Letter of Comfort:Enforceable Guarantee or Moral Obligation?                 

Harshit Dusad,Associate at Juris Corp

Letters of Comfort (“LoC”) continueto hold a mystifying position in the financing spectrum. While some interpretit as an enforceable obligation on the issuer, some merely see it as anunenforceable representation of a fact. In common parlance, LoC is a letter issued by a parentcompany or other related party/affiliate which has a controlling stake or power(“Issuer”) over another entity (usually a borrower) (“Obligor”) to the lendersof the Obligor. LOCs are intended toprovide some form of “comfort” to the lenders in relation to the obligationsand performance of the Obligor. The level of “comfort” will be integrallylinked to the nature of statements made by the issuer in the LoC. Thesestatements generally relate to assurance of financial soundness of the Obligorto repay its debt and perform its obligations and also at times provide comfortas regards the Issuer itself.                                                

Is it a guarantee?                                                                                                     The difference between LoCand guarantee lies in the terms of their enforceability. While guarantees create anindependent financial obligation on the Issuer / guarantor in case of anydefault by the Obligor, this need not necessarily be the case with an LoC. Theprovisions of Contract Act 1872 or Companies Act 2013 define and regulateguarantees. LoCs are a derivative ofcommercial transactional parlance and do not have a strict legal backing, other than that of specificperformance under Contract Act 1872. The applicability of contract law alsodepends significantly on the nature of LoC and therefore the language of the LoC becomes criticalto determine the enforceability.    

 

Binding nature –Judicial pronouncements                                                  (i)English Courts: Enforceabilityof LoC depends upon the facts, intention of the parties and the language usedtherein. In Kleinwort Benson Ltd. vs Malaysia Mining Corp Bhd [(1989) 5BCC 337 (CA)], subsidiary of the defendant procured £5m credit line from theplaintiff bank. The bank made credit line available, but extracted a LoC fromthe defendant which stated “It is our policy to ensure that the businessof the subsidiary is at all times in a position to meet its liabilities to youunder the above arrangements.” The subsidiary defaulted and the bankclaimed against the defendant under the LoC. The matter went before the courtwhere it was held that the LoC was merely a statement of present fact regardingthe parent’s intentions and was not a contractual promise as to parent’s futureconduct.                                                                                   

 Hencein the United Kingdom, enforceability of LoC is attributed to facts, intentionof parties and the language used therein.

                                                         

(ii)  Malaysia: The Malaysian Court, in OSKTrustees Berhad v Kerajaan Malaysia [Civil Appeal No. W-01-7-01/2012], hadan occasion to decide upon enforceability obligations under a LoC which statedthat “… the Government ensures that MITP is (in) a position to meet (anddo meet on a full and timely basis) their liabilities in respect of all amountsborrowed for so long as the amount in respect of the borrowings remainoutstanding.”  Upon default, the government denied to acknowledge theLoC as a guarantee. Therefore, an action against the government was filed onthe ground that the government had breached its undertaking, representation andassurance in the LoC. However, the court held that “the words used in theletter of comfort did not contain words which convey the idea that theGovernment would be undertaking a contractual obligation.                                                                

 (iii) Singapore: The Singapore High Court had thefirst occasion to decide upon enforceability of LoC (or letter of awareness, inthis case) in The Hongkong and Shanghai Banking Corporation Limited vJurong Engineering Limited [(2000) 2 SLR 54]. The Hon’ble court held that thecourt must look beyond the terms and at the intentions of the parties in each caseas the LoC as a term has no precise meaning under the laws of Singapore. Upondue consideration, it was observed that it is not necessary to examine everysingle word or term used, but instead only its general tone. In this case, itwas found that the comfort letter had been drafted "in the language ofdeliberate equivocation in keeping with a 'gentleman's agreement' where theissuer confirms that he will abide by his moral obligations". Therefore,the parties did not intend the letter of awareness to create legal relations.                                                                                            

Hence in Singapore, enforceability of LoC depends upon the text of theLoC along with the surrounding circumstances.

                                                                                                                                    (iv) China: For enforceability before Chinese courts, LoC must include an assumption ofguarantee obligations. In Foshan Municipal People’s Government vs. Bank ofCommunications (Hong Kong Branch) Re: Guarantee Dispute [2005], the governmentissued a LoC stating that “If the borrower delays or defaults on itspayment of principal and interest due under the facility, we the Guangdongprovincial government will be responsible for resolving the default such thatthe bank does not suffer any economic loss.” The People’s Republic of China Supreme People’sCourt (“SPC”) held that the LoC has no guarantee obligations as the governmentwas only responsible only for resolving the problem. This can never beinterpreted as taking liability as the guarantee. 

This was again reaffirmed by the SPCin Bank of Communications (Hong Kong Branch) vs.Ganjyun Company Limited,Yunfu Municipal People’s Government and Others Re: Dispute over Loan GuaranteeContract (Appeal) [2015]. 

                                           (v)  Australia:The Supreme Court of New South Wales in Australia considered theenforceability of LoC in Banque Brussels Lambert SA v. Australian NationalIndustries Ltd. In this matter, Banque Brussels Lambert S.A. (“BBL”) providedSpedley Security Ltd. (“SSL”) with a line of credit. In negotiating the line ofcredit, BBL sought a guarantee from the parent company, Australian NationalIndustries Ltd. (“ANI”), but ended up with a LoC which stated that the ANIwould not reduce its shareholding in Spedley Holding Company before giving 90days notice to BBL. It also stated about ANI’s practice to ensure that SSL willat all times be in a position to meet its financial obligations as they falldue.   

However, ANI reduced itsshareholding without giving any notice to BBL and ANI also didn’t make anyefforts to ensure that SSL was in a position to meet its financial obligations.Later when SSL defaulted, BBL attempted to recover the loans from ANI bybringing an action for breach of contract.

The court held that a LoC shall notonly be interpreted in light of its language, but also in the context of itssurrounding circumstances. The course of the negotiations showed that BBL waslooking for very strong language in the letter, and went so far as to reject adraft that expressly stated that the letter was not a guarantee. Additionally,ANI was given notice that BBL considered LoC to create binding obligations. Therefore, it is creating bindingobligations on ANI.

 

Indian Jurisprudence

The Delhi High Court considered aquestion relating to enforceability of LoC in Lucent TechnologiesInc. vs. ICICI Bank Ltd. & Ors. [2009]. Relying on the principleslaid down in various international judgments, the Hon’ble court was of a viewthat “the circumstances and documents do not indicate that the partiesintended to create any legal relations. The very terms of the letter dated 13thSeptember, 2000, the term sheet enclosed therewith and the response of theplaintiff as contained in letters of comfort dated 27th September, 2000 and30th November, 2000 are a strong indicator in this regard. Both use phrases andconcepts having clear technical legal significance and do not manifest anyintent that a final and concluded contract had been entered into. In view ofthe above discussion, it, therefore, has to be held that the communicationsplaced before this court do not contain the kind of assent required to make fora binding contract.” Therefore, the issuer was not under any financialobligation to pay any amount under the agreement between the borrower and thebank.

The Karnataka High Court also had anoccasion to decide on enforceability of LoC in United Breweries (Holdings)Ltd. vs Karnataka Industrial Investment and Development Corporation Ltd. [AIR2002 Kar 65]. In this case, the appellant gave LoC on behalf of one of itsassociate company stating that “We hereby confirm that it is our normalpractice to see that all our associates companies meet their financial andcontractual obligations and this end we will undertake all reasonable steps toensure that M/s. Dominion Chemical Industries Ltd conducts its operationsefficiently to meet its obligations in the usual course of business.”

Upon default, the matter came beforethe Hon’ble high court where it was held that this was not a guarantee and itwas more in the nature of recommendatory letter. If a person has not stood as aguarantor or surety, he cannot be treated as a guarantor or surety withoutthere being a specific undertaking by him that he would discharge the liabilityof the third person in the case of his default. Lastly, the Hon’ble court alsodefined LoC as “A document that indicates one party's intention to try toensure that another party complies with the terms of a financial transactionwithout guaranteeing performance in the event of default.”

It may therefore be said that theenforceability of LoC in India depends upon the words used in therein alongwith the intent of the parties.

 

 Implication

The intention behind issuance of an LoC willdetermine the nature and extent of its enforceability. “Keep Well Letters”, “Letter of Intent”, “ComfortUndertaking” are some of the terms commonly used for LoCs, depending on thenature of the obligations undertaken by the Issuer (if at all). What one mustremember is that LoCs are generally taken as an alternative to Guarantee andcould therefore not be enforced as such. Seeking specific performanceunder LoCs is an option, but it may not necessarily be the case if the partiesdid not intend it to be so.

There is no “one size fits all” approach to an LoC and therefore each LoChas to necessarily be interpreted on its own standing. The title is not determinative ofthe substance of the document. A detailed eye to distinguish between contractsand mere statements of fact and / or intent is equally critical.

Changing corporate structures andincreased need for financing eventually demand all sorts of “comfort” andtherefore LoCs are here to stay. The test of a good lawyer is therefore to reflect the binding / nonbinding nature in the text of the LoC itself in a manner that it is not aninterpretation issue and it gives comfort in the real sense!

 

涉外债务安慰函的性质及其效力

近年来，在我国尤其是东南沿海地区出现了大量涉外债务安慰函纠纷案件，其涉及诉讼标的额之大、社会影响之广、法律问题之复杂，实非一般民商事案件所能比拟。因安慰函内容措辞模糊，缺乏法律规范和交易惯例可以援引，当事人双方对安慰函的性质、效力及其效果的认识相差甚远，司法实践中对出具人应承担道义上责任还是保证责任分歧很大。本文结合我国担保法规定、国际惯例和司法实践，对安慰函所涉社会法律问题进行论述，以期为此类案件的裁判积累审判经验和提供理论参考。 

一、关于安慰函的基本理论

安慰函又称赞助信、安慰信、意愿书，通常是指政府或企业控股母公司为借款方融资而向贷款方出具的表示愿意帮助借款方还款的书面陈述文件。安慰函虽然在广义上为国际融资信用担保文件之一，但其最显著的特征是其条款一般不具有法律拘束力，而只有道义上的约束力，即使明确规定了它的法律效力，也由于其条款弹性过大而不会产生实质性的权利义务。

通说认为，安慰函不是保证合同，但与保证合同有相似的地方，特殊的安慰函也是保证合同的一种形式。在西方国家，安慰函因其内容措辞不同可分五种情况，各自的效力与效果也不同：（１）确认债务人现状的安慰函，尤其是母公司对子公司的现状给予确认；（２）承担清偿债务的道义上责任的安慰函；（３）补充清偿的安慰函，即承诺在债务人清偿不足时承担实际清偿责任；（４）连带责任的安慰函，近似于连带责任保证；（５）承担其他义务的安慰函，如给予债务人资产支持、确保债务人不破产、监督债务财务状况等等。只有上述（３）、（４）两种安慰函属于保证，有法律拘束力，并在出具人违反承诺时，法院可以强制执行。

 二、我国法院对安慰函性质及其效力的处理

在我国，由于当事人之间对安慰函的实际作用和意义尚未达到形成共识的地步，使用者和接受者对安慰函的性质、效力及效果的预期相差甚远，而法学理论界对此探讨不多，法官处理此类案件缺乏法律规范和交易惯例可援引，亦无权威学说可资参考，具有相当难度。

在举世瞩目的广东国投公司破产案中，广东省高级法院认为，安慰函从形式上看，不是广东国投公司与特定债权人签订的，而是向不特定的第三人出具的介绍性函件；从内容上看，安慰函并无担保的意思表示，没有约定当债务人不履行债务时，代为履行或承担还债责任。因此，安慰函不能构成中国法律意义上的保证，不具有保证担保的法律效力，依据安慰函申报担保债权全部被裁定驳回。

但是，因安慰函自身内容措辞的极其模糊，要正确判断其属何种性质在实际案件的审判中并不容易，更未达成共识。司法实践中，不同的法院、法官或者同一法院在不同时期对安慰函可能作出不同的认定，甚至对同一安慰函亦存在截然相反的理解。例如，某市政府出具给某香港商业银行的安慰函内容有：“本政府愿意督促该驻港公司切实履行还款责任，按时归还贵行贷款本息。如公司出现逾期或拖欠贵行贷款本息情况，本政府将负责解决，不使贵行在经济上蒙受损失。”对该安慰函及类似内容的其他安慰函是否具备保证性质就有重大分歧意见。

一种裁判意见认为，该安慰函不符合我国担保法第六条关于保证的规定，根据“保证不能推定”原则，不能认定具有保证性质。

另一种裁判意见则认为，这种承诺具有为借款人的借款提供保证担保的意思表示，符合我国担保法第六条关于保证的规定精神，构成法律意义上的保证。法官对安慰函的性质及其效力认定问题，已经出现了明显裁判思路和处理方式的不统一现象，已影响到法律适用的安定性。  

另须注意的是，安慰函不仅广泛地为涉外债务出具，在一些国内外汇融资中，有关政府与企业主管部门应贷款人之要求出具安慰函亦为数不少。因出具安慰函并不需要反映在公司或政府的负债记录上，目前我国有多少地方政府或金融机构究竟为多少债务出具安慰函尚是个未知数，但可以肯定其数目是相当庞大的。如果大量的安慰函被认定为构成法律上的债务保证，贷款人当然可以从此获得经济利益，但出函人须承担担保责任的话，则对我国各级政府或金融机构的冲击、影响之大，也应是可以预见的。

随着越来越多的安慰函纠纷案件进入我国司法诉讼程序，对该问题的处理，已成为我国法院、法官乃至各级政府和金融监管机构不可回避的重大社会法律问题。合理判断安慰函的性质与效力，统一认识裁判思路，正确适用法律，保护当事人的合法权益，已成为当务之急。

三、司法实践中对安慰函性质判定的基本途径与方法

司法实践中如何正确认识安慰函并判断其属于何种性质，已成为正确裁判案件的关键。判断安慰函性质，有哪些途径、方法可循呢？笔者认为，除应依据有关法律原则和具体法律规范进行分析外，还应从以下几方面进行认定：

1.结合安慰函产生的社会背景与用途进行判断。从安慰函产生的社会背景看，由于有关政府或母公司不愿明确提供担保，但为相关融资需要，而向贷款人出具安慰函的形式，为债务人清偿债务提供道义上的支持，使贷款人获得心理上的安全感。从安慰函的产生看，它并不是为了保证，恰恰是为了避免承担因保证带来的法律责任，才有了安慰函，因此安慰函不是保证合同书。实践中，有的安慰函其措辞极近似于保证，出具人与保证人并无分别，此也不排除构成保证。  

２.从函件内容判断。这是判定安慰函性质的最根本的方法。“安慰函的效力和效果由内容决定”，而“判断安慰函的内容是道义上的还是法律上的，关键看措辞和交易习惯，即当事人对安慰函的预期。”如果安慰函的内容有代偿债务人清偿或承担担保义务、保证债务人还款等内容的，则该安慰函应当认定属于保证性质，出具人应承担担保责任；如果安慰函的内容措辞明确发函人仅承担纯粹道义上的督促、支持责任，则不能认定为法律意义上的保证，法院不能强制执行；如果安慰函的内容措辞含糊不清，难以判断为法律上的保证抑或为道义上的责任，则尚需结合其他方法进行综合判定。 

3.从函件名称判断。安慰函因其措辞的模糊不能直接判断其性质的，应当结合安慰函的名称来判断。如果函件名称为“安慰函”、“赞助信”、“慰问信”的，除非其内容有较明确的保证还款意思表示，一般应解释为不具有保证义务而只需承担道义责任的安慰函，至少不能解释为保证。

4.从债权人催收债权情况判断。一般说来，如果债权人接受安慰函时如有发函人承担保证还款责任的预期者，在债务人未依约履行还款时，应向发函人发出催收通知，要求其履行保证责任。因此，从安慰函出具后的债权催收情况上，至少可以帮助推断贷款人对安慰函并没有像对待保证合同那样，持有相同的担保预期。

5.从债权人对安慰函的内部批示材料判断。受函人对安慰函的预期目的有时会体现在受函人对待安慰函的内部批示材料上。如有债权人在安慰函顶部的空白处批示：“……考虑到上述贷款有十足押品担保，且安慰函本身亦无实际的担保效力。故仍建议接受……”这内部批示清楚地反映了受函人对待安慰函并不抱有担保债权之预期，难以认定为法律意义上的保证行为。

6.从安慰函出具人的主体身份判断。安慰函的出具人多为地方政府，而政府不愿意明确提供保证，才出具安慰函。因为国家机关不能作为保证人不仅是我国法律法规的禁止性规定，而且也是世界各国的立法通例。在安慰函内容模糊的情况下，推定为保证理由值得商榷。如非保证，即使后来由于客观经济环境、情势变更，债权未能得到足额受偿，亦难期待从安慰函获得额外的经济利益。

来源《人民司法》 ，2004 (9) :60-61。作者：易新华刘子平梁朔梅

 

 

 

以下为补充资料

Comfort Letter

What is a 'ComfortLetter'

A comfort letter is a writtendocument that provides a level of assurance that an obligation will ultimatelybe met. In its traditional context, a comfort letter is given to organizationsor persons of interest by external auditors regarding statutory audits,statements, and reports used in a prospectus.The comfort letter will be attached to the preliminary statements as assurancethat it will not be materially different from the final version.

Also known as "letter ofcomfort" or "solvency opinion."

BREAKING DOWN 'Comfort Letter'

In other practical uses, comfort letters are often issuedby auditors to lenders as solvency opinionson whether a borrower can meet the payment obligations of a loan. They areopinions, not guarantees, that theunderlying company will remainsolvent.

Comfort letters can also be issued to underwriters asan obligation to carry out "reasonable investigation" into offeringsof securities. These letters of comfort will ensure that the reports conform togenerally accepted accounting principles (GAAP). This helpsthe underwriter betterunderstand aspects of the financial data which might not otherwise bereported, such as changes to financialstatements and unaudited financial reports.

Yet another broadcategory of comfort letter application is parent company to subsidiary, whereby a parent company can, for example, issue aletter of comfort on behalf of a subsidiary that needs to borrow from a bank inits locale, or provide a letter to a supplier of a subsidiary that wishes totransact a large purchase order of raw materials.

Read more:ComfortLetter https://www.investopedia.com/terms/c/comfort_letter.asp#ixzz5ICRMkC7X 
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Letter of comfort(contract law)

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A letter of comfort,sometimes called a "letterof intent", is acommunication from a party to a contract to the other party that indicates aninitial willingness to enter into a contractual obligation absent the elements ofa legally enforceable contract.The objective isto create a morally binding but not legally binding assurance.^[1]

Generally, a letter of comfort isdrafted only in vague terms, to avoidcreating enforceable contract terms.^[2] Few nations regulate lettersof comfort by statute; whether a letter of comfort creates legally enforceablecontractual terms is often determined only by courts of law, based solely onthe wording of the document.^[1] Despitetheir nonbinding status, letters of comfort nonetheless provide risk mitigation because the parent company isputting its own reputation in jeopardy.^[3]

In international contracts, lettersof comfort are often used to assure a contracting party that a parentcorporation will provide its subsidiary with the necessary resources to fulfillthe contract.^[2] However, under bothinternational and European Union law, a letter of comfortdoes not require the parent corporation to fulfill the obligations incurred byits subsidiary.^[1] Whenused to provide support for a subsidiary's actions, a letter of comfort usually consists of three terms:^[4]

·       A statement from the parent organization acknowledging that its subsidiaryhas entered into a contract.

·       A promise that the parent organization will not sever its legal relationship with the subsidiary until contractual terms aresatisfied.

·       A statement of comfort (e.g., "it is our policy" or "it isour intention") indicating how far the parent organization will go tosupport the subsidiary in fulfilling its contractual terms.

Canada recognizestwo types of letters of comfort. The weaker version, in which a parent organization acknowledges that asubsidiary has entered into a contract but which provides no assurance of intention,is called a letterof awareness. The strongerversion, the letter of comfort, indicates the parentorganization's intention to support the subsidiary.^[5] In the United States, there is ageneral presumption against the enforceability of letters of comfort. However,depending on the wording of the document, there may be legal liability underthe rule of reliance.^[6]

 

 

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