The legal status of letters of comfort

Abstract

Letters of comfort (LOCs) have been in use for many decades, but their legal status remain unclear in South Africa and elsewhere. When a subsidiary needs a loan from a bank but does not have adequate collateral to back up the loan request, the parent company usually steps in to provide surety for its subsidiary, either by issuing a guarantee, surety, or pledge. But in some situations when the parent company does not want to be held accountable for the debts of its subsidiary, it issues a letter of comfort. This letter is issued under the express disclaimer that the holding company does not want to accept the legal liability of its subsidiary but would ensure that its subsidiary repays the loan amount as when it falls due. This creates some uncertainties around the legal capacity and effects of the LOCs in the legal system in South Africa and elsewhere, where these letters are in use. In South Africa, there is no provision in the statutes to regulate LOCs. The courts treat them on a case-by-case basis, subject to the content inscribed therein as well as the circumstantial evidence leading to their issuance. The seminal case in South Africa in which an LOC was at the centre of a dispute is the Bernert v ABSA case. In this case the High Court (HC) ruled in favour of the plaintiff. However, this ruling was abrogated by the Supreme Court of Appeal (SCA). The decision of the SCA was later confirmed by the Constitutional Court (CC). The situation in South Africa is like other Anglo common law jurisdictions, such as the United Kingdom and Canada, with the exception of Australia. In Australia LOCs carry contractual effect, ab initio. This became clear in several Australian landmark cases, such as the Banque Brussels Lambert SA v Australian National Industries and the Gate Gourmet Australia (in Liquidation) v Gate Gourmet Holding. The legal nature of LOCs varies from one country to the other, and are informed by a particular country’s legal system, socio-economic landscape and the cultural identity of that jurisdiction. The research has interrogated the legal status and effect of LOCs in the Republic and elsewhere and highlights important lessons and conclusions that could be implemented in future.