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COMFORT LETTER - NON BINDING

A Comfort Letter, also known as a letter of responsibility, aims to give the recipient reassurance that the provider of the letter will support the obligations of a third party. In other words it is a written assurance often provided by a parent company in respect of the obligation of its subsidiary to a third party.

 

Generally a Comfort Letter is used where:

 

  • A parent company is requested by the lender of its subsidiary to give reassurance in relation to the subsidiary's obligations under a loan agreement that it would support the subsidiary in case of financial difficulties.
  • A parent company provides reassurance to a subsidiary's supplier (or to the party which has contracted with its subsidiary) in relation to the payment and/or performance obligations of the subsidiary under a contract.
  • A Comfort Letter may also be issued by a government to the party which has contracted with a public body, in relation to that body's obligations under a contract.

 

A Comfort Letter can either be legally binding or non-legally binding. Whether the letter is intended to be legally binding or not depends on its wording, specific terminology used in the Letter determines whether the assurance given constitutes a binding contract or only a moral obligation.

 

This Comfort Letter - Non Binding aims to establish a non-legally binding obligation on the provider, it creates a mere moral obligation as opposed to a legal obligation.

 

A Comfort Letter - Non Binding is generally given as an alternative to a guarantee where the provider of the letter wishes to give some comfort to the recipient but it is unable or unwilling to provide a guarantee because of prohibitions in its constitutional documents, or negative pledges it has given to a third party, or it is prohibited on regulatory grounds from giving a guarantee.

 

Whether to accept a non-legally binding comfort letter rather than a guarantee is a commercial decision to be taken by the recipient of the letter. If the provider is unable or unwilling to give a legally binding comfort letter, then a non-binding one may still be better than no letter at all, because a non-binding comfort letter may impose sufficient pressure on the provider to comply with its obligation.

 

Therefore the crucial feature of a Comfort Letter is whether there is an intention to create legally binding obligations on the provider. Both recipients and providers of comfort letters must understand the fundamental difference in the nature of the obligations provided by a guarantee, a binding comfort letter and a non-binding comfort letter.

 

For a comfort letter that creates a legally binding obligation see: Comfort Letter – Binding.

 

 

This Comfort Letter - Non Binding is in Microsoft Word format, written in plain English, easy to use and edit.

 

 

 

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