Cameron Miranda
A letter of comfort, also known as a letter of intent, is a written document that provides assurance that a contractual obligation will be met. It is a communication from a party to a contract to the other party that indicates a willingness to enter into a contractual obligation without creating a legally enforceable contract. Letters of comfort are generally drafted using vague language to avoid creating legally enforceable obligations. They are often used to assure a contracting party that a parent corporation will provide its subsidiary with the necessary resources to fulfill the contract. In the context of a loan, a non-binding letter of comfort assures the lender of the borrower's creditworthiness. Whether a letter of comfort creates legally enforceable terms is often determined by courts of law, based on the document's wording.
| Characteristics | Values |
|---|---|
| Legally binding | No |
| Purpose | To provide assurance that an obligation will be met |
| Usage | Commonly used in international contracts, finance transactions, and commercial transactions |
| Wording | Vague |
| Issuer | Parent company, auditor, accounting firm |
| Recipient | Lender, underwriter, supplier, customer |
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What You'll Learn
Letters of comfort are rarely legally binding
The purpose of a letter of comfort is to provide assurance that an obligation will be fulfilled. It is commonly used in finance transactions, where a holding company issues a letter of comfort to a bank regarding its subsidiary's financial obligations. Similarly, in commercial transactions, a holding company may provide a letter of comfort to its subsidiary's customer or supplier to assure them of the subsidiary's ability to meet its contractual obligations. Letters of comfort are often used when the holding company is unable or unwilling to provide a guarantee but wants to offer assurance.
Letters of comfort are also used in the context of loans, where an independent auditor or accountant may issue a non-binding letter of comfort to a lender, indicating the borrower's ability to repay the loan. This letter does not constitute a guarantee but suggests the borrower's financial soundness. Additionally, letters of comfort can be issued to underwriters, committing the issuer to conduct a "reasonable investigation" into the offerings of securities and provide a report that adheres to generally accepted accounting principles (GAAP).
While letters of comfort are typically non-binding, there have been instances where courts have demonstrated a willingness to treat them as legally binding. For example, in Kleinwort Benson v Malaysia Mining Corporation BHD [1989] 1 WLR 379, the Court of Appeal opined that a letter of comfort could be binding if its terms go beyond mere expressions of present policy or intentions and imply future actions. However, this decision is an exception, and letters of comfort are generally not legally enforceable.
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They are used to assure a contracting party
A letter of comfort is a written document that provides assurance to a contracting party that an obligation will be met. It is a communication from a party to a contract to the other party that indicates a willingness to enter into a contractual obligation without creating a legally enforceable contract. The letter of comfort is typically drafted in vague terms to avoid creating enforceable contract terms.
In international contracts, letters of comfort are used to assure a contracting party that a parent corporation will support its subsidiary in fulfilling its contractual obligations. For example, a parent company may issue a letter of comfort on behalf of its subsidiary to assist the subsidiary in obtaining credit or financing. This is often in the form of a loan, where a third party attests to the company's capacity to repay, which can be presented to a lending institution as evidence of creditworthiness.
Letters of comfort can also be used by underwriters to carry out a "reasonable investigation" into offerings of securities, ensuring that reports conform to generally accepted accounting principles (GAAP). This helps underwriters better understand unaudited financial reports and changes to financial statements.
In finance transactions, a holding company may issue a letter of comfort to a bank regarding its subsidiary's financial obligations. Similarly, in commercial transactions, a holding company may give a letter of comfort to its subsidiary's customer or supplier to support the subsidiary's obligations.
Letters of comfort are generally used when the company is unwilling or unable to give a guarantee but wishes to provide assurance to the recipient regarding its subsidiary's ability to meet its contractual obligations.
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They are drafted in vague terms
Letters of comfort are drafted in vague terms to avoid creating legally enforceable obligations. They are designed to provide assurance or encouragement, imposing moral but not legal obligations on the issuer. The vague language used in letters of comfort typically includes statements of comfort, such as "it is our policy" or "it is our intention", indicating the level of support the parent organisation intends to provide to its subsidiary in fulfilling its contractual obligations.
The use of vague terms in letters of comfort serves to protect the issuer from being legally bound to any specific commitments. By avoiding clear and unambiguous promises, the issuer can maintain flexibility and reduce the risk of legal repercussions if they fail to uphold the stated intentions. This ambiguity allows the issuer to express their willingness to enter into a contractual obligation without actually creating a legally enforceable contract.
In the context of loans, for example, a non-binding letter of comfort should not be a condition precedent to a lender entering into the loan facility. This is because the courts could interpret the letter as contractual consideration for the loan, potentially creating a legally binding obligation. To prevent this, letters of comfort typically avoid the use of the future tense and focus on expressing present policy or intentions rather than making promises about future conduct.
The vague wording in letters of comfort also allows for flexibility in the evolving relationship between the parties involved. For instance, in commercial transactions, a holding company may issue a letter of comfort to a bank regarding its subsidiary's financial obligations. The vague terms in the letter enable the holding company to express its support for its subsidiary without making specific commitments that may become restrictive or impractical as circumstances change.
Despite the vague language, letters of comfort still provide risk mitigation. Even though they are not legally binding, the issuing party puts its reputation on the line. This creates a moral obligation for the issuer to follow through on the stated intentions, providing a level of comfort and assurance to the recipient.
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They are often used in international contracts
In international contracts, letters of comfort are often used to assure a contracting party that a parent company will provide its subsidiary with the necessary resources to fulfil the contract. This is done by indicating the parent organisation's intention to support the subsidiary.
For example, a parent company may write a letter of comfort on behalf of its subsidiary to assist the subsidiary in obtaining credit or financing. This is especially useful when the parent company is unable or unwilling to give a guarantee but wishes to attest to the subsidiary's ability to meet its financial obligations.
Letters of comfort can also be used to provide assurance to a supplier of a subsidiary that wishes to transact a large purchase order of raw materials. In this case, the letter of comfort serves as a keepwell agreement, assuring the supplier that the subsidiary has the backing of its parent company.
It is important to note that under international and European Union law, a letter of comfort does not require the parent corporation to fulfil the obligations incurred by its subsidiary. Instead, it serves as a moral obligation and provides risk mitigation because the parent company is putting its reputation on the line.
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They can be issued to underwriters
Letters of comfort are often issued to underwriters as an obligation to carry out a "reasonable investigation" into new offerings of securities. These letters ensure that the reports conform to generally accepted accounting principles (GAAP). This helps the underwriter better understand aspects of the financial data that might otherwise be unreported, such as changes to financial statements and unaudited financial reports.
In the context of a loan, a non-binding letter of comfort should not be a condition precedent to a lender entering into the loan facility. This is because the courts could interpret it as the loan constituting contractual consideration for the giving of the letter. In other words, a non-binding letter of comfort will give no indication of future actions and will avoid using the future tense.
Letters of comfort are designed to give assurance or encouragement only, imposing moral, but not legal, obligations on their issuer. They are therefore useful for those who are unwilling or unable to give a guarantee but still want to attest to the ability of an obligor to meet its financial obligations. For example, sponsors of businesses are commonly asked to provide letters of comfort in the context of annual audits as a condition for auditors to give a "clean" going concern statement.
Letters of comfort are rarely considered legally binding documents. Most are written in relatively vague language and include disclaimers to the effect that the writer is merely stating an opinion, not undertaking an obligation. In international contracts, letters of comfort are often used to assure a contracting party that a parent corporation will provide its subsidiary with the necessary resources to fulfil the contract. However, under international and European Union law, a letter of comfort does not require the parent corporation to fulfil the obligations incurred by its subsidiary.
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Frequently asked questions
A letter of comfort, also known as a letter of support, is a written document that provides assurance that a financial or contractual obligation will be met.
Letters of comfort are used to assure a contracting party that a parent corporation will provide its subsidiary with the necessary resources to fulfill a contract. They are often used when a holding company is unable or unwilling to give a guarantee.
A letter of comfort is not a legally binding document, whereas a guarantee is. Letters of comfort are designed to impose moral, but not legal, obligations on the issuer.
A letter of awareness is a weaker version of a letter of comfort. It acknowledges that a subsidiary has entered into a contract but does not assure the intention of the parent company to support the subsidiary.
Letters of comfort are often used in international contracts and finance transactions. For example, a parent company might issue a letter of comfort to a bank regarding its subsidiary's financial obligations. They can also be used to provide assurance to a supplier or customer of the subsidiary.
