What Is a Letter Agreement?
Most business contracts have a standard format that is followed by the parties during the drafting process. However, sometimes the parties reach a simple understanding of the transaction, and a structured document is not required to convey the same. In such situations, a letter agreement is used. So what is a letter agreement, and what does it signify? It is essentially a document written by one party to another, expressing its intention to enter into a binding agreement. It highlights the conditions governing the transaction that is acceptable to both the parties. The other party has to sign it in order to convey its acceptance.
Purpose of a Letter Agreement
The primary purpose of a letter agreement is to reflect the understanding between both parties to work together. It protects their rights. It outlines the conditions that they agree to and expresses them in the form of a letter. It serves as proof of their willingness to work with each other. Either party can write the agreement. However, the party writing it is in a position of control and can choose what should be reflected in it. It is written in simple language to make it easier to understand. Since it does not follow the format of other business contracts, it is comparatively shorter in length. However, it is equally effective and enforceable as any other business contract.
Key Terms of a Letter Agreement
The following are few key terms of a letter agreement that should be incorporated therein:
- Name and address of the sender
- Date and place of writing the agreement
- Name and address of the recipient
- Subject line
- After the salutation, include an introductory line briefly describing the background of the letter
- Terms of the agreement, including work to be performed, the timeline of the work and payment information.
- A closing sentence requesting the recipient to countersign a copy of the letter
- Signature of the sender
- Space for signature of the recipient
Drafting a Letter Agreement
When drafting a letter agreement, there are some important points to be kept in mind. These are:
- After adding the names and addresses of the parties and the introduction, the body should consist of the main points agreed to by the parties. These should be written in a concise manner and in simple language that can be understood without any difficulty.
- Since this type of agreement is unlike any other business contract in terms of drafting, it does not include specific clauses for different terms. These can be mentioned as bullet points or in a paragraph. The intention is to state the terms as directly as possible.
- Include the standard boilerplate terms such as governing law, assignment, and notices. These are required to address issues common to almost every agreement.
- The tone of the letter should be formal. It should not sound too rude or overbearing.
- Ensure that both the parties sign in their respective signature blocks. The block for the recipient is usually preceded by the words “Acknowledged and agreed” to indicate the acceptance of the agreement. After both parties sign it, it becomes legally binding.
Types of Letter Agreement
Some of the different types of letter agreements are:
- Side letters: these are used in a transaction for mergers and acquisition (M&A). They address a subject that is extremely sensitive and is not intended to be circulated among all the people involved in the transaction. Consequently, there may be multiple side letters in one M&A transaction.
- Loan agreement letter: Loan agreement letter is an agreement between the lender and the borrower and outlines their mutual obligations.
- Sale agreement letter: It is an agreement between a buyer and a seller wherein it specifies the products or services purchased, the terms of payment and obligations of both the buyer and seller.
- Settlement agreement letter: Settlement agreement letter is an agreement between an employer and an employee whereby the latter waives his/her right to approach the employee tribunal against the former. It states that any dispute between the two will be discussed and sorted privately between them.
- Party wall agreement letter: this agreement is signed by two neighbours whose properties overlap. It protects their property from any unwanted damage in case they have to renovate or work on the shared property.
Download a Sample Letter Agreement
A sample agreement can be downloaded from below.
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