Letter of comfort: How does it differ from a guarantee?

A letter of comfort (LoC) is a letter given by a third party (usually the parent company or promoter flagship), to help secure lending facilities for the borrower. Ordinarily, a letter of comfort is assumed as a moral obligation or passive reassurance by the third party issuing such a letter in support of the borrower.

A letter of comfort is understood to be inherently non-binding in nature depending on the language used and there being no tangible recourse against the letter of comfort provider. The letter of comfort is widely used in commercial transactions and is a mere reassurance of performance. The distinction in obligations under a LoC and a guarantee is evaluated below.

In United Breweries (Holdings) Ltd v Karnataka Industrial Investment and Development Corporation Ltd, a letter of comfort had been given on behalf of an associate company stating “that it is our normal practice to see that all our associate companies meet their financial and contractual obligations and [to] this end we will undertake all reasonable steps to ensure that … conducts its operations efficiently to meet its obligations in the usual course of business”.

SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Vikramaditya Kapoor and Tania Khullar are associates.