Letters of Comfort

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Letters of Comfort   What? A document given to a
financer in a situation in which a guarantee
might otherwise be given. They have generally
been sufficient to secure payment to the
creditor. When? Will typically be given when a
bank is lending to a subsidiary company, and is
reluctant to do so without some assurance the
parent company will support the subsidiary.
Letters of Comfort developed as an alternative to
a guarantee or surety when the parent company was
unwilling, or unable to issue a more traditional
security, often as they do not want to create a
clear liability and have to show a contingent
liability on their balance sheet.
Their place in law Kleinwort Benson There is
no general rule concerning letters of comfort.
Leon Proscour, Letters of Responsibility in
French Law a letter of comfort will be regarded
as a commitment to perform as In the commercial
world the creation of a meaningless instrument or
document is unthinkablesome performance is
provided in order to help a creditor insure his
rights. In Banque Rogers CJ was influenced by
this French approach, calling it refreshingly
honest and sensible.
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Defendant Australian National Industries (ANI)
3) BBL Wanted additional reassurance the loan
would be repaid
Plaintiff Banque Brussels Lambert (BBL)

• 4) ANI provided BBL a letter of comfort
• Provide the bank with 90 days notice of any
  decision to dispose of shareholding in Holdings
• Acknowledged that should they do this, the
  Plaintiff has the right to call for the repayment
  of all outstanding loans within 30 days
• - Confirmed that it is their practice to ensure
  that Spedley will at all times be in a position
  to meet its financial obligations as they fall
  due
•   

1) Had 45 Controlling interest in Holdings
2) Spedley wanted loan of US5 million from BBL
Parent company Spedley Holdings (Holdings)
Subsidiary Spedley Ltd (Spedley)
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X
2) This meant P. could not ask D to pay for
outstanding loans
X
3) D also did not ensure Spedley could meet its
financial obligations to P
X
4) Spedley was unable to repay debt to P and
later went into liquidation
P sought relief on the basis of beach of
contract, equitable estoppel or misleading or
deceptive conduct in breach of s52 of the Trade
Practices Act 1974
1) 1989 D. sold shares in Holdings without giving
P. 90 days notice
D denied liability in contract on the basis that
the parties did not manifest an intention to
create legal relations
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• Plaintiff
• 1) In commercial transactions, presumption is for
  an intention to create legal relations.
• Onus of proving absence of intention rests on
  party who claims no intention was intended.
  Edwards v Skyways
• 2) The letter of comfort constitutes a binding
  contractual obligation which the defendant
  breached.
• The letter made two promises enforceable at law
• Whilst the facility, or agreement, existed D
  was to provide the P with 90 days notice if it
  sold its shareholdings in Holdings
• During the life of the facility, the D would
  ensure Spedley would at all times be in a
  position to meet its financial obligations as
  they fell due.

Defendant 1) Skyways onus is discharged by
examining the actual course of negotiations
leading up to final version of the letter and
doing a close textual analysis of the letter 2)
Not liable to compensate P for any damage as the
letter of comfort involved no enforceable legal
obligation Kleinwort Benson Ltd v Malaysia
Mining Corp Berhad
Vs
Issues 1) Was there an intention to create
legal obligations? 2) Were the terms of the
letter of a sufficiently promissory nature to be
held contractual?
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1) The intention to Create Legal Obligations
A) Looking at the lead up to the formation of the
letter At the time of negotiation, was made clear
to the D and Spedley that the loan would only
occur if P received a suitable letter of comfort
or other form of commitment, therefore, as this
was basis of transaction, was intention.
B) Examining the presumption of intention in
commercial transactions - Rogers CJ found at
523, that it would be remove the credibility of
commercial transactions to not assume there is an
intention to create legal relations and that
the whole thrust of the law today is to attempt
to give proper effect to commercial transactions
. - Applied Hirst J comments in Kleinwort
Benson, and Staughton J comments in Chemco
Leasing SpA v Redifusion plc that commercial
judges will tend towards placing high
significance on comfort letters as they are an
inherent element of a commercial banking
transaction and the promises made in them are an
important feature. Therefore, the court
concluded that the presumption of intention
stands. .
Conclusion There was an intention to create
legal obligation
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2) Whether the statement was promissory in
character
This becomes the key element in the case
A) Test in Australian law Dick Bentley
Productions Ltd v Jharold Smith (Motors) Ltd Lord
Denning MR - If an intelligent bystander would
reasonably infer that a warranty was intended,
that will suffice. - There is a prima facie
ground for inferring a contract was intended if
the statement was made for the very purpose of
inducing the other party to act upon it, and
actually inducing him to act upon it. As P only
acted upon receiving the letter, the statement
was promissory in character.
B) Examine the actual letter Paragraph One
Contains no contractual representation but is
merely an indication of awareness Paragraph Two

• D counters by referring to the phrases it
  would not be our intention and We would,
  however, provide
• Inclusion of would and however softens the
  statement to only being a statement of present
  intention

P. argued The para is expressed in the language
of promise and the amendments made in negotiation
does not detract from this
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The court split the second paragraph into two
sections 2 (a) Defendants intention to reduce
shareholdings in Holdings Caters for the
contemplated intention to retain their interest
in Holdings The statement that it is not their
intention to reduce their interest has the same
effect as agreeing or promising that they will
not reduce their holdings until they had
fulfilled their obligation i.e. repaid the debts.
Conclusion Held to be contractual as this is
sufficient to be a promissory statement. 2 (b)
Comments regarding the 90 days notice and 30 days
calling for repayment. - Contains an undertaking
of a contractual nature that is not diminished by
the word however. This wording merely deals
with what they would do in the situation that
their intention (to keep a holding of Holdings)
changes. - Earlier drafts of the letter already
dealt with 90 days notice and 30 days demand, and
the action was also intended to provide clear
benefit to the plaintiff. Thus, this removes any
significance of the word would Conclusion No
reason why 2(b) should not be regarded as a
promissory statement.
Paragraph Three - If the paragraph is read as
it is our practice to ensure that Spedley is at
all times in a position to repay all loans made
to it by your Bank (at 526), it has the same
meaning as if they were saying we promise to
ensure that thus it is a promissory statement
through interpretation.
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• Conclusion
• There was an intention to create a legal
  obligation
• The statements in the letter of comfort were
  promissory in character

Decision The Defendant (ANI) was in breach of
two enforceable contractual promises and the
Plaintiff (BBL) succeeds in liability