Letters of comfort

Letters of comfort are generally used by parent companies to encourage potential lenders to extend credit to their subsidiary companies by stating their intention to provide financial backing for those subsidiaries. It is generally the case that such letters merely amount to statements of present intention on the part of the parent company and, therefore, do not amount to offers that can be accepted by the creditors of any subsidiary companies. Given the operation of the doctrine of separate personality, this effectively leaves the creditors with no legal recourse against the parent company for any loans granted to the subsidiary.

            In Kleinwort Benson v Malaysian Mining Corp the defendant company had issued a letter of comfort to the plaintiffs in respect of its subsidiary company, MMC Metals. However, when MMC Metals went into liquidation, the defendant failed to make good its debts to the plaintiffs.

            At first instance, the judge decided in favour of the plaintiffs, holding that, in such commercial circumstances, the defendants had failed to rebut the presumption that there had been an intention to create legal relations. On appeal, it was held that, in the circumstances of the instant case, the letter of comfort did not amount to an offer; it was a statement of intention which could not bind the defendants contractually. Therefore, the Malaysian Mining Corp was not legally responsible for the debt of its subsidiary.

            It is important to note that the Kleinwort Benson case opens up the possibility that, under different circumstances, letters of comfort might be considered to constitute offers capable of being accepted and leading to contractual relations. Under suchcircumstances, the presumption as to the intention to create legal relations as they  normally apply in commercial situations will operate, though it is almost inconceivable that a court would decide that a letter of comfort amounted to an offer without also finding an intention to create legal relations.

CONTENTS OF A CONTRACT

CONDITIONS, WARRANTIES AND INNOMINATE TERMS

Once it is decided that a statement is a term, rather than merely a pre-contractual representation, it is necessary to determine which type of term it is, in order to determine what remedies are available for its breach. Terms can be classified as one of three types.

  

Conditions

A condition is a fundamental part of the agreement and is something which goes to theroot of the contract. Breach of a  condition gives the innocent party the right either to terminate the contract and refuse to perform their part of it or to go through with the agreement and sue for damages.

 Warranties

A warranty is a subsidiary obligation which is not vital to the overall agreement and does not totally destroy its efficacy. Breach of a warranty does not give the right to terminate the agreement. The innocent party has to complete their part of the agreement and can only sue for damages.

 IMPLIED TERMS

So far, all of the cases considered in this chapter have involved express terms: statements actually made by one of the parties, either by word of mouth or in writing. Implied terms, however, are not actually stated but are introduced into the contract by implication. Implied terms can be divided into three types.