A Letter of Comfort (LoC) is a financial instrument provided by the parent company/ promoter, attesting to the obligor's financial soundness and solvency. Its enforceability does not lie under the strict definition of a guarantee.

But there are certain similarities between the instruments. Generally, a contract of guarantee similarly has three parties where a third person (the parent company or the promoter, in this case) acts as a surety for the principal debtor (obligor or the company taking the loan) to the lender. The Indian Contract Act, 1872 governs a contract of guarantee.

However, the position of LoC as covered under the Act has been a contentious issue. In Lucent Technologies v. ICICI Bank, the Delhi High Court held that whether LoC would be treated as a guarantee or not depends on the intention and the wordings of the letter. In the United Breweries case, the High Court held that the letter's value is merely discretionary and not enforceable unless the issuer performs the obligations. On the other hand, in Intesa Sanpaolo v. Videocon, the Bombay High Court had looked at the interconnectedness of the terms of LoC with the lender's discretion to grant any credit or loan.

The decision to grant the loan was conditional on the execution of such a letter. Here, the nature of LoC assumes the form of guarantee irrespective of the original state in which it existed.

Recently, the Bombay High Court interpreted this issue in Yes Bank Limited v. Zee Entertainment. The court examined whether the terms of the letter amounted to guarantee under Section 126 of the Indian Contract Act. The court, in this case, heavily relied on the correspondence undertaken after the issuance of LoC. In this case, Yes Bank had neither filed a suit for loan recovery nor sought enforcement of put option agreement. Furthermore, the enforcement of obligations prayed and those undertaken by the LoC are different. Therefore, LoC can be enforced if it incorporates the undertaking of liability on default in unequivocal terms.

Such an instrument based on the mutual trust between parties creates a binding relationship between them. Therefore, the agreement's construction should be on those terms. While considering the LoC as security, one must evaluate the agreement's formulation and the parties' intention. The lender especially should be cautious of the wordings of the issued letter. Otherwise, this will result in commercial uncertainty of such a transaction. It will frustrate the purpose of such security. 

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.