Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you’re negotiating a commercial deal, an investment, or even a key supplier relationship, you might be offered (or asked for) a side letter.
At first glance, a side letter can feel like a harmless add-on: a short document that “just clarifies” one or two points. But in practice, side letters can carry real legal weight - and they can change the risk profile of your main agreement in ways you didn’t expect.
So, what is a side letter in an Australian business context, when should you use one, and what should you watch out for?
This guide breaks it down in plain English, from a small business perspective, so you can move quickly while still protecting your position.
What Is A Side Letter?
A side letter is a separate written document that sits alongside a main contract and records additional terms, clarifications, or promises between the parties.
In other words, if your main agreement sets out the “core deal”, the side letter usually covers one or more of the following:
- a special arrangement that doesn’t belong in the main contract
- a clarification about how a clause will operate in practice
- an agreed exception for one party
- a temporary concession (for example, while you’re ramping up)
- a confirmation of a commercial understanding that might otherwise be left as a handshake
Side letters are common in Australian startups and small businesses because they can be a practical tool during fast-moving negotiations - especially where the main contract is “standard form” and hard to amend.
Is A Side Letter Legally Binding In Australia?
It depends - but very often, yes.
A side letter can be legally binding if it’s drafted and signed in a way that shows an intention to create legal relations and the usual elements needed for enforceability. Depending on how it’s structured, that might be because it operates as a contract (which generally needs consideration) or as a deed (which has different formal requirements and doesn’t rely on consideration in the same way).
The risk for business owners is that side letters are sometimes treated informally, even when they effectively change the deal. That’s why it’s important to approach them like any other contractual document: assume it may be enforceable unless it’s clearly drafted to be non-binding.
How Is A Side Letter Different From A Contract Variation Or Amendment?
A side letter is separate to the main contract, but it can still operate like a variation if it changes how the parties’ rights or obligations work.
A variation (sometimes called a deed of variation or amendment agreement) is usually the cleaner option when you want to formally change the main contract itself. A side letter is often used when you want to keep the main agreement unchanged but record an additional arrangement.
If you’re unsure which is appropriate, it’s often a sign you should pause and check what your main agreement allows (particularly any “entire agreement” and variation/change clauses, including any “no oral modification” wording).
When Do Australian Businesses Use Side Letters?
Side letters can show up in many different deals. Here are some common scenarios we see for Australian startups and small businesses.
1. Investment And Shareholder Deals
If you’re raising capital, side letters may be used to give a particular investor a specific right that isn’t offered to everyone else - for example:
- additional reporting or information rights
- a special consent right on certain decisions
- an advisory role or observer seat
- a discount, fee rebate, or separate commercial arrangement
This is where side letters can become politically and legally sensitive. If you have multiple shareholders, a side letter that gives one shareholder special treatment can create tension - and may even conflict with your Shareholders Agreement if it’s not handled properly.
2. Leasing And Property Arrangements
In commercial leasing, a side letter might record:
- an agreed rent-free period
- a commitment to fit-out contributions
- a temporary waiver of certain obligations
- how “make good” will be handled at the end of the lease
Because lease disputes can be expensive and disruptive, any side arrangement should be documented carefully and checked against the lease terms (including whether side arrangements are permitted and whether the landlord must sign in a particular way).
3. Supplier, Distribution, Or Manufacturing Deals
You might use a side letter when the main agreement is a template and the supplier won’t change it, but you still need a particular concession - like priority supply, a pricing hold, or a modified service level for a period.
In these situations, the side letter can be useful - but you need to ensure the side letter doesn’t contradict key parts of the main contract (like payment terms, limitation of liability, or termination rights).
4. NDAs And Confidentiality Arrangements
Sometimes side letters are used to clarify how confidential information will be treated in a particular project (for example, what counts as “confidential”, or who can access it internally).
If the arrangement is important to your business, consider whether you should instead update the core NDA or put project-specific confidentiality terms into a formal services agreement.
What Should A Side Letter Include?
A good side letter is short, clear, and leaves very little room for argument later. While every deal is different, a side letter usually includes:
- Parties: the full legal names of each party (and ACN/ABN where relevant)
- Date: when it is signed (and whether it takes effect immediately or on a trigger event)
- Reference to the main agreement: the contract name and date (so there’s no doubt what it relates to)
- The purpose: a short explanation of what it’s doing (for example, “to clarify” or “to record an agreed concession”)
- Specific terms: the actual additional clauses or promises
- Priority and conflict wording: what happens if the side letter conflicts with the main agreement
- Term and expiry: whether it’s ongoing or ends on a specific date/event
- Confidentiality (if needed): whether the side letter itself is confidential
- Execution: proper signing blocks and signing authority
It’s also important that your side letter is consistent with the way your business signs documents more generally. If you’re a company, signing requirements matter - especially if you want stronger enforceability under the Corporations Act.
If you need a refresher on signing rules for companies, it can help to understand signing under section 127 and how execution works in practice.
Key Legal Risks With Side Letters (And How To Avoid Them)
Side letters are practical, but they come with common traps. Here are the ones we see most often for small businesses.
1. The “Entire Agreement” Clause Problem
Many contracts contain an “entire agreement” clause, which generally says the written contract is the full agreement and supersedes prior understandings.
This doesn’t automatically invalidate a later side letter. However, if your main contract says changes must be made in writing and signed (and sometimes in a particular form), then your side letter should be drafted to clearly operate as a valid variation (and comply with those requirements). If it doesn’t, you can end up in a dispute about whether the side letter is enforceable or whether the main contract still governs.
This is one of the biggest reasons side letters should never be treated as casual email add-ons.
2. Unintentionally Creating A Variation (Or Breach)
If the side letter changes how the parties operate, it can function like a variation - even if it’s not labelled that way. If the side letter conflicts with the main agreement, you can end up with:
- confusion about which document applies
- a dispute over enforceability
- claims that a party breached the main contract (even when they thought they were following the side letter)
A simple fix is to include a clear “priority” clause (for example, stating that the side letter prevails to the extent of inconsistency, or stating that it is not intended to vary the agreement and is only a non-binding clarification).
3. Confidentiality And Disclosure Issues
Side letters are often used specifically because one party wants a special deal. That can raise confidentiality issues, particularly where there are multiple stakeholders (like other shareholders, franchisees, or group companies).
For example, if you have a startup with several investors, a side letter giving one investor extra rights might need to be disclosed or approved under your existing governance documents. Even if it doesn’t, you should think through the relationship impact and whether confidentiality is realistic or appropriate.
4. Authority To Sign
One surprisingly common issue: the person signing the side letter may not have authority to bind the other party.
If you’re relying on the side letter, check who is signing and whether they have the right authority (especially for larger counterparties). If you’re having someone sign on behalf of your own business, make sure you’re doing it correctly - including understanding p.p. signatures where relevant.
5. Regulatory And Consumer Law Flow-On Risks
Some side letters are used to make promises about performance, warranties, or service levels. If you later market those promises to customers, you can create consumer law risk if you can’t deliver them.
This is particularly relevant if your side letter affects customer-facing outcomes like delivery timeframes, refunds, or warranties. Your public messaging still needs to align with the Australian Consumer Law (ACL), including avoiding misleading or deceptive conduct and honouring consumer guarantees.
If warranties are part of your offer, it’s also worth keeping your approach consistent with your ACL obligations (including how warranties interact with consumer guarantees), which comes up often when businesses talk about “standard warranty periods” like in warranties.
Do You Need A Side Letter, Or Should You Update The Main Agreement Instead?
A side letter can be a smart option when you need speed and flexibility - but it’s not always the best tool.
As a general guide, a side letter may be suitable when:
- you need to record a narrow commercial concession
- the main contract is otherwise fine and doesn’t need broader changes
- the arrangement may be temporary (for example, a transition period)
- you want to keep the main document standard for operational reasons
On the other hand, you may be better off updating the main agreement (or preparing a proper variation) when:
- the change affects core obligations like price, scope, termination, liability, or IP ownership
- the side letter would conflict with multiple clauses in the main contract
- the arrangement needs to be relied on long-term
- you need clear “one document” certainty for staff, investors, or future buyers
From a practical business perspective, think about this question: If there’s a dispute in 18 months, will you want to explain the deal using one document or three?
That’s also relevant if you plan to sell the business or raise further funding. Due diligence processes tend to uncover side letters, and unexpected obligations can reduce value or delay a transaction.
How Side Letters Can Affect Your Business Structure And Governance
If you’re a startup, it’s worth checking whether the side letter conflicts with your internal governance documents. For example, if your Company Constitution says certain decisions require shareholder approval, a side letter that promises a counterparty you’ll do something might put you in a difficult position if you can’t actually get that approval later.
In practice, this is where side letters can create “hidden handbrakes” in your business. They might be convenient now, but they can limit your ability to make changes later.
Key Takeaways
- What is a side letter? It’s a separate document that sits alongside a main agreement and records extra terms, clarifications, or concessions.
- A side letter can be legally binding in Australia, depending on how it’s written, signed, and structured.
- Side letters are common in investment, leasing, and supplier deals, especially when the main agreement is difficult to amend.
- Major risks include unintended conflicts with the main contract (including “entire agreement” and variation requirements), accidental variations, confidentiality issues, and signing authority problems.
- If the change affects core deal terms (like liability, termination, or IP), it’s often safer to update the main agreement rather than relying on a side letter.
- Side letters can create governance and due diligence issues later, so it’s worth getting the structure right from the beginning.
If you’d like a consultation on drafting or reviewing a side letter for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
