A Practical Guide to Letters of Comfort
Although LoC are used across a range of commercial activities, treasurers should recognise what the LoC is and what it is not. In this respect the key feature for treasurers to recognise is that this type of LoC is not intended to create enforceable contractual obligations in respect of the credit exposure of the corporate to the bank. Care is needed. In some jurisdictions, guarantees or collateral undertakings are called LoC to avoid tax or registration requirements – these are not the subject of the guidance note.
The provider of the credit service is often concerned that a parent/controlling company should be aware of a credit relationship between the bank and a subsidiary or, perhaps, a joint venture company. The LoC is intended to at least assure the bank that the parent company is aware of the credit relationship and of its magnitude. If need be, it can explain how, at the time of writing, the recipient of the service fits into the group overall. And it may be able to address other issues of concern to the bank without the parent undertaking any potential contractual obligation or liability to anyone. In other circumstances, a bank may take comfort from some limited expression of goodwill.
The company’s approach to issuing the LoC is based on avoiding agreeing legally enforceable obligations. This need can arise in a variety of circumstances. It may be a result of a company policy in respect of only committing itself in limited cases. Alternatively, it may be a way of addressing the credit requirements of a complex joint venture. There may also be jurisdictions where issuing guarantees attract local taxes not payable for LoC – and the bank is happy with the level of support the LoC represents. Issuing a guarantee may also create local tax disadvantages for the subsidiary company. The treasurer must balance the requirements of the business for credit alongside the commercial relationship with the bank.
As the hub of this process in the company, the treasurer needs to be in control of a number of issues:
The ACT’s Briefing Note contains advice on what treasurers should look to include in the LoC when constructing the wording. Individual circumstances may dictate a variation in actual wording and banks may well seek to include all manner of additional requirements.
However, treasurers should always consider the need to avoid any statement that could be characterised as a promise and which runs the risk of being enforceable itself and may add weight to arguments about enforceability intentions in relation to other matters in the letter.
This is re-inforced by case law, which indicates that inclusion in a LoC of a disclaimer of any intent to create enforceable obligations is highly advisable, if not necessarily 100% reliable. Case law is not consistent on LoC so the treasurer may also need to ensure that any local jurisdictional tax or legal implications of issuing the LoC are addressed specifically in the wording.
For example, the wording “It is currently our policy that members of the group manage their business so that they can expect to be able to meet their obligations as they fall due. Nothing in this statement should be taken to impose on us any obligation to notify you of any future change in policy,” is at least arguably only a statement as to current fact rather than a promise as to future conduct. This was the conclusion in the English courts in Kleinwort Benson Ltd. V. Malaysia Mining Co. Berhad (1989). Nevertheless the Australian courts in Banque Brussels Lambert SA v. Australian National Industries Ltd, (1989) found that the wording “It is our practice to ensure our affiliate Spedley Securities Ltd will at all time be in a position to meet its financial obligations as they fall due,” had the same effect as “we promise to ensure…”
This article can be read in more detail at www.treasurers.org/goto/lettersofcomfort