Letters of comfort: a comparative law and trans-systemic analysis of chameleonic instruments

Abstract

Over the last few decades, banks throughout the world have found it increasingly difficult to obtain outright guarantees from companies to cover loan or other financial facilities to subsidiaries. Consequently, various third party credit support devices or comfort instruments, generally known as letters of comfort, have developed to provide an alternative to traditional forms of security. It is necessary for a proper understanding of these instruments to investigate their origin, to delineate them, and to consider their use in corporate group and banking practice. The typical comfort letter transaction involves the parent‐subsidiary‐lender trinity and at least three different, but inter‐related relationships which may be regulated by different legal regimes – first, between a lender and the subsidiary; secondly, between a lender and the parent company; and thirdly, between the parent company and the subsidiary. When the relationship between a lender and the subsidiary breaks down or the latter becomes insolvent, the courts are usually asked to determine the contractual effect of the letter of comfort as between the lender and the parent company. Letters of comfort are predominantly used in international business transactions. The issue of comfort letter enforceability is considerably more complex within an international context than in one’s own legal system. Courts in different jurisdictions and in disparate legal systems have adopted distinct approaches to determine the contractual enforceability of letters of comfort. Accordingly, a trans‐systemic view of the contractual effect of letters of comfort is necessary to be aware of the way in which such letters are treated in other legal systems, and to facilitate a consistent treatment of an instrument of international use in one’s domestic law. Over the years, letters of comfort have become more detailed in content. The result is more litigation about the enforceability of letters of comfort and, because of courts undertaking more contractual analysis of such letters, a doctrinal foundation for the assessment of liability against a parent company has started to be developed by courts in some jurisdictions. Legal liability based on a letter of comfort is a real possibility. Like a boomerang, a letter of comfort is potentially a dangerous instrument when it returns to its unsuspecting originator.