A letter of comfort, sometimes called a "letter of intent", is a communication from a party to a contract to the other party that indicates an initial willingness to enter into a contractual obligation absent the elements of a legally enforceable contract. The objective is to create a morally binding but not legally binding assurance.[1]

Generally, a letter of comfort is drafted only in vague terms, to avoid creating enforceable contract terms.[2] Few nations regulate letters of comfort by statute; whether a letter of comfort creates legally enforceable contractual terms is often determined only by courts of law, based solely on the wording of the document.[1] Despite their nonbinding status, letters of comfort nonetheless provide risk mitigation because the parent company is putting its own reputation in jeopardy.[3]

In international contracts, letters of comfort are often used to assure a contracting party that a parent corporation will provide its subsidiary with the necessary resources to fulfill the contract.[2] However, under both international and European Union law, a letter of comfort does not require the parent corporation to fulfill the obligations incurred by its subsidiary.[1] When used to provide support for a subsidiary's actions, a letter of comfort usually consists of three terms:[4]

Canada recognizes two types of letters of comfort. The weaker version, in which a parent organization acknowledges that a subsidiary has entered into a contract but which provides no assurance of intention, is called a letter of awareness. The stronger version, the letter of comfort, indicates the parent organization's intention to support the subsidiary.[5] In the United States, there is a general presumption against the enforceability of letters of comfort. However, depending on the wording of the document, there may be legal liability under the rule of reliance.[6]

References

  1. ^ a b c Mäntysaari, Petri. The Law of Corporate Finance: General Principles and EU Law. Heidelberg: Springer, 2010, p. 1985.
  2. ^ a b Fontaine, Marcel and De Ly, Filip. Drafting International Contracts: An Analysis of Contract Clauses. Leiden: Martinus Nijhoff Pub., 2009, p. 198.
  3. ^ Huang, Wei-Xin. Institutional Banking for Emerging Markets: Principles and Practice. Chichester: Wiley, 2007, p. 218.
  4. ^ Bradgate, Robert and White, Fidelma. Commercial Law. Oxford: Oxford University Press, 2008, p. 350.
  5. ^ World Trade Organization. Dispute Settlement Reports 2002. Cambridge: Cambridge University Press, 2004, p. 1298.
  6. ^ Furmston, Michael; Tolhurst, G.J.; and Mik, Eliza. Contract Formation: Law and Practice. New York: Oxford University Press, 2010, p. 303.
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