It may seem that letters of intent have the potential to be absolutely useless in certain circumstances. The question arises as to why a creditor accepts a comfort letter from a guarantor who refuses to give security if the letter cannot be legally enforced. The commercial reality is that if a company does not meet its obligations, whether for legal or honor reasons, it gives a bad image of this activity. A bad reputation can be much worse for a company than having to repay a loan. While this may not seem like a reasonably harsh punishment for someone who does not comply with a non-contractual version of a guarantee, it is worth remembering that the author of a comfort letter was infallibly asked for a guarantee first and the author refused. In practice, auditors often send letters of intent to lenders in the form of a credit report indicating whether a borrower can meet the payment obligations of a loan. These are opinions, not guarantees, that the underlying company will remain solvent. A letter of intent may also contain binding confidentiality provisions that specify what the parties may or may not disclose to external parties in connection with the transaction. A letter of intent may contain various binding provisions, including those relating to non-compete obligations or the hiring of certain senior officers if the agreement is reached.
Classifying and categorizing the legal rights arising from one of these comfort letters is very difficult. There must be a purpose for a comfort letter, a value declared by the author of the letter, that leads a creditor to make loans where they would not otherwise do so. However, the letter would not constitute a complete guarantee, otherwise the author of the comfort letter would simply have agreed to give a guarantee. Letters of intent are often requested and their inclusion in funding is often the subject of intense negotiation, as is the exact wording of the document. A letter of intent, sometimes referred to as a “letter of intent,” is a notice from one party to the other that indicates an initial intention to enter into a contractual obligation without the elements of a legally binding contract. The aim is to create a morally binding, but not legally binding, insurance. [1] Canada has two types of letters of intent. The weaker version, in which a parent organization acknowledges that a subsidiary has entered into a contract but does not provide a commitment of intent, is called a letter of knowledge. The stronger version, the Letter of Intent, shows the parent organization`s intention to support the subsidiary. [5] In the United States, there is a general presumption against the enforceability of comfort letters.
However, depending on the wording of the document, there may be legal liability under the rule of trust. [6] It can be very difficult for a potential borrower to obtain unsecured financing, especially if that borrower has affiliates that would logically be able to secure the borrower`s debt (e.g., a parent company). While it is entirely within an affiliate`s right to choose not to secure a debt, this puts the potential debtor in a very difficult situation. As a compromise, a borrower`s affiliate may provide some sort of collateral to a creditor who is not abiding by a guarantee. This insurance often takes the form of a letter of intent, which is a statement by the affiliate indicating their intention to ensure that a debt is repaid. A comfort letter (also known as a letter of intent or declaration of knowledge) is usually a statement in which the issuer or signatory declares its support for the debtor`s obligations to the creditor. A comfort letter is often used in place of a collateral arrangement or as a replacement for a collateral arrangement in the situation where the issuer wishes to avoid/facilitate liability. A general example of this is a parent company that provides comfort letters as collateral for a subsidiary`s obligations to a bank or other creditor/lender. The wording of a comfort letter is decisive for the subsequent legal effect and can have consequences in several respects – is the comfort letter binding and to whom is the issuer liable? It is therefore important that banks, parent companies and other issuers exercise caution when drafting and obtaining a comfort letter, as it may be interpreted contrary to the issuer`s intent if the wording is sufficiently ambiguous. If the issuer has any doubts, he should seek professional help. In the banking sector, the document is usually issued by a bank to its customers.
The letter shows the bank`s willingness to offer a short-term loan if necessary. In government matters, the document shows the assurance of the federal or state government willing to assist the lender for public enterprises. It shall explain to the supplier the assistance it is prepared to provide to the borrower to ensure that it fulfils its obligation in a timely manner. A comfort letter is usually signed before the closing date of the tender offer. The issuer should prepare a registration statement and ensure that the provider receives the necessary information. The information is intended to help the supplier make an informed decision. In general, a comfort letter is not a legally binding document and should therefore not be wrongly considered as a confirmation letter. The document is a moral obligation to help a subsidiary obtain a loan. As mentioned above, the circumstances that led to the issuance of the letter and the intentions of the parties may influence whether the letter is legally binding or not. However, it is important to note that any letter of intent, even non-binding letters of intent, establishes some degree of legal liability, as it contains at least representations of current facts. If these statements are false, the donor of the letter may be held liable for false or negligent misrepresentation.
Canadian courts have shown that they are willing to admit evidence of the circumstances surrounding the issuance of a letter of intent. These external factors can be used to facilitate the interpretation process. In Brussels, Banque Bruxelles Lambert S.A. (“BBL”) Spedley Security Ltd. (“SSL”) a line of credit is available. During the negotiation of the credit line, BBL sought a guarantee from SSL`s parent company, Australian National Industries Ltd. (“ANI”), but was unable to obtain one. Ultimately, ANI provided BBL with a comfort letter containing the following key conditions: In deciding whether the wording was promising in nature, the court also considered the parties` intention to include it in the letter. Since KBL required and did not receive a full guarantee from MLC, it followed that the absence of promissory note wording (e.g. a statement that the above would continue to be MLC`s policy) was intentional and indicated that MLC deliberately avoided making a promise in the letter.
The Court relied on Edwards v. Skyways Ltd. for the thesis that contractual intent is presumed in commercial transactions until there is strong evidence to the contrary.3 The Australian court criticised the reasoning in terms below, arguing that careful analysis of the text can distort the meaning of a document, and treating a letter of intent as a matter of honour meant ignoring the purpose for which it was given. in the first place.