Cold Comfort? The importance of accurate language in ‘comfort’ letters in financial transactions
Comfort letters are typically used to assure the recipient that a financial or contractual obligation with another party can be met. However, they are not usually legally enforceable commitments.
A recent case highlights the importance of accurate language when preparing and signing comfort letters to ensure they serve their intended purpose in financial transactions.
What is a comfort letter?
Comfort letters are designed to provide ‘comfort’ that a financial or contractual obligation will be honoured. They are signed by a third-party, such as the holding company of a borrower in a finance transaction, who has a better financial standing to that of the borrower. Letters of comfort are frequently used when the third-party is not willing to provide a guarantee.
Comfort letter or guarantee?
The recent High Court case of IDBI Bank Ltd v Axcel Sunshine Ltd [2025] has highlighted the importance of accurate wording in comfort letters. The court considered whether a document entitled ‘a letter of comfort’ could be considered as a guarantee or indemnity which would allow the bank to seek recovery of unpaid amounts owed by the borrower from the third-party that signed the original comfort letter.
In its judgment, the court referred to Associated British Ports v Ferryways [2009] when noting that, while the document may be called a ‘letter of comfort’, the content and nature of its construction are of greater importance. A key difference between a letter of comfort and a guarantee is that a guarantee provides a contractual promise as to future conduct and is not merely a warranty or statement of present fact (Kleinwort Benson v Malaysia Mining Corporation [1989]).
Wording in the letter, such as “we hereby irrevocably and unconditionally agree, confirm and undertake to [the Bank]” and clauses containing wording which indemnified the bank constituted a typical ‘see-to-it’ guarantee. This led the court to conclude that, despite the document being called a ‘letter of comfort’, the content was promissory in nature and intended to be legally binding and enforceable and had the effect of guaranteeing the debt.
Key takeaways for all parties in finance transactions
This case demonstrates the importance of accurate language when drafting and negotiating documentation in finance transactions, and how the wording can render the title of a document obsolete. Furthermore, it serves as a reminder, if requested by a lender to sign any document, all parties should carefully consider the wording and obtain independent legal advice on its content.
Our Real Estate Finance team acts for both borrowers and lenders and advises on finance documents. If you have any questions in connection with the above, please get in touch.