Lloyd's Maritime and Commercial Law Quarterly
Taking comfort in certainty: to enforce or not to enforce the letter of comfort
Paula Giliker *
This article examines the legal enforceability of letters of comfort. English law in
Kleinwort Benson v.
MMC adopted a position of non-enforceability in the absence of a clear intention to the contrary. French law, in permitting contractual enforcement, has faced numerous difficulties in identifying the nature of the obligation undertaken and in reconciling letters of comfort with the regulations governing guarantees. The author submits that, in view of the problems experienced in French law, the Court of Appeal’s decision in
Kleinwort Benson should be supported as giving welcome clarity to this area of law
.
Letters of comfort represent a familiar commercial tool by which a parent company, unwilling or unable to guarantee the debts of its subsidiary, may send a message of support to financial institutions to encourage the grant of loan facilities to the subsidiary. They are therefore ‘‘a means of reassuring a potential creditor that a debt will be repaid’’.1
Three issues are usually addressed. The first is to state the parent company’s awareness of the financing, the second a commitment to maintain ownership or control of the subsidiary until the debt is paid and the third (and most forceful) to express a policy or intention to support the subsidiary by financial or managerial means.2
Whether termed letters of awareness, letters of support, letters of responsibility or letters of patronage,3
they will usually reflect a compromise between the bank’s preference for a formal form of guarantee and the parent company’s desire not to be bound in case of default. By avoiding a formal guarantee, the parent company avoids showing any contingent liability on its balance sheet, is able to bypass ultra vires
problems and, in France, the restrictive rules attached to formal guarantees or ‘‘cautionnements
’’. Yet, by choosing to adopt the ‘‘language of deliberate equivocation’’,4
it is inevitable that, should the subsidiary default, the enforceability or otherwise of these documents will come into question.
* Senior Lecturer in Law, Queen Mary, University of London. The author would like to thank James Davey, Anthony Giliker and Keith Syrett for their helpful comments on an earlier draft of this article.
1. R. Bradgate, Commercial Law
, 3rd edn (Butterworths, 2000) § 23.3.
2. See P.R. Wood, Comparative Law of Security and Guarantees
(Sweet & Maxwell, 1995), § 27–2.
3. Confusingly, in France, letters of comfort (lettres de confort
) are also termed ‘‘lettres d’intention’’. A letter of intention is, of course, a distinct commercial tool which seeks to set down the parties’ intentions as negotiations progress and raises its own difficulties in terms of contractual enforcement: see R.B. Lake and U. Draetta, Letters of Intent and Other Precontractual Documents: Comparative Analysis and Forms
, (Butterworths, 1994); 2nd edn M.P. Furmston, T. Norisada and J. Poole, Contract Formation and Letters of Intent
(Wiley, 1998), ch 5; and J. Holger, Der Letter of Intent
(Frankfurt: P. Lang, 2000). Letters of intent will not be discussed in this article, but for an overview of private European law, see (1997) 2 Eur Counsel 30.
4. See Staughton J in Chemco Leasing SpA
v. Rediffusion Ltd
(19 July 1983) Unreported; aff’d
[1987] 1 FTLR 201 (CA).
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