Canada: How Comforting Is A Comfort Letter?

Last Updated: December 28 2011

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 nature, the court also looked to the intention of the parties in including it in the letter. Because KBL asked for, and did not receive, a full guarantee from MLC, it followed that the lack of promissory language (e.g. a statement that the above would continue to be MLC's policy) was purposeful, and indicated that MLC was intentionally avoiding making a promise in the letter.

The court also noted that the letter contained other statements that would be rendered irrelevant if the letter were in fact tantamount to a guarantee. If MLC were giving a guarantee there would be no need for assurances that MLC would maintain its ownership of MMC Metals Ltd. The redundancy of the additional terms where the letter was interpreted as a guarantee also served as an indicator that MLC was intentionally not giving a guarantee.

The court held that to interpret the words of the letter as promissory would be to improperly read the extra words "and will continue to be" into the statement in question where there was no evidence to show that those were the words the parties intended to use. Instead of a contractual promise, the court held that the above statement was merely a moral commitment or a matter of the signor's honour. Without a factual context to indicate a contractual intent, the court would not attach contractual liability to language that was clearly not promissory.

Banque Brussels Lambert SA v. Australian National industries Ltd. – A Binding Obligation

Just after Kleinwort, the Supreme Court of New South Wales in Australia considered the enforceability of comfort letters in the case of Banque Brussels Lambert SA v. Australian National Industries Ltd. ["Brussels"].2

In Brussels, Banque Brussels Lambert S.A. ("BBL") provided Spedley Security Ltd. ("SSL") with a line of credit. In negotiating the line of credit BBL sought a guarantee from the parent company of SSL, Australian National Industries Ltd. ("ANI"), but could not procure one. In the end, ANI provided BBL with a comfort letter including the following salient terms:

"(1) We acknowledge that the terms and conditions of the arrangements have been accepted with our knowledge and consent and state that it would not be our intention to reduce our share holding in Spedley Holdings Limited from the current level of 45% during the currency of this facility. We would, however, provide your bank with ninety (90) days notice of any subsequent decisions taken by us to dispose of this share holding, and furthermore we acknowledge that, should any such notice be served on your bank, you reserve the right to call for the repayment of all outstanding loans within thirty (30) days.

(2) We take this opportunity to confirm that it is our practice to ensure that our affiliate, Spedley Securities Limited, will at all times be in a position to meet its financial obligations as they fall due. These financial obligations include repayment of all loans made by your bank under the arrangements mentioned in this letter."

Years after the line of credit was extended, ANI sold off its shares in SSL without giving BBL any advance notice, meaning that BBL lost the chance to demand payment of the debt prior to the sale. Additionally, it was clear that ANI did not make efforts to ensure that SSL was in a position to meet its financial obligations.

SSL did not repay the loan, and so BBL attempted to recover the loans from ANI by bringing an action for breach of contract. ANI took the position that the reasoning in Kleinwort protected them from any liability under the comfort letter. The Supreme Court of New South Wales disagreed.

Once again the court in this case held that a comfort letter had to be interpreted in light of its language, but also in the context of its surrounding circumstances. The facts of Brussels differed from those of Kleinwort in a few ways. The course of the negotiations showed that BBL was looking for very strong language in the letter, and went so far as to reject a draft that expressly stated that the letter was not a guarantee. Additionally, ANI was given notice that BBL considered comfort letters to create binding obligations. In determining the nature of the obligations created by the comfort letter, the court considered whether 1) the contextual evidence indicated an intention to contract; and 2) whether the language in the letter was promissory in nature. Ultimately it was held that the requisite intention and language was present, and that ANI was liable for SSL's debt.

The reasoning behind this decision was based largely on the premise that business people do not just write up documents for fun, and to hold comfort letters as creating no legally binding obligation would render the document useless. The court reasoned that if the language contained in a document is promissory on its face and there is no indication that the parties do not intend the obligations in the letter to be enforceable, the court is duty bound to hold the contracting parties to their bargain. The fact that BBL requested a guarantee from ANI and was denied did not preclude this finding.

The court relied on the case of Edwards v. Skyways Ltd. for the proposition that an intention to contract is assumed in commercial transactions, unless there is strong evidence to the contrary.3 The Australian court was critical of the reasoning in Kleinwort, arguing that minute textual analysis can twist the meaning of a document, and to treat a comfort letter as a matter of honour was to disregard the purpose for which it was given in the first place.

This analysis led the Australian court to hold ANI liable for the debt of SSL, giving legal effect to the comfort letter in this case.

Toronto Dominion Bank v. Leigh Instruments Ltd. (Trustee of) – The Current State of the Law

Ten years after the decisions in Brussels and Kleinwort, the Canadian courts were tasked with settling the law surrounding comfort letters in Canada in the case of Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of) ["Leigh"].4 The facts in Leigh were very complicated. However, a short summary will suffice for the purpose of extracting the rules and reasoning behind the case.

Toronto Dominion Bank ("TD") extended a great deal of credit to Leigh Instruments Ltd. ("LIL"), at first by way of transferring a debt owed by LIL's parent company, itself a subsidiary of Plessey Company PLC ("Plessey"), and subsequently directly to LIL. TD extended $45 million in credit to LIL, and in the course of those financings asked for and received five comfort letters. Each of the letters contained the following statement, among others:

"It is our policy that our wholly owned subsidiaries, including Leigh Instruments Limited, be managed in such a way as to be always in a position to meet their financial obligations including repayment of all amounts due under the above facility."

The fifth and final letter was identical in substance to the first four, except for one provision at the end that read:

"This letter replaces our letters of 31st August 1989, 31st March 1989 and 30th June 1989 and does not constitute a legally binding obligation."

In the end, LIL went bankrupt and TD demanded payment from Plessey, who refused to pay.

The court held that the language added to the fifth comfort letter was reviewed and accepted by senior TD officials. Therefore, Plessey had demonstrated and TD had taken notice of a clear intention to not have the promises in the final comfort letter treated as legally binding. As such, Plessey could not be held to account for LIL's failure to pay its debts.

While this conclusion may not surprise anyone, interestingly the court held that the ruling in this case would have been the same even without the new wording in the final letter. This finding hinged on the court's willingness to allow evidence of the circumstances surrounding the contract to aid in the interpretation of the contract. It should be noted that the court was clear that external circumstances would only be allowed into evidence where there is ambiguity in the wording of the contract, and could only be used to ascertain the intention of reasonable parties similarly situated. External evidence cannot be used to argue what the parties' subjective intent was at the time the contract was made.

It was this external evidence that made all the difference in Leigh. The evidence showed that TD's internal policies considered comfort letters to be documentation, and not a security. Plessey had refused to give a guarantee, and TD's subsequent risk evaluation on the line of credit seemed to reflect the increased risk that would come with a non-guaranteed loan. TD's legal department advised on the ambiguity and uncertainty inherent in receiving a comfort letter pursuant to a financing. Additionally, there was evidence that a primary reason for TD extending the loan was to foster a positive relationship with Plessey, a giant multinational corporation. All of these surrounding facts led the court to the decision that Plessey's comfort letter could not have been intended to be a legally binding contract.

Further to these reasons, the court endorsed the reasoning in Kleinwort. First, that if the statement reproduced above was a binding guarantee, then the rest of the document (which stated and guaranteed many other things) would be meaningless. Also, the statement in question was in the present tense, like in Kleinwort, and the Ontario court was no less hesitant to read the extra words "and will continue to be" into the contract where there was no evidence to prove that those were the words the parties intended to use.

In the end it was TD who was left picking up the tab for LIL's debt, as LIL was bankrupt by the time this litigation was resolved. Plessey did not contribute any money as the court held it had no legal obligation to pay, only a moral one.

Claims for Misrepresentation

Although not addressed in the above summaries, the courts in both Kleinwort and Leigh discuss the additional possibility of comfort letters leading to liability even where they are not contractual in nature.

This liability would arise from the law of representations. Representations are statements made that, while not part of the terms of a contract, induce a party to enter into a contract. So, in the case of a comfort letter that is not deemed to be contractual, the author of the letter can still be held accountable for losses associated with the financing if they made representations that were not true.

The law distinguishes between three kinds of false representations: innocent, negligent and fraudulent. An innocent misrepresentation (where the misrepresentation was made with good intentions) would give the party who was induced into the contract the chance to void the contract, but not the opportunity to sue for money. A negligent misrepresentation would be a false statement made where there was no thought or care that went into making the false statement. This type of misrepresentation allows the induced party to sue for money. Fraudulent misrepresentation occurs when a representation is known to be false, but it is made regardless. This most egregious form of misrepresentation allows the induced party to void the contract and to sue for money.

The law of representations makes it important to consider the repercussions of comfort letters outside of contract, because even where the nature of the letter is not contractual, the party giving the letter could suffer monetary losses where statements in the letter are false.

Key Lessons

While the cases reviewed in this article seem to be at odds with one another, on closer inspection they actually help to form a coherent understanding of the way in which comfort letters are treated and interpreted.

  1. A Matter of Interpretation

    First and foremost, each comfort letter must be interpreted individually. The title "comfort letter" is not determinative of the substance of the letter. Some comfort letters may be contracts while others may be mere statements.
  2. Context Matters

    Courts in Canada have shown a willingness to allow evidence of the circumstances surrounding the giving of a comfort letter. These external factors can be used in order to help aid the interpretive process.
  3. Objective Intentions Control the Analysis

    A contract is generally to be interpreted according to the plain meaning of the words on the page. However, the courts will trace the reasonable intentions of the parties with an analysis of the contract and the surrounding context where there is ambiguity present in the words of a contract. The court will reconstruct the scenario and consider what the intention of reasonable parties in that situation would have been. This forms the objective standard on which the nature of the statements contained in a comfort letter will be decided.

Conclusion

It may seem as though comfort letters have the potential to be absolutely useless in certain circumstances. The question begs as to why a creditor would accept a comfort letter from a guarantor that refuses to give a guarantee when the letter cannot be enforced at law. The commercial reality is that when a business fails to meet its obligations, whether as a matter of law or honour, it reflects poorly on that business. A bad reputation can be much worse for a company than having to repay a loan. While this may not seem like an appropriately harsh punishment for one who fails to honour a non-contractual version of a guarantee, it should be remembered that, unfailingly, the author of a comfort letter will have been asked for a guarantee first, and the author refused.

In addition to this weak punishment, it is entirely possible, and in fact probable, that some comfort letters will be interpreted as binding legal obligations in the future. All it would take is for the wording of a letter to indicate promissory intent (perhaps by using the future tense), and the letter would be held to create legally binding obligations.

If there is one overriding lesson to take away from this line of cases, it is that one should not give a comfort letter lightly. Careful thought should go into drafting a comfort letter, and it is of supreme importance that the words on the page exactly match the intentions of the authors. Otherwise the parties may find themselves in the somewhat ridiculous position of being locked in long and expensive legal battles, arguing over what they thought the other side was thinking as in the cases of Kleinwort, Brussels and Leigh.

Footnotes

* Shawn Goldmintz is an articling student at Aird & Berlis LLP.

1. Kleinwort Benson Ltd. v. Malaysia Mining Corp., [1989] 1 All E.R. 785 (C.A.), revg [1988] 1 All E.R. 714 (Q.B., leave to appeal to H.L. refused [1989] 1 All E.R. 785 (C.A.) at p. 798).

2. Banque Brussels Lambert SA v. Australian National industries Ltd. (1989), 21 N.S.W.L.R. 502 (S.C.).

3. Edwards v. Skyways Ltd, [1964] 1 All E.R. 494 (Q.B)

4. Toronto Dominion Bank v. Leigh Instruments Ltd. (Trustee of) (1998), 40 B.L.R. (2d) 1 (Ont. Ct. (Gen Div.)), affd 45 O.R. (3d) 417 (ONCA), leave to appeal to S.C.C. refused [1999] S.C.C.A. No. 27570 (QL).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.