The recent case of IDBI Bank Limited v Axcel Sunshine Limited and Siva Industries and Holdings Limited [2025] EWHC 442 (Comm) considers the enforceability of a so-called "letter of comfort" under English law. The High Court in this case found a "letter of comfort" to be a legally binding guarantee and indemnity and reiterated that the court’s focus when construing a "comfort letter" should be on the substantive content and construction of the document as a whole.

Background

IDBI Bank Limited (the Bank) advanced an initial loan of USD67m under the terms of a Credit Facilities Agreement (CFA) dated 26 March 2014 made with Axcel Sunshine Limited (Axcel), a company incorporated in the British Virgin Islands.

The CFA was designed to provide Axcel with funds to discharge previous liabilities owed to the Bank by companies within its wider corporate group. Siva Industries and Holdings Limited (Siva), a company incorporated in India, had guaranteed these previous borrowings as parent, and faced enforcement action and payment demands from the Bank in respect of these earlier guarantees. By repaying the earlier borrowings, the CFA would release Siva from its liabilities in respect of the earlier guarantees.

As security for the CFA, the Bank stipulated, among other items, a corporate guarantee from Siva. Siva was reluctant to provide such a guarantee (among other reasons, because Indian law prohibited the guarantee by an Indian company of an obligation incurred by a company resident outside India, save with permission of the Reserve Bank of India). After protracted negotiations, Siva agreed instead to provide a letter of comfort (LoC), in a format acceptable to the Bank.

Axcel subsequently defaulted on the CFA, and legal proceedings were initiated by the Bank to recover the outstanding sum, c. USD143.7m, from Siva as surety.

Siva alleged in its defence, among other things, that the LoC was unenforceable, was only ever intended as a paper exercise and that the Bank had made it clear that it would never be used or relied upon. The Bank, on the other hand, asserted that the LoC was (and was always intended to be) a binding and enforceable guarantee and indemnity.

Letters of comfort

A comfort letter is a document issued by a parent company or related party, typically to provide assurance to a lender about the financial soundness of, and support for, a subsidiary or affiliate. Unlike formal guarantees, comfort letters are usually drafted to avoid creating legally enforceable obligations (and as such, do not generally have much, if any, value as security).

The enforceability of comfort letters has been the subject of some judicial scrutiny. In the case of Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 W.L.R. 379, the Court of Appeal held that a letter of comfort issued by Malaysia Mining Corp in relation to the debts of a subsidiary pursuant to a credit facility was not enforceable as a guarantee because it was merely a statement of Malaysia Mining Corp’s present intention to support that subsidiary, rather than a binding commitment. The court emphasised that the enforceability of a letter of comfort depends on the specific language used and the intention of the parties involved. As further explained in Associated British Ports v Ferryways [2009] EWCA Civ 189, the label used by the parties will not be determinative of the status of a comfort letter, which is instead a matter of construction of the document as a whole.

Decision

The court in the Axcel Sunshine case found that the LoC provided by Siva was, notwithstanding its label, a valid and enforceable contract of guarantee and indemnity. Although the LoC was in the form of a letter addressed by Siva to the Bank’s Dubai branch, it was clearly in form and content a contract, having “all the hallmarks of a document that the Parties intended to be legally binding and enforceable”. Notably, clause 6 of the LoC stated that “This Letter of Comfort is irrevocable and constitutes legal and binding obligation(s) upon us…”. As to the nature of the legal obligations which it contained, the court found the wording to include clear and unequivocal promises of both guarantee and indemnity. Clause 3 of the LoC contained what the judge held to be a “classic ‘see to it obligation’ which is characteristic of a guarantee” - an irrevocable and unconditional promise to the Bank to ensure that Axcel would perform its obligations under the CFA, to ensure that the Bank was repaid, and to provide assistance to Axcel to enable it to repay the Bank. Meanwhile the terms of clause 11, stating that Siva would keep the Bank indemnified against any loss or damage caused by the disbursement of the CFA to Axcel, could not be construed otherwise than as a promise of indemnity.

The court dismissed Siva’s claim that it had relied on a representation by the Bank that the LoC was only a paper exercise and would never be used or relied upon. There was no evidence to support this, and the Bank had made it clear (including in the terms of the CFA itself) that it required the credit facility to be “secured” by the LoC. Siva’s board minutes approved the terms of the draft LoC as “security” for the CFA, and contained no suggestion that the board was told, or believed, that the LoC would not be enforceable or relied upon by the Bank. The court rejected any suggestion that the LoC was a sham.

Having also found in favour of the Bank on other points (which go beyond the remit of this article) the court held that the Bank was entitled to payment of all sums claimed under the LoC, including default interest under the CFA.

Conclusions

As with any agreement, it is the substance, and not the name, which determines its legal effect. While a comfort letter is traditionally viewed as a non-binding indication of intent, parties should not take "comfort" from the name, but should take care to scrutinise the substantive terms of the document. If there is no intention to create legal relations, this should be made clear in the drafting. From a lender’s point of view, the court’s decision in this case will be reassuring – although it is clearly preferable for a guarantee and indemnity to be properly so labelled from day one, in the interests both of clarity and of swift and hassle-free enforcement.

This decision is the latest in a line of cases considering the nature of obligations assumed by support providers. Our recent article The (significant but not conclusive) clue is in the name - contractual interpretation of Guarantees v Indemnities considers the difference between guarantees and indemnities; for an introduction to guarantees see A-Z of banking and finance: G is for guarantee.