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