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:
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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.
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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.
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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.
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 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.
The main aspect of a Comfort Letter is whether there is an intention to create legally binding obligations on the provider. This Comfort Letter - Binding aims to establish a legally binding obligation on the provider, however please note that even if the comfort letter creates a legally binding obligation, it is unlikely to be a satisfactory substitute for a guarantee because the wording of a comfort letter tends to be vague and therefore more difficult to enforce than a guarantee.
For a Comfort Letter that creates a non-binding obligation see: Comfort Letter - Non Binding.
This Comfort Letter - Binding is in Microsoft Word format, written in plain English, easy to use and edit.
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