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A key issue for the courts when deciding on the legal status of a comfort letter is whether or not the party proffering the comfort letter intended to create legal relations - Essay Example

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In order to determine whether the party proffering the comfort letter intended to create legal relations between themselves and the other party it is necessary to discuss the relevance of comfort letters.
Comfort letters came into usage due to the difficulty in finding someone…
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A key issue for the courts when deciding on the legal status of a comfort letter is whether or not the party proffering the comfort letter intended to create legal relations

Comfort letters are common in loan agreements, as an alternative from asking the lender to obtain a guarantor for the loan. In order for a claimant to be able to rely on the letter of comfort as a guarantee of payment, the claimant has to prove that the person issuing the letter intended to create legal relations between themselves and the claimant.
According to Ellinger (1989) comfort letters can be identified into 3 specific types, and can include undertakings from a parent company to meet the financial commitments of the subsidiary company. Less stringent comfort letters identify that the parent company knows of the intention of the subsidiary company to enter into a contract with the other party, but makes no express guarantee to honour the agreement of the subsidiary or to actively intervene to ensure that the subsidiary company fulfils the contract.
These letters can have legal effect despite the fact that they cannot be relied upon as a guarantee that the party will fulfil their part of the contract. One of the first cases to consider the effect of comfort letters was Banque Brussels Lambert S A v Australian National Industries Ltd1 in which the defendant averred that the letter should not be regarded as a binding contract. In this case, the bank insisted on a letter of comfort as a condition of the loan agreement between the parties. The bank had originally tried to force the defendant to guarantee the payments on the loan, which the defendant had refused to do. The claimant attempted to aver that the letter of comfort contained promissory paragraphs with regard to the conduct of the defendant and that the defendant had breached these promises. One such paragraph stated
We take this opportunity to confirm that it is our practice to ensure that our affiliate [the borrower] will at all times be in a position to meet its financial obligations as they fall due. These ... Read More
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