Letter of Comfort / Guarantee and Indemnity


A. Letter of Comfort

 

Letters of comfort (also known as letters of support or letters of responsibility) are letters of moral commitments given to support certain obligations. Unlike guarantees, these are merely commitments are not legally binding. Usually a letter of comfort is usually given by the parent company to the lender to support the obligations of its subsidiary. They are often used in situations where the issuer is unable or unwilling to provide a guarantee, but wishes to give the lender some comfort (citing certain ethical or moral commitments). There are various reasons why the issuer of the letter of comfort may be unable to provide a guarantee, for example, restrictions in the articles of association, restrictions under other borrowing commitments, or for regulatory reasons.

 

B. Guarantee and Surety

 

A guarantee is a legal commitment to pay or fulfill the debt or obligation of another person in the event of a default by the person responsible for the debt or obligation.  Legally, it is a secondary obligation for the giver of a guarantee (also known as the "guarantor"). The beneficiary of the guarantee is known as the "creditor", and the person whose payment or performance is guaranteed is called a "debtor", "primary obligor", or the "principal".

 

C. Indemnity

 

An indemnity is similar to a guarantee, it is a contractual commitment to take responsibility for the losses of another person. This is a primary obligation, as it is independent of the obligation of the third party (the principal) to compensate (the beneficiary) the beneficiary for the loss. This is preferred by most lenders since it does not depend on the validity of the underlying transaction. Even if the underlying transaction is set aside (e.g. due to illegality), or if the guaranteed obligations have been amended, the giver of indemnity will still need to compensate as the primary obligor.