Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 All ER 785, C.A., "Malaysian Tin and a Comfort Letter"

The essence of the case is the following:  The Plaintiff's, a bank, gave a loan to the subdivision of the defendants, "Metals", for the sake of trading tin in the London metals exchange.  The defendants refused to assume joint and several liability or give a guarantee on the loan, and in its place, made it clear to the Plaintiff that they will provide a "comfort letter", stating the policy of the company.

The tin market collapsed, "Metals" liquefied, and the defendants refused to pay the loan given by the plaintiffs to Metals, because they claimed that the comfort letter was not a contract.  Defendants lost the case, and appealed.

Held: The comfort letter was not a contract, and the defendants were not liable for the loan.

Reasons for the decision by Gibons LJ:

1)  There were two agreements, one of them contained an agreement on interest rates on the loan, which, due to the fact that defendants refused to assume joint or several liability or give a guarantee, were increased by 1/8%

2) The wording of the comfort letter was not promissory

3) Clause #1 and #2 were contractual.  If clause #3 (the comfort letter) was promissory, then there would be no need in clause #1 and #2, hence subjectively there was no intention by the defendants to make #3 promissory.

4) The context in which the comfort letter was produced (with the knowledge of the plaintiff that the defendant refused to assume joint or several liability or give a guarantee), and with the express request of the plaintiff, shows that there was no intention by the defendant for the comfort letter to express any promissory obligations.

5) The wording of the comfort letter does not a contractual promise of any future policy of the defendant.

6) The plaintiffs agreed to give Metals a loan with the full knowledge that the defendants refused to assume joint or several liability or give a guarantee, and accepted the comfort letter in its place, which showed to the LJ that both parties were aware there was no security given.

7) The plaintiffs drafted #3, and if they wanted an express guarantee, they should have drafted #3 in those terms, although the fact that they alone drafted #3 was not decisive on his judgment.

The ratio of this case is that comfort letters, if drafted in a way as to not give a promise, cannot be considered a contract.