In banking terminology, a letter of comfort is an assurance given by the parent company for its subsidiary or affiliate company with respect to some financial obligation of the latter. Letter of comfort is generally given when the parent company (issuer) is unable or unwilling to give "guarantee" with respect to the latter's financial obligation which if given is usually binding on...
In banking terminology, a letter of comfort is an assurance given by the parent company for its subsidiary or affiliate company with respect to some financial obligation of the latter. Letter of comfort is generally given when the parent company (issuer) is unable or unwilling to give "guarantee" with respect to the latter's financial obligation which if given is usually binding on the issuer to comply with. Through the issue of letter of comfort, the company aims to provide some sort of pseudo comfort with respect to the obligations of its subsidiaries or affiliates. The problem however is that such letters of comfort carry little to no legal obligation on behalf of the company who issues them and often is just reduced to a moral duty or obligation on its part. However, in some instances Letter of Comfort (LOC's) also have been given legal effect depending upon the tone and manner of the drafting of the same, but however in large scenarios LOC's have often been unenforceable in a court of law.
Letters of comfort are drafted and worded in the tone of letter of recommendation in a business context usually by a parent company for the subsidiary, affiliate, or associate companies. A Letter of Comfort merely ensures that the company providing the same will try to ensure to the best of its capacity to make the other party comply with the terms and conditions of the financial transaction. The only catch being that the company shall only try to do so but would not take any guarantee per se and in event of default of the same will not be liable for compensation as the company would have been, had it, guaranteed the performance of the contract. It is issued with the sole purpose of comforting in the little possible way a company when no other means is left to do the same.
The Karnataka High Court in the case of United Breweries (Holdings) Ltd v Karnataka Industrial Investment and Development Corporation Ltd has relied on the definition of Letter of Comfort as "a document that indicates one party's intention to try to ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default."
Though both the instruments are enacted with the aim to ensure stability and soundness in the contract, the impact is often different. Whereas in the case of a guarantee if there is default the party who guaranteed the performance of the contract, or a particular amount of money in the given contract, would be legally liable to pay in all circumstances. On the other hand, in the case of Letter of Comfort the party if defaults, the person providing such comfort will not be legally liable for the damages, in other words it is nothing but an empty formality or promise.
There remains a great amount of apprehension when a Letter of Comfort is issued versus when a Guarantee is issued. It is advisable that in light of conflicting judgements and its ambiguous nature which is often depended on the manner in which it is constructed that it be only resorted to as a last means or in other words it does not provide the comfort as one would likely infer from looking at in firsthand.
Views are personal.