How Comforting Is A Comfort Letter?

Article by Shawn Goldmintz*

Introduction

It can be very hard for a prospective borrower to attain financing without a guarantee, especially when that borrower has affiliates that would logically be in a position to guarantee the borrower's indebtedness (e.g. a parent corporation). While it is well within an affiliate's rights to choose not to guarantee a debt, it puts the prospective debtor in a very tough situation. As a compromise, an affiliate of the borrower can give some kind of assurance to a creditor that falls short of a guarantee. This assurance often takes the form of a comfort letter, which is a statement made by the affiliate indicating their intention to ensure that a debt will be repaid.

Classifying and categorizing the legal rights that flow from one of these comfort letters is very tricky. There must be some purpose to a comfort letter, some value that is provided by the author of the letter that induces a creditor to extend credit where they otherwise would not. That being said, ostensibly the letter is not a full guarantee, otherwise the author of the comfort letter would have simply agreed to give a guarantee in the first place. Comfort letters are commonly requested, and their inclusion in a financing is often the subject of intense negotiation, as is the precise wording of the document.

This article will endeavour to show the development of the law regarding comfort letters by analyzing leading decisions in other jurisdictions, and then looking to the leading case in Canada to distil the current state of the law.

Kleinwort Benson Ltd. v. Malaysia Mining Corp. – A Matter of Honour, A Gratuitous Promise

The first case we will explore in this paper is Kleinwort Benson Ltd. v. Malaysia Mining Corp. ["Kleinwort"],1 an English Court of Appeal case from 1988. In this case the plaintiff, Kleinwort Benson Ltd. ("KBL"), granted a £5 million credit facility to MMC Metals Ltd., a subsidiary of Malaysia Mining Corp. ("MLC").

In negotiating the credit agreement, KBL requested that MLC be a party to the loan, or failing that, a guarantor of the loan. MLC rejected both options, and after rigorous negotiations agreed to provide a "letter of comfort" as a compromise. The letter recounted the terms of the loan to the subsidiary and provided statements designed to provide some level of comfort to the lender, the most important of which read:

"It is our policy to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements."

A second credit facility of £5 million was extended on the same terms as the original indebtedness, and was accompanied by an identical letter of comfort. Soon after these financings were provided, MMC Metals Ltd. went out of business, due to a collapse in the market price of tin.

KBL then requested payment of the outstanding amounts on these loans from MLC, who denied liability. MLC took the position that the comfort letters did not create a legally binding promise to pay in favour of KBL. Naturally, KBL initiated a claim against MLC for repayment of the debt.

The litigation that ensued required the English Court of Appeal to consider the nature of the statements contained in a comfort letter. The document title "comfort letter" was held not to have any inherent legal meaning. This first step of the analysis in Kleinwort gives us the proposition that a comfort letter must be classified before any other analysis can take place. Accordingly, the language and surrounding circumstances of each letter must be analyzed to determine its effect.

The Court of Appeal's analysis of the comfort letter in Kleinwort turned on the interpretation of the statement in the letter reproduced above, and specifically whether the statement could be considered a promise as to future conduct or as a contractual warranty. It was noted that the use of the future tense is an indicator of an intention to make a promise about future conduct. However, the court also conceded that the use of the present tense did not bar the conclusion that the language in the statement above was an enforceable contractual promise.

In deciding whether the language was promissory in...