Letters of comfort and legal liability in Australia

Australian Banking and Finance Law Bulletin, Volume 20, Number 8

This article advises that, in order to avoid contractual liability, Australian issuers of letters of comfort should state expressly that the documents are not intended to have legal effect.

A letter of comfort is generally given by a third party who has some commercial relationship with the borrower in a financing transaction. They are used to encourage lenders to enter into transactions without the third party having to give a guarantee.

Examples of statements used in letters of comfort include undertakings from the issuer to maintain its shareholding in the borrower, confirmation that the issuer is aware of the transaction, and statements that the issuer will use its influence to see that the borrower complies with its obligations.

English courts have shown a reluctance to interpret letters of comfort as having a contractual effect, and have focussed on a construction of letters of comfort under which they are not legally binding.

This can be contrasted with Australian courts, where letters of comfort have more readily been held to impose some form of legal liability on the issuer, not just a moral obligation. The Australian courts favour giving proper effect to commercial transactions. This article mentions a recent case in which the judge stated that it was necessary to identify whether or not there was the requisite intent to contract in any given context.

The author suggests that, if an issuer wishes to avoid having contractual liability, it should expressly state that the document is not intended to have legal effect. However, the author also points out that it is likely that letters qualified in this manner may be unacceptable to the intended recipient.

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