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 I. Introduction

Comfort letters are an alternative to endorsements that fulfill a personal guarantee function against a creditor or a future creditor in order for them to grant the sponsored (debtor) a corporate finance. It is an obligation of result, in which the sponsor guarantees the good purpose of the designed financing operation.

The Supreme Court distinguishes between “weak” and “strong” comfort letters (Supreme Court Judgement of 13th February 2007). The “weak” letters are mere recommendations or declarations of trust, while “strong” comfort letters represent a one-sided legal business that creates a compulsory relationship between the sponsor and the beneficiary.

II. “Strong” comfort letters

 With regards to “strong” comfort letters, the case-law doctrine of the Supreme Court has been compiled, inter alia, in Judgement No. 424/2016, of 27th June.

a) Background of the case

 In this case, a bank entity granted a loan to a company due to the fact that two companies that held a dominant position above the sponsored company provided “strong” comfort letters.

As the repayment of the offered loan and personal guarantee were breached, the bank entity requested for the sponsors to be sentenced to pay the sponsored wages of the debtor, which had expired, and was liquid and payable.

The defendants opposed against said main claim arguing that said comfort letter only contained some declarations of intentions, without any mandatory obligations. And they added that none of them were parent companies of the debtor and that, in any case, they shall only be liable in accordance with their percentage of ownership in said debtor company.

b) Supreme Court’s analysis

 As a preliminary matter, the Supreme Court analysed the mandatory efficiency of the comfort letter, for example, its suitability to constitute or create a mandatory relationship (referring to its Judgement No. 440/2015, of 28th July) as exposed below:

In this sense, the comfort letter, for example, in its qualification of strong, answers to the structure of unilateral legal business with mandatory transcendence, as unilateral voluntary declaration, of regular character, directed to the constitution or creation of a mandatory relationship, which requires the following suppositions or conditions:

(i) First of all, it has to contemplate a clear and unequivocal will of the sponsor to be bound; for example, a real voluntary declaration to create an authentic mandatory bond;

(ii) Secondly, the acceptance by the creditor, which can be tacit or purported, and is inferred from the relation of causality between the issuance of the comfort letter and the implementation or execution of the intended financing; and

(iii) As for the concrete relationship which shall exist between the debtor and sponsored, the Supreme Court does not require anymore this relationship to be necessarily within the framework of a parent company concerning its subsidiary, but it understands that there is a causa credendi in any relationship justifying the validity of the personal interest, attribution or benefit that could imply for the sponsor the implementation of the intended financing operations, due to either its condition of parent-subsidiary, or its condition of creditor or sponsor (Supreme Court Judgement of 13th February 2007).

c) Conclusion of the Supreme Court

In the light of the foregoing, the Supreme Court concluded that comfort letters were fully suitable for the constitution of the sponsors’ mandatory bonds, because said engagement was determined in order to conduct the credit transaction.

Then, the Supreme Court analysed the scope of the mandatory effect which characterises the comfort letter, concluding in favour of the joint nature of the mandatory commitment assumed by the sponsoring companies, since these were the tools that the parties agreed in order to guarantee, as a whole, the refinancing of the debt of the debtor and its guarantor parent company (mainly participated by the sponsors) which was conducted through the grating of a new loan.

For more information, please contact

Carla Villavicencio

Barcelona, 3rd August 2018

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