Letters of Comfort

a sele!ed issue in commercial pra!ice

Cliff Lui
What is a Letter of Comfort?
• A label given to a document sent by a parent
company to encourage a lender to make a loan to
its subsidiary

• True comfort letter - not legally binding.

• Used in place of a guarantee, which places specific

and certain legal obligations on the guarantor.

• The issue at stake is determining whether a

document is a letter of comfort, which would be
legally non-binding.

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A P
$
B
A gives a document to P. A does not
want it to be legally binding.
P gives money to B. P wants document
to bind A to the document’s purported
intentions.
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• Problems arise when B fails to pay P, and A refuses
to pay P.

• Courts step in to decide whether the document is

legally binding or not.

• To avoid bad debts, banks should evaluate the

risks before relying on a dubious document as
‘security’ for lending money.

• Borrowers’ parent companies should draft letters

that convince banks to lend, but preclude any
legal liability.

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 Remedies for the Plaintiff ?

• Enforcement as guarantee (rare)

• Contract

• Misrepresentation

• Estoppel

• Unjust Enrichment

• Deceit

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Kleinwort Benson, CA (UK)

• Loan facility from Kleinwort to Metals upon

receipt of letter sent by MMC.

• “We are aware of the loan facility”

• “We will not reduce our current financial interest
in Metals...”

• “it is our policy to ensure that the business of [the

subsidiary] is at all times in a position to meet its
liabilities to you under the above arrangements”

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• Clause 1 (not contested).

• Clause 2 (agreed to be promissory in nature).

• Clause 3 (contested clause) found to be mere

statement of current policy and not future
intention.

Kleinwort Benson Ltd. v Malaysia Mining Corporation Berhad [1989] 1 WLR 379
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 Banque Brussels (Aust)
• Bank lent money to Spendley upon receipt of a letter
from Spendley’s parent, ANI.
• “We confirm we are aware of the loan”
• “It would not be our intention to reduce our shareholding
in [subsidiary] during the currency of this facility. We
would, however, provide your Bank with 90 days’ notice if
we dispose of this shareholding, and should any such
notice be served on your Bank, you reserve the right to call
for the repayment of all outstanding loans within 30 days.”

• “It is our practice to ensure that [subsidiary] will be at

all times be in a position to meet its financial obligations
as they fall due. These include repayment of all loans
made by your Bank ...”
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• Clause 1 (not contested).

• Clause 2 (contested clause) found to be

promissory in nature.
• It was just a slightly weaker form of the agreed
promissory clause in Kleinwort Benson.

• Clause 3 (contested clause) found to be promissory

in nature.

Banque Brussels Lambert v Austin National (1989) 21 NSWLR

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• “It is our practice to ensure that Spendley will at
all times be in a position to meet its financial
obligations as they fall due.”

• “It is our practice to ensure that Spendley is at all

times in a position to repay all loans made to it by
your Bank”.

• “We promise to ensure that Spendley will at all

times be in a position to repay the plaintiff ”.

Banque Brussels Lambert v Austin National (1989) 21 NSWLR

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• “it is our policy to
ensure that the
business of [the
subsidiary] is at all
times in a position to
meet its liabilities to
you under the above
arrangements”
• “It is our practice to
ensure that
[subsidiary] will be at
all times be in a
position to meet its
financial obligations
as they fall due. These
include repayment of
all loans made by your
Bank ...”

• Note the similarity between the 2 contested

clauses. Can the different treatment in the cases
be reconciled

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• “There should be no room in the proper flow of
commerce for some purgatory where statements
made by businessmen, after hard bargaining and
made to induce another business person to enter
into a business transaction would, without any
express statement to that effect, reside in a
twilight zone of merely honourable engagement.”

Rogers CJ 

Banque Brussels Lambert v Austin National (1989) 21 NSWLR

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• “The whole thrust of the law today is to attempt
to give proper effect to commercial transactions.
It is for this reason that uncertainty ... has fallen
into disfavour as a tool for striking down
commercial bargains. If the statements are
approximately promissory in character, the courts should
enforce them when they are uttered in the course of
business and there is no clear indication that they are not
intended to be lega'y enforceable.”
                 Rogers CJ

Banque Brussels Lambert v Austin National (1989) 21 NSWLR

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Reconciliation – Forging the Key

• Determining the intentions of the parties

• Edwards v Skyways

• Back to Basics
Document to be construed objectively in light of
the factual matrix known to both parties,
providing the “genesis” and “aim” of the
transaction.

• Prenn v Simmonds applied in Bouygues.

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 Kleinwort Banque Brussels
• The plaintiff had • The fact that a letter is not
negotiated for a guarantee intended to be a guarantee
does not stop it from being
or joint and several
legally binding.
liability of the defendants,
but finally settled for a • Throughout the negotiations,
comfort letter. Which the plaintiff expressed its
they knew was not a intention for the parent to
make payment. “the comfort
traditional security. letter is... a binding obligation...
if this isn’t the case, the [loan]
• As compensation, P had won’t be granted.”
raised the loan facility’s
commission. • The plaintiff had wanted a
“strong comfort letter” as
some “degree of security” for
the loan.

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 Testing the Key
Re Atlantic Computers [1995] UK

Toronto Dominion Bank [1998] Canada

Bouygues v Shanghai Links [1998] HK

HSBC v Jurong Engineering [2000] Singapore

LaSalle Bank v Citicorp [2003] USA

Gate Gourmet [2004] NSW

Toppan Printing [2005] HK

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 Re Atlantic Computers

• Letters were given in connection with hire

purchase facilities granted by NAB to AML,
subsidiary of AC. AML is now in liquidation.

• “We undertake that without the prior consent of

the Bank: that if AML is unable to meet its
commitment, the parent company will take steps
to make arrangements for its present, future or
contingent obligations to the Bank both for
capital and interest to be met.”

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• Ascertaining the intentions of the parties:
- “This document is not intended to be a guarantee
and, in the case of paragraph (c) above, it is an
expression of present intention by way of comfort
only.”

• This was sufficient to preclude AC from any legal

liability arising.

• Useful if you are drafting the letter of comfort.

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 Toronto Dominion Bank
• Bank lent money to Leigh upon receipt of letter
from Plessey.

• “This is to confirm that Plessey has full knowledge

of the loan granted to Leigh.”

• “We undertake not to reduce our shareholding in

Leigh without prior notification to yourselves.”

• “It is Plessey’s policy that Leigh be managed in

such a way as to be always in a position to meet its
financial obligations.”

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• Ascertaining the intentions of the parties:
- Court will look at the document and its terms as a
whole, and objective facts are admissible to aid
interpretation (!)

- “This letter does not constitute a legally binding

commitment.”

- The parent had described their support as being

informal and the bank had used the subsidiary’s
credit-risk rating instead of the parent’s.

• Clause 3 interpreted negatively as in Kleinwort.

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HSBC v Jurong Engineering
• Huge issued a letter to the Bank, who lent to its
subsidiary, Jurong Engineering.

• “We will continue to maintain ownership and undertake to

advise you forthwith if we dispose...”

• “We will cause the borrower to be operated in such a way as to

be able to meet all its obligations from time to time to you. If
the borrower cannot, we endeavour to make funds available...”

• “We will not take any action which will result in the borrower
being unable to meet all its obligations to you and undertake to
advise you of any circumstances which may affect the going
concern of the borrower.”

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• Ascertaining the intentions of the parties:
- The general tone of the letter should be examined in
light of the surrounding facts and no minute textual
analysis shall be undertaken, cf. Kleinwort.

- The bank was asked to evaluate the risks themselves

in loaning on a ‘clean’ basis or on a comfort letter.
The letters were not issued before the loan facilities.
Casual treatment of the letters was evidence against
having intentions to have legal relations,
cf. Banque Brussels.

• Bank had drafted the letter itself, so

contra preferentum applied...

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• “We will continue to maintain ownership and
undertake to advise you forthwith if we dispose...”

• “We will cause the borrower to be operated in

such a way as to be able to meet all its obligations
from time to time to you. If the borrower cannot,
we endeavour to make funds available...”

• “We will not take any action which will result in

the borrower being unable to meet all its
obligations to you and undertake to advise you of
any circumstances which may affect the going
concern of the borrower.”

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 LaSalle Bank v CitiCorp

• Comfort letters are generally unenforceable.

• But, they may be enforceable depending on the wording

of the document and circumstances in which the
comfort letter was granted. Whether the lender
reasonably relied on it is also instrumental.

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 Gate Gourmet Holding

• “This is to confirm that the parent entity, GGH AG, will

provide the financial support that may be necessary to
enable GGH Pty to meet its financial commitments as
and when they fall due.”

• “This Letter of Support will not be withdrawn before

GGH Pty has sufficient means to meet their obligations
without the support of the parent entity.”

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• Ascertaining the intentions of the parties:
- The purpose of the letter discerned from the
circumstances and the words themselves aid in
construing the letter.

- Australian Corporations Law s588G imposes

statutory duties on directors to prevent insolvent
trading – this goes to the heart of the letter and the
plaintiffs were entitled to anticipate compliance with
the entire letter.

- The words themselves were strongly promissory in

character.

• Reinforces Banque Brussels Lambert.

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 Bouygues v Shanghai Links

• “We advise that under an agreement entered into

by [parent], all of the funds required to pay the
contract price will be deposited in an account of
the [parent]. Payment of the contract price will be
made from this account and funds can be paid out
of this account by the signature of ...”

• Ps contracted with X, subsidiary of D.

X terminated the contract. D did not pay.

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 Toppan Printing
• “Naturally, the parent takes full responsibility for
the subsidiary’s accounts and financially supports
its publishing business.”

• In the absence of express words of promise, it is

necessary to consider the context in which the
letter was written.

• The letter, even if construed objectively in light of

the surrounding facts seems meaningless. It is
incredible that the experienced plaintiff would
rely on such a casual expression of intent.

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 Using the Key

1. Determine whether the parties intended to be

legally bound:
i. from the objective, mutually known facts;
ii. from the document.

2. Find words to be promissory or not (will, would...)

3. Make sure that the terms would help your client if

they are indeed held to be promissory.

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 Alternative Keys

• Misrepresentation: normal principles apply but

you have to show that what was (mis)represented
was a fact.

• Estoppel: shield or sword – follow US or

Australian law?

- Estoppel argument accepted in Banque Brussels: “...

represents the advance that the law in this country
has achieved over concepts that inform the
decision of the CA in Kleinwort Benson.”

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• Even unjust enrichment?
- promise was breached by D;
- resulted in sale of shares in [subsidiary] by D,
which would not have been permitted;
- D was thus unjustly enriched by its wrongful
conduct.

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 Questions
Thanks!

References:
BLG 2005 July (18) 3-4 | NYLJ 2004, 231(13) | JIBL 1990, 5(8), 340-344 | IBFL 1995, 14(7), 74-75 |
LaSalle Bank National Assoc. v Citicorp Real Estate, Inc., WL 21671812 | Gate Gourmet Australia
PTY Ltd. v Gate Gourmet Holding AG [2004] NSWC 149 | Banque Brussels Lambert v Australian
National Industries Ltd. (1989) 21 NSWLR | HSBC v Jurong Engineering Ltd. [2000] 2 SLR 54 |
Kleinwort Benson Ltd. v Malaysia Mining Corporation Berhad [1989] 1 WLR 379 | Chemco Leasing
SpA v Rediffusion plc [1987] 1 FTLR 201 | Re Atlantic Computers plc [1995] BCC 696 | Bouygues SA
v Shanghai Links Executive Community Ltd. [1998] 2 HKLRD 479 | Toppan Printing Co. v Chinese
United Press Ltd. and M Channel Corp. Ltd. HCA 2898/2002 | Toronto-Dominion Bank v Leigh
Instruments Ltd. (Trustee of) 178 D.L.R. (4th) 634