Comfort letters are often given by a parent company to a lender in relation to a credit facility being granted by the lender to the parent’s subsidiary. They are usually used where the issuer is unable or unwilling to give a guarantee, but wishes to give some comfort to the lender. The purpose is to give some comfort to the recipient of the letter by specifying certain moral or legal consequences or commitments. There are several circumstances where the issuer of a comfort letter is unable to give a full guarantee, for example where there are restrictions in its constitution or in other contracts, or because of regulatory grounds.
Comfort Letters can either be legally binding or non-legally binding. Whether the comfort letter is intended to be legally binding or not depends on its wording; specific terminology used in the letter determines whether the assurance given constitutes a binding contract or only a moral obligation. Thus the wording used in a comfort letter may mean that it is equivalent to a legally binding guarantee, or it may have no legal effect at all. .
Differences between a comfort letter and a guarantee
Under a guarantee, the guarantor undertakes to pay to the third party the amounts which the guaranteed party fails to pay. Guarantees normally operate within a clear legal framework, setting out the rights and obligations which attach to them.
The issuer and receiver of a comfort letter may have rights and obligations which are tantamount to a guarantee but this will depend on the exact wording, the surrounding circumstances and intentions of the parties.
In the case of a straight guarantee, the guarantor who has paid the creditor of a subsidiary has, by law, an automatic claim against the subsidiary. On the other hand under a letter of comfort the issuer of the letter does not have an automatic claim.
As mentioned above the wording, the circumstances leading up to the grant of the letter and the parties’ intentions can all affect whether the letter is legally binding or not. However it’s important to note that every comfort letter, even non-binding comfort letters, will give rise to some degree of legal responsibility, as it will contain at least representations as to present fact. If those representations are false, the giver of the letter may be liable on the grounds of deceit or negligent mis-statement.
It is therefore essential that the party giving the comfort letter should be satisfied that the statements in it are true as at the date when given.
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