How Contents of a Comfort Letter Are Construed or Interpreted - Case Study Example

How Contents of a Comfort Letter Are Construed or Interpreted This paper will deal on how to construe or interpret the contents of a comfort letter or, for that matter, of any letter in connection with corporate acts. A comfort letter has different meanings and there is no hard and fast rule that dictates its strict legal definition. Along this line, it can just be any other letter. What is important is the spirit and import as indicated and expressed in the text or the wording thereof. The case in point to be deciphered in the present treatise is that of Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd [1988] 1 WLR 379. 1In the suit, Kleinwort Benson, or KB for brevity, proposed to extend a loan to MMC Metals Ltd or Metals for short, which is a subsidiary of Malaysia Mining Corporation (or Malaysia Ming). In the process of the lending proposal, KB requested from Malaysia Mining a letter to the effect that the latter would assure KB that Metals would pay the liability when it became due. At first, KB wanted to ask for a guarantee from Malaysia Mining. In essence, KB desired a situation that if Metals could not settle the debt, Malaysia Mining, as the parent company, would be under legal obligation to be subrogated into the shoes of Metals, the subsidiary. Malaysia Mining did not heed the call of KB. In lieu of the letter supposedly clearly defining the mother company as a guarantor of the debt of Metals, Malaysia Mining wrote a prudently crafted letter where it was stated that it was the policy of the company (Malaysia Mining) to ensure that Metals would always be in a capacity to pay back what was borrowed from KB. The carefully worded correspondence is now the so-called comfort letter at issue. When Metals became troubled with insolvency owing to the predicaments of the tin industry because of the problematic world market, KB claimed payment from Malaysia Mining for the obligation of Metals. KB charged that Malaysia Mining had made a promise to prevent going into a situation where it could not pay its debts. The question now is whether or not Malaysia Mining is liable to KB on the basis of the language set forth in the comfort letter. The court that finally ruled the case answered in the negative. In this paper, independent views are hereby conveyed regarding the matter. The facts have to be analyzed in sufficient detail. At the outset, it is undisputed that KB requested from Malaysia Mining a documentary guarantee whereby the latter would have been bound by the accountability of its subsidiary. From this act and notion alone, it was readily clear that without that guarantee, KB was not holding on anything as would make Malaysia Mining a co-debtor or co-borrower of Metals. It was precisely because of this vacuum that KB asked for a written commitment from Malaysia Mining for the latter to give an assurance for the payment of the loan in the possibility that Metals would not be able to pay the debt. Malaysia Mining refused and the refusal manifestly exhibited the position of the parent corporation that it did not opt to become a co-borrower of its subsidiary or to stand as its guarantor. When KB pushed through with the loan covenant, it took the risk of probably failing to collect from Metals. When indeed Metals was not able to settle the liability, there was no reason to make Malaysia Mining legally responsible to tender payment based on the comfort letter which it sent to KB because, in the first place, there was nothing in the comfort letter making or even presuming Malaysia Mining to be so liable. Going to the language used by Malaysia Mining, the ruling in its favor became more convincing when it declared no commitment to pay for and in behalf of Metals by refusing to sign a guarantee. It simply made known a policy which was not a promise or a pledge. To make a comparison, one who says it is his policy to be honest is different from when he promises to be honest. A policy of the state for space exploration is not a promise for definite courses of action to explore the space. Neither is a government policy to aid poor but deserving students a definite promise or commitment to enroll all such students. Simply stated, a policy is not a promise. One can plan to do a thing but faces no sanction if he commits the sin of omission. However, he who promises to do a thing and fails to do it can be legally adjudged answerable to the party to whom the promise is made. In the cited case, there was no legal intention coming from Malaysia Mining to be bound by the failure of Metals to pay. The declaration of a policy ensuring that the subsidiary would always be in a position to pay KB did not have any binding effect on the parent company. This notion was stressed and emphasized by the fact that it refused the previous request of KB for the issuance of a guarantee. Consequently, the failure of Metals to so pay did not legally entitle KB to collect from Malaysia Mining. Written contracts and agreements bind the parties. Unilateral promises bind the makers of the promise in accordance with what is or what are intended. The policy in the comfort paper indicated by Malaysia Mining was not more than but a policy and it was wrong for KB to insist that there was a legal intention on the part of Malaysia Mining to be bound to pay the loan of Metals. Any lawful obligation must be express or implied and if it is in writing, the same has to be construed and interpreted according to the intention and purpose of the parties. The questioned policy is not within the meaning of that interpretation. To consider the claim of KB for collection as tenable would be to unreasonably bind Malaysia Mining indefinitely as a co-maker or guarantor of Metals. Surely, the parent company did not intend to be so bound; otherwise, it could have just merely heeded the request for a guarantee. A policy cannot be equated to a promise. Policy can be a guide or a course or a principle which a person, group or state adopts. Upon the other hand, a promise is a pledge and the obligor or debtor making so will give the creditor a reason to expect that whatever is promised will be fulfilled and that failure to so fulfill gives the creditor a legal ground to take action against the debtor. In a policy, there are no parties who oblige and are obliged. Policy simply draws the line of action according to the theory which the policy maker believes is for the good of the person, group or state. If the things or visions that are outlined in a policy are not realized, no legal duty arises such as to punish or sanction the one who issued or adopted it. In the case at bar, the fact that Malaysia Mining carefully crafted or worded the comfort letter strongly showed that it did not mean to deliver any promise to KB. There was nothing in it which could be construed as part of a contract or a covenant imposing a duty upon Malaysia Mining to pay the loan liability of Metals in the event of the failure of the latter. A civil accountability cannot be presumed unless there are apparent reasons to show that, in truth and in fact, the parties agreed that one or the other is liable under the covenanted circumstances. The logical and practical ground for this is that a civil liability gives a burden so that the basis for it must be manifest and evident. While it is true that there are times that comfort letters create legal relations, the duty or responsibility of the party to do or not to do must be clear enough as to make any prudent man believe that indeed such duty or responsibility does exist. It cannot just be presumed. It will be ridiculous to impose an obligation when there is none. In the case under review, it was not sufficiently shown that the comfort letter created any obligation to pay on the part of Malaysia Mining. There was no time or period stipulated. There was therefore no definite deadline. It was a vague situation. There was no specified length for performance. To allow the view that Malaysia Mining was liable would be like making it accountable forever or perpetually. That is not the contemplation of the law. Reference Certainty of terms and intention. [internet] Accessed November 11, 2009. Available at: Read More