Amy Hiew explains when a letter of comfort may or may not be legally binding.

Letters of comfort, also known as letters of support, are commonly used in the world of banking and finance. But what value do they really have? Are they legally binding? These issues were considered in OSK Trustees Berhad v Kerajaan Malaysia (Civil Appeal No. W-01-7-01/2012) where the Court of Appeal outlined the principles to be applied in determining the legal effect of such documents.
 
BRIEF FACTS
 
Malaysian International Tuna Port Sdn Bhd (“MITP”) is a special purpose vehicle incorporated for the purpose of carrying out upgrading works in Kompleks LKIM Batu Maung, Penang and to manage and operate the said complex under a Concession Agreement which it entered into on 16 December 2004 with Lembaga Kemajuan Ikan Malaysia (“LKIM”)(“Concession Agreement”).
 
To finance its work under the Concession Agreement, MITP issued RM240 million of Islamic bonds under a Bai Bithaman Ajil Islamic Securities Facility (“BAIS Facility”) pursuant to a Trust Deed dated 10 April 2007. OSK Trustees Berhad (“Trustee”) was appointed as the trustee for the holders of these bonds.
 
The Ministry of Agriculture and Agro-Based Industry (“MOA”), on behalf of the Government, issued a letter of support dated 2 October 2006 (“letter of comfort”) to the Trustee in connection with the Islamic bonds. After referring to the upgrading works and the Concession Agreement, the letter of comfort stated as follows:
 
 “2.   MITP has to incur borrowings in order to implement this important national project. By virtue of this, we confirm the viability of MITP, including its ability to incur borrowings and repay which is critical to ensure the successful implementation and completion of the project as envisaged by the Government through the said Concession Agreement dated 16 December 2004 and the Shareholders’ Agreement between LKIM and Bindforce Sdn Bhd dated 26 October 2006 and the Supplementary Agreement to the said Shareholders’ Agreement signed on 1 August 2005 where the Government through LKIM:
 
(a)     Ensures that MITP is (in) a position to meet (and do meet on a full and timely basis) their liabilities in respect of all amounts borrowed for so long as the amount in respect of the borrowings remain outstanding; and
 
(b)     Provide all necessary support to MITP and also ensure that MITP shall not take any detrimental action which cause MITP not being able to perform its obligations in respect of its borrowings.
 
3.      This letter is strictly limited to the points raised in paragraph 2(a) and (b) above and there is no express or implied guarantee with regards to the borrowings of MITP.”
 
MITP defaulted on its repayment obligations under the BAIS Facility and the Trustee obtained judgment against MITP for a sum of approximately RM208 million. The Trustee then filed an action against the Government on the ground that the Government had breached its undertaking, representation and assurance in the letter of comfort.
 
It was the Government’s case that MOA had issued the letter of comfort upon the request of MITP to assist MITP in obtaining the initial A+ rating from the Malaysian Rating Corporation Berhad (“MARC”) only. The Government also contended, amongst others, that the letter of comfort was merely supportive and without any liability to be imposed upon the Government.
 
The High Court dismissed the Trustee’s claims and held that the letter of comfort issued by the Government was not intended to create any binding effect between the parties. The Trustee appealed against the decision of the High Court.
 
COURT OF APPEAL DECISION
 
The Court of Appeal unanimously dismissed the Trustee’s appeal and upheld the High Court’s decision that the letter of comfort issued by the Government was not intended to create any binding effect between the parties.
 
Having found that the decision of the learned High Court Judge was primarily based on findings of facts, the Court of Appeal emphasised that an appellate court will not readily interfere with the findings of facts made by the High Court unless the Trustee is able to show that the trial judge was wrong and that the decision ought to have been the other way.
 
The Court of Appeal agreed with the High Court that three main questions had to be answered, namely:
 
(1)     Whether the letter of comfort amounted to an undertaking, representation and assurance that the Government would ensure that MITP would be in a position to fulfil its obligations under the BAIS Facility or whether the letter of comfort was merely a letter of comfort without any legal liabilities;
 
(2)     Whether the subscribers for the Islamic bonds relied upon the undertaking, representation and assurance when subscribing for those bonds. If yes, whether the Government can be found liable based on that reliance; and
 
(3)     Whether the Government officials had given an undertaking, representation and assurance as alleged during the meetings between the Trustee’s and the Government’s representatives.
 
In answering the above questions, the Court of Appeal laid down the following guiding principles in determining the nature of a letter of comfort.
 
Whether the parties intended to create legal obligations
 
In determining whether a letter of comfort gives rise to a contractual relationship between the parties, the overriding test is that of the intention of the parties as deduced from the document as a whole seen against the background of the practices of the particular trade or industry (Banque Brussels Lambert SA v Australian National industries Ltd [1989] 21 NSWLR 502 and HSBC Ltd v Jurong Engineering Ltd & Ors [2000] 2 SLR 54).
 
Whether a letter of comfort is capable of giving rise to a legally binding undertaking will depend on the intention of the parties and the circumstances under which the same is given (North South Properties Sdn Bhd v David Teh Teik Lim & Anor [2005] 2 CLJ 510).
 
Whether the terms are sufficiently promissory in nature
 
The meaning of an agreement is to be discovered from the words used, read in the context of the circumstances in which the agreement was made (Bank of Credit and Commerce International SA v Munawar Ali, Sultana Runi Khan and Others [2001] 1 All ER 961).
 
Whether the essential and critical terms have been agreed upon
 
While there is a presumption with commercial arrangements that parties intend to create legal relations, and that the courts should strive to give effect to the express arrangements and expectations of those engaged in business, nonetheless there can be no binding and enforceable obligation unless the terms of the bargain, or at least their essential and critical terms, have been agreed upon (Atco Controls Pty Ltd (in Liquidation) v Newtronics Pty Ltd [2009] VSCA 238).
 
The Court of Appeal concluded that the effect to be attributed to a letter of comfort (or letter of awareness) is essentially a matter of construction and each case must be determined based on its own facts and circumstances.
 
Application to the facts
 
Two of the Government’s witnesses testified that the draft letter of comfort was proposed by MARC. A letter dated 28 September 2006 was produced wherein MITP requested MOA to immediately release the letter of comfort and reiterated that “the wording in the support letter does not amount to any guarantee from MOA but merely a strong support letter from MOA reaffirming what is required in the Shareholders Agreement dated 26.10.2004.” Based on the above evidence, the Court was satisfied that the Government did not intend to be legally bound by the terms of the letter of comfort.
 
The Court of Appeal then turned to the issue of reliance by the subscribers of the Islamic bonds. The Court upheld the High Court Judge’s finding that the subscribers did not rely solely on the letter of comfort even though it was acknowledged that the letter of comfort was the main factor for the A+ rating given to the bonds. The Court of Appeal noted that this conclusion was reached based on the trial judge’s assessment of the evidence of two of the Trustee’s witnesses.
 
The Court of Appeal then examined the words used in the letter of comfort. The Court was of the view that the words used in the letter of comfort did not contain words which convey the idea that the Government would be undertaking a contractual obligation.
 
The Court of Appeal quoted the words of Tadgell J in the Supreme Court of Victoria case of Commonwealth Banking of Australia v TLI Management Pty Ltd [1990] VR 510, “it would have been very simple, if that had been intended, to have used words of promise, such as “we agree”, “we undertake”, or even “we promise”. The words “we confirm that we will …” were, in the circumstances, at least ambiguous”. The Court of Appeal opined that the absence of such words of promise further fortified the Government’s argument that the letter of comfort did not have any binding effect on them.
 
CONCLUSION
 
Based on the Court of Appeal’s decision, one may conclude that the factual matrix behind the issuance of the letter, the intention of the parties, and an analysis of the language used, will be key determinants in deciding the legal effect of a letter of comfort.
 
While it is possible for letters of comfort to carry little legal weight, it is also possible that some letters of comfort may be interpreted as containing binding legal obligations even though the parties may not have intended as such. It would primarily depend on whether the wordings used indicate such an intention.
 
Perhaps the lesson to take away from this case is that utmost care must be given to the drafting of a letter of comfort or before accepting one, as the case may be, to ensure that the words used are unambiguous and accurately reflect the intention of the parties.