letters of comfort final

Letters of Comforta sele!ed issue in commercial pra!ice

Cliff Lui

What is a Letter of Comfort?• A label given to a document sent by a parent

company to encourage a lender to make a loan to its subsidiary

• True comfort letter - not legally binding.

• Used in place of a guarantee, which places specific and certain legal obligations on the guarantor.

• The issue at stake is determining whether a document is a letter of comfort, which would be legally non-binding.

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3

A

B

P$

A gives a document to P. A does not want it to be legally binding.P gives money to B. P wants document to bind A to the document’s purported intentions.

• Problems arise when B fails to pay P, and A refuses to pay P.

• Courts step in to decide whether the document is legally binding or not.

• To avoid bad debts, banks should evaluate the risks before relying on a dubious document as ‘security’ for lending money.

• Borrowers’ parent companies should draft letters that convince banks to lend, but preclude any legal liability.

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Remedies for the Plaintiff?

• Enforcement as guarantee (rare)

• Contract

• Misrepresentation

• Estoppel

• Unjust Enrichment

• Deceit

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• Loan facility from Kleinwort to Metals upon receipt of letter sent by MMC.

• “We are aware of the loan facility”

• “We will not reduce our current financial interest in Metals...”

• “it is our policy to ensure that the business of [the subsidiary] is at all times in a position to meet its liabilities to you under the above arrangements”

Kleinwort Benson, CA (UK)

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• Clause 1 (not contested).

• Clause 2 (agreed to be promissory in nature).

• Clause 3 (contested clause) found to be mere statement of current policy and not future intention.

Kleinwort Benson Ltd. v Malaysia Mining Corporation Berhad [1989] 1 WLR 3797

• Bank lent money to Spendley upon receipt of a letter from Spendley’s parent, ANI.

• “We confirm we are aware of the loan”

• “It would not be our intention to reduce our shareholding in [subsidiary] during the currency of this facility. We would, however, provide your Bank with 90 days’ notice if we dispose of this shareholding, and should any such notice be served on your Bank, you reserve the right to call for the repayment of all outstanding loans within 30 days.”

• “It is our practice to ensure that [subsidiary] will be at all times be in a position to meet its financial obligations as they fall due. These include repayment of all loans made by your Bank ...”

Banque Brussels (Aust)

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• Clause 1 (not contested).

• Clause 2 (contested clause) found to be promissory in nature.

• It was just a slightly weaker form of the agreed promissory clause in Kleinwort Benson.

• Clause 3 (contested clause) found to be promissory in nature.

9Banque Brussels Lambert v Austin National (1989) 21 NSWLR

• “It is our practice to ensure that Spendley will at all times be in a position to meet its financial obligations as they fall due.”

• “It is our practice to ensure that Spendley is at all times in a position to repay all loans made to it by your Bank”.

• “We promise to ensure that Spendley will at all times be in a position to repay the plaintiff”.

Banque Brussels Lambert v Austin National (1989) 21 NSWLR10

• “it is our policy to ensure that the business of [the subsidiary] is at all times in a position to meet its liabilities to you under the above arrangements”

• “It is our practice to ensure that [subsidiary] will be at all times be in a position to meet its financial obligations as they fall due. These include repayment of all loans made by your Bank ...”

• Note the similarity between the 2 contested clauses. Can the different treatment in the cases be reconciled

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• “There should be no room in the proper flow of commerce for some purgatory where statements made by businessmen, after hard bargaining and made to induce another business person to enter into a business transaction would, without any express statement to that effect, reside in a twilight zone of merely honourable engagement.”

Rogers CJ


• “The whole thrust of the law today is to attempt to give proper effect to commercial transactions. It is for this reason that uncertainty ... has fallen into disfavour as a tool for striking down commercial bargains. If the statements are approximately promissory in character, the courts should enforce them when they are uttered in the course of business and there is no clear indication that they are not intended to be lega'y enforceable.” Rogers CJ


• Determining the intentions of the parties

• Edwards v Skyways

• Document to be construed objectively in light of the factual matrix known to both parties, providing the “genesis” and “aim” of the transaction.

• Prenn v Simmonds applied in Bouygues.

Reconciliation – Forging the Key

Back to Basics

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Kleinwort

• The plaintiff had negotiated for a guarantee or joint and several liability of the defendants, but finally settled for a comfort letter. Which they knew was not a traditional security.

• As compensation, P had raised the loan facility’s commission.

Banque Brussels

• The fact that a letter is not intended to be a guarantee does not stop it from being legally binding.

• Throughout the negotiations, the plaintiff expressed its intention for the parent to make payment. “the comfort letter is... a binding obligation... if this isn’t the case, the [loan] won’t be granted.”

• The plaintiff had wanted a “strong comfort letter” as some “degree of security” for the loan.

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Re Atlantic Computers [1995]

Toronto Dominion Bank [1998]

Bouygues v Shanghai Links [1998]

HSBC v Jurong Engineering [2000]

LaSalle Bank v Citicorp [2003]

Gate Gourmet [2004]

Toppan Printing [2005]

Testing the KeyUK

Canada

HK

Singapore

USA

NSW

HK

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Re Atlantic Computers

• Letters were given in connection with hire purchase facilities granted by NAB to AML, subsidiary of AC. AML is now in liquidation.

• “We undertake that without the prior consent of the Bank: that if AML is unable to meet its commitment, the parent company will take steps to make arrangements for its present, future or contingent obligations to the Bank both for capital and interest to be met.”

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• Ascertaining the intentions of the parties:

- “This document is not intended to be a guarantee and, in the case of paragraph (c) above, it is an expression of present intention by way of comfort only.”

• This was sufficient to preclude AC from any legal liability arising.

• Useful if you are drafting the letter of comfort.

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• Bank lent money to Leigh upon receipt of letter from Plessey.

• “This is to confirm that Plessey has full knowledge of the loan granted to Leigh.”

• “We undertake not to reduce our shareholding in Leigh without prior notification to yourselves.”

• “It is Plessey’s policy that Leigh be managed in such a way as to be always in a position to meet its financial obligations.”

Toronto Dominion Bank

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- Court will look at the document and its terms as a whole, and objective facts are admissible to aid interpretation (!)

- “This letter does not constitute a legally binding commitment.”

- The parent had described their support as being informal and the bank had used the subsidiary’s credit-risk rating instead of the parent’s.

• Clause 3 interpreted negatively as in Kleinwort.

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• Huge issued a letter to the Bank, who lent to its subsidiary, Jurong Engineering.

• “We will continue to maintain ownership and undertake to advise you forthwith if we dispose...”

• “We will cause the borrower to be operated in such a way as to be able to meet all its obligations from time to time to you. If the borrower cannot, we endeavour to make funds available...”

• “We will not take any action which will result in the borrower being unable to meet all its obligations to you and undertake to advise you of any circumstances which may affect the going concern of the borrower.”

HSBC v Jurong Engineering

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- The general tone of the letter should be examined in light of the surrounding facts and no minute textual analysis shall be undertaken, cf. Kleinwort.

- The bank was asked to evaluate the risks themselves in loaning on a ‘clean’ basis or on a comfort letter. The letters were not issued before the loan facilities. Casual treatment of the letters was evidence against having intentions to have legal relations, cf. Banque Brussels.

• Bank had drafted the letter itself, so contra preferentum applied...

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• “We will continue to maintain ownership and undertake to advise you forthwith if we dispose...”

• “We will cause the borrower to be operated in such a way as to be able to meet all its obligations from time to time to you. If the borrower cannot, we endeavour to make funds available...”

• “We will not take any action which will result in the borrower being unable to meet all its obligations to you and undertake to advise you of any circumstances which may affect the going concern of the borrower.”

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• Comfort letters are generally unenforceable.

• But, they may be enforceable depending on the wording of the document and circumstances in which the comfort letter was granted. Whether the lender reasonably relied on it is also instrumental.

LaSalle Bank v CitiCorp

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• “This is to confirm that the parent entity, GGH AG, will provide the financial support that may be necessary to enable GGH Pty to meet its financial commitments as and when they fall due.”

• “This Letter of Support will not be withdrawn before GGH Pty has sufficient means to meet their obligations without the support of the parent entity.”

Gate Gourmet Holding

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- The purpose of the letter discerned from the circumstances and the words themselves aid in construing the letter.

- Australian Corporations Law s588G imposes statutory duties on directors to prevent insolvent trading – this goes to the heart of the letter and the plaintiffs were entitled to anticipate compliance with the entire letter.

- The words themselves were strongly promissory in character.

• Reinforces Banque Brussels Lambert.

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• “We advise that under an agreement entered into by [parent], all of the funds required to pay the contract price will be deposited in an account of the [parent]. Payment of the contract price will be made from this account and funds can be paid out of this account by the signature of ...”

• Ps contracted with X, subsidiary of D. X terminated the contract. D did not pay.

Bouygues v Shanghai Links

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Toppan Printing• “Naturally, the parent takes full responsibility for

the subsidiary’s accounts and financially supports its publishing business.”

• In the absence of express words of promise, it is necessary to consider the context in which the letter was written.

• The letter, even if construed objectively in light of the surrounding facts seems meaningless. It is incredible that the experienced plaintiff would rely on such a casual expression of intent.

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Using the Key

1. Determine whether the parties intended to be legally bound: i. from the objective, mutually known facts;ii. from the document.

2. Find words to be promissory or not (will, would...)

3. Make sure that the terms would help your client if they are indeed held to be promissory.

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Alternative Keys

• Misrepresentation: normal principles apply but you have to show that what was (mis)represented was a fact.

• Estoppel: shield or sword – follow US or Australian law?

- Estoppel argument accepted in Banque Brussels: “... represents the advance that the law in this country has achieved over concepts that inform the decision of the CA in Kleinwort Benson.”

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• Even unjust enrichment?

- promise was breached by D;

- resulted in sale of shares in [subsidiary] by D, which would not have been permitted;

- D was thus unjustly enriched by its wrongful conduct.

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QuestionsThanks!

References: BLG 2005 July (18) 3-4 | NYLJ 2004, 231(13) | JIBL 1990, 5(8), 340-344 | IBFL 1995, 14(7), 74-75 | LaSalle Bank National Assoc. v Citicorp Real Estate, Inc., WL 21671812 | Gate Gourmet Australia PTY Ltd. v Gate Gourmet Holding AG [2004] NSWC 149 | Banque Brussels Lambert v Australian National Industries Ltd. (1989) 21 NSWLR | HSBC v Jurong Engineering Ltd. [2000] 2 SLR 54 | Kleinwort Benson Ltd. v Malaysia Mining Corporation Berhad [1989] 1 WLR 379 | Chemco Leasing SpA v Rediffusion plc [1987] 1 FTLR 201 | Re Atlantic Computers plc [1995] BCC 696 | Bouygues SA v Shanghai Links Executive Community Ltd. [1998] 2 HKLRD 479 | Toppan Printing Co. v Chinese United Press Ltd. and M Channel Corp. Ltd. HCA 2898/2002 | Toronto-Dominion Bank v Leigh Instruments Ltd. (Trustee of) 178 D.L.R. (4th) 634

letters of comfort final

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