UK: Letters of Comfort Readdressed

The case concerned the issue of whether a letter of awareness² (the ‘Letter’) created a binding obligation on Jurong to recompense HSBC for losses incurred in relation to credit facilities granted to a subsidiary of Jurong. One of the key terms of the Letter provided that if the subsidiary was unable for any reason to meet its obligations, Jurong would endeavour to make funds available in amounts sufficient to enable the subsidiary to meet its obligations. The subsidiary failed to make various repayments and was wound-up by another creditor. HSBC’s subsequent claim for breach of the Letter was dismissed on the ground that in addition to the parties’ conduct in negotiating it, the Letter did not, as a whole, disclose any intention to create legal relations on the part of Jurong.

The significance of this was the Court’s application of the principle that having been created in a commercial setting, such documents are presumed to give rise to legally binding obligations. Consequently, the onus in rebutting the presumption to create legal relations was said to have rested with Jurong, the defendant.

However, on the basis of amongst other things, repeated requests from HSBC, after the Letter had been issued, for Jurong to issue a guarantee in its place, the Court found that HSBC did not in fact place any significant reliance on the Letter in the decision to extend credit facilities. With respect to the Letter’s wording mentioned above, which would in effect have afforded HSBC a level of protection similar to that of a guarantee if held enforceable, the Court held that it was not intended to be binding as the obligation was qualified by the words ‘will endeavour’ and therefore amounted to no more than a confirmation by Jurong that it would abide by its moral obligations.

While the result may not be a surprise as regards the enforcement of letters of comfort generally, by applying a presumption of contractual intent, the Court did go some way towards restoring a degree of credibility in such documents. To have done otherwise and to treat such documents as virtually meaningless would very much undermine their use by sophisticated commercial entities such as HSBC – i.e. why insist upon an agreement which is in effect a nullity? Even in this case, while Jurong did not include an express disclaimer of liability (if indeed one were to have ever been accepted) it still managed to achieve the same result.

Bearing in mind the difficulty of piercing the corporate veil despite the economic reality of a parent company’s influence over the affairs of its subsidiaries, it may be appropriate for the limits of a parent’s liability to be reconsidered where its conduct has given rise to legitimate expectations that it would accept (an agreed degree of) responsibility for the obligations of a subsidiary. In this sense, the presumption of contractual intent applied in this case, in effect, affirms the need to protect a third party’s expectation that agreements made in a commercial context should as a matter of course be taken seriously.

1 Hong Kong and Shanghai Banking Corporation Ltd v Jurong Engineering Ltd [2000] 2 S.L.R. 54
2 No distinction was made between letters of comfort and of awareness, both considered part of a generic group of documents the effect of which is thought generally to fall short of that of guarantees