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Letters of comfort: a comparative law and trans-systemic analysis of chameleonic instruments

Trichardt , Anton Petrus, Law, Faculty of Law, UNSW


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  • Title:
    Letters of comfort: a comparative law and trans-systemic analysis of chameleonic instruments
  • Author/Creator/Curator: Trichardt , Anton Petrus, Law, Faculty of Law, UNSW
  • Subjects: Bank lending; Credit facilities; Corporate lending
  • Resource type: Thesis
  • Type of thesis: Ph.D.
  • Date: 2010
  • Language: English
  • Additional Information: Thesis restricted until 28/02/2013.
  • Print availability: T/2010/458 (Please speak to a staff member at the Library Help Zone)
  • Permissions: This work can be used in accordance with the Creative Commons BY-NC-ND license.
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  • Description: Over the last few decades, banks throughout the world have found it increasingly difficult to obtain outright guarantees from companies tocover loan or other financial facilities to subsidiaries. Consequently, various third party credit support devices or comfort instruments,generally known as letters of comfort, have developed to provide an alternative to traditional forms of security. It is necessary for a properunderstanding of these instruments to investigate their origin, to delineate them, and to consider their use in corporate group and bankingpractice.The typical comfort letter transaction involves the parent‐subsidiary‐lender trinity and at least three different, but inter‐related relationshipswhich may be regulated by different legal regimes – first, between a lender and the subsidiary; secondly, between a lender and the parentcompany; and thirdly, between the parent company and the subsidiary. When the relationship between a lender and the subsidiary breaksdown or the latter becomes insolvent, the courts are usually asked to determine the contractual effect of the letter of comfort as between thelender and the parent company.Letters of comfort are predominantly used in international business transactions. The issue of comfort letter enforceability is considerablymore complex within an international context than in one’s own legal system. Courts in different jurisdictions and in disparate legal systemshave adopted distinct approaches to determine the contractual enforceability of letters of comfort. Accordingly, a trans‐systemic view of thecontractual effect of letters of comfort is necessary to be aware of the way in which such letters are treated in other legal systems, and tofacilitate a consistent treatment of an instrument of international use in one’s domestic law.Over the years, letters of comfort have become more detailed in content. The result is more litigation about the enforceability of letters ofcomfort and, because of courts undertaking more contractual analysis of such letters, a doctrinal foundation for the assessment of liabilityagainst a parent company has started to be developed by courts in some jurisdictions. Legal liability based on a letter of comfort is a realpossibility. Like a boomerang, a letter of comfort is potentially a dangerous instrument when it returns to its unsuspecting originator.

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