Prof Richard Taylor, Damian Taylor. Contract Law Directions (6 edn, 2019). p 65. Para 1.

You might be wondering why businessmen bother to make an agreement if it has no legal effect—is it worth the paper it is written on? [mine] In banking practice ‘comfort letters’ are used literally; they provide comfort to a lender that he will get his money back. A borrower’s parent company (i.e. its main shareholder) will usually be saying something along the lines of ‘we will try to be a really good parent company and make sure that our subsidiary pays all your money back’. The bank does not expect to be able to sue on this agreement, and should insist on receiving a guarantee if it wants to have legally enforceable rights against the parent company.

In Kleinwort Benson Ltd v Malaysia Mining Corp. (1989) the following wording in a comfort letter was held not to contain an intention to create legal relations: ‘It is our policy to ensure that the business of [our subsidiary] is at all times in a position to meet its liabilities to you under the above arrangements.’ Companies must be careful not to promise to ‘guarantee’ or ‘undertake’ to do anything as this is more likely to be interpreted as a binding agreement.

I'm not swayed by Shawn Goldmintz's (BBA York, JD Windsor) article.

It may seem as though comfort letters have the potential to be absolutely useless in certain circumstances. The question begs as to why a creditor would accept a comfort letter from a guarantor that refuses to give a guarantee when the letter cannot be enforced at law. The commercial reality is that when a business fails to meet its obligations, whether as a matter of law or honour, it reflects poorly on that business. A bad reputation can be much worse for a company than having to repay a loan. While this may not seem like an appropriately harsh punishment for one who fails to honour a non-contractual version of a guarantee, it should be remembered that, unfailingly, the author of a comfort letter will have been asked for a guarantee first, and the author refused.

In addition to this weak punishment, it is entirely possible, and in fact probable, that some comfort letters will be interpreted as binding legal obligations in the future. All it would take is for the wording of a letter to indicate promissory intent (perhaps by using the future tense), and the letter would be held to create legally binding obligations.

I'm asking just about comfort letters that aren't legally enforceable. Viz. disregard last para above.

If I were the lending officer at a rich bank, I'd distrust any borrower or its parent company that can't guarantee! I wouldn't lend it. After all, I can just lend to someone else who does guarantee, though I may have to sweeten my offer.

  1. The emboldened quote doesn't feel true to me. Any examples? To the lender, "a bad reputation" won't get her his money back, and feels useless.

  2. Are there other reasons?

  • This question is more about company finances and law rather than personal finances. – SZCZERZO KŁY Nov 4 '19 at 8:33

To give you some insight to this matter, you might consider some real world examples that somewhat gives you "comfort" to the viability of these comfort letters. Ha ha.

Both AMEX and Ford Motor credit are known to lend money to borrowers who are in good standing despite their credit scores or bankruptcy history. On the other hand, borrowers that fail to pay what they owe them may never be able to borrow money from those sources. Essentially these companies lend with their own internal credit score.

Along those lines, many car financing deals fall into the comfort letter category. Here in the US, a person with sufficient credit history and income can borrow enough to drive an expensive car off the lot with no down payment ($40K is not all that uncommon). Typically, the first car payment is not due until 45 days after the sale and then it take at least 3 months of non payment in order for the car company to reposes the car. During that time the borrower can make the car worth a fraction of the sales price plus taxes and fees. Essentially every car loan is 50% or so of trust.

Consider another situation, you are a lawyer and a company approaches you to defend them against a suit that claims that they owe money to banks, contractors, or employees. While you look into the claim you see the plaintiff(s) have a viable claim. You may be unwilling to take the case, but even if you did you would want your fee upfront as this company has demonstrated that they do not always pay their bills.

Reputation is very important in business and takes years to cultivate. These letters of comfort may not be available to a person with little reputation in large amounts. They would likely start small, and may grow to quite large sums later in life after a long track record of paying.

This is exactly what credit scores are trying to do. A high credit score is, in the best of all worlds, show someone who has a great history of repayment.

Okay, so you are a banker and loan a company a large amount of money. The owner misappropriates the money, and goes to live in a sheltered place with the money hidden from authorities. Since the company has no operating funds, or the equipment to earn money it goes bankrupt. So no matter if you have a comfort letter, of a formally binding agreement they are worth the same: $0.

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