Comfort letter

London, 1989: in Kleinwort Benson v Malaysia Mining Corporation, the Court of Appeal holds that the parent owes nothing. Kleinwort had opened a 5 million pound facility, later raised to 10 million, to MMC Metals, the group's tin trading subsidiary, against a letter in which the parent wrote that it was its policy to ensure that the subsidiary was at all times in a position to meet its liabilities. Tin collapses in October 1985, the subsidiary stops paying, and the court reads the sentence as a statement of present policy, with no promise about the future. The bank had taken the letter in place of a guarantee the parent refused to give. Everything turns on the wording. French law calls it a lettre d'intention and, since the ordinance of March 23, 2006, ranks it among personal securities: an undertaking to do or not to do whose object is support given to a debtor in performing its obligation to its creditor (article 2322 of the Civil Code). The commercial chamber of the Cour de cassation reads it word by word. 'We are aware of this loan' binds to nothing. 'We will use our best efforts to ensure our subsidiary meets its repayments' creates a best efforts obligation: the lender must prove fault by the parent. 'We will ensure that our subsidiary has the cash it needs' creates an obligation of result: the subsidiary's default is enough, and the parent owes damages up to the loss. If the letter promises to pay in the subsidiary's place, the court recharacterizes it as a suretyship, with its formalities. A guarantor answers for the debt; a comfort letter commits to a course of conduct, and its sanction is liability in damages. In a French société anonyme, a letter that commits to a result is treated as a guarantee and requires board authorization (article L. 225-35 of the Commercial Code).