Comfort letter: Overview, definition and example
What is a comfort letter?
A comfort letter is a document issued by one party, usually a third party, to provide assurance or confidence to another party. It typically outlines the issuer’s support or acknowledgment of the financial or operational status of a business or transaction. While a comfort letter isn’t a legally binding guarantee, it helps to ease concerns by showing that the issuer backs the situation in some way.
Why is a comfort letter important?
A comfort letter is important because it offers reassurance, often in financial or contractual dealings, where one party might be uncertain about the other party’s ability to fulfill its obligations. It can help secure financing, encourage investment, or facilitate business partnerships. Although not legally enforceable like a guarantee, a comfort letter serves to strengthen trust and provide confidence.
Understanding a comfort letter through an example
Imagine a small business looking to secure a loan from a bank. The bank is concerned about the company’s financial stability. To reassure the bank, the business's parent company provides a comfort letter. This letter assures the bank that, while it’s not a formal guarantee, the parent company will support the business if it struggles to repay the loan.
In another example, a supplier wants to ensure that a customer can meet the terms of a contract. The customer’s parent company issues a comfort letter, stating that the parent company has confidence in the customer’s ability to fulfill the contract, even though it isn’t legally obligated to do so.
Example of a comfort letter clause
Here’s how a comfort letter clause might appear in a contract:
“The Parent Company shall provide a comfort letter to the Supplier, confirming its support of the Customer’s obligations under this Agreement. The comfort letter shall not constitute a legally binding guarantee, but shall serve as assurance that the Parent Company supports the Customer in fulfilling its obligations.”
Conclusion
A comfort letter is a useful tool for providing reassurance in business transactions, though it doesn’t offer the same legal binding power as a guarantee. By understanding comfort letters, businesses can foster trust, secure funding, and navigate contractual relationships with more confidence.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.