Cautionary Obligations and Right in Security

Question 1

Kleinwort Benson v Malaysian Mining Corp [1989] 1 All ER 785

Cautionary obligation - Comfort letter

Answer 1

• “Comfort letters” in which one company assumes a moral but not a legal obligation to help another have no contractual effect.
• Held a letter of comfort from a parent company to a lender did not have contractual effect if it was merely a statement of present fact regarding the parent company’s intentions and was not a contractual promise as to the parent company’s future conduct. On the facts, the letter of comfort was in terms a statement of present fact and not a promise as to future conduct and in the context in which the letters were written was not intended to be anything other than a representation of fact giving rise to no more than a moral responsibility on the part of the defendants to meet M’s (M = subsidiary) debt.

Question 2

Royal Bank v Greenshields 1914 SC 259

Cautionary obligation - Misrepresentation

Answer 2

 H., whose bank account was overdrawn to the extent of about £300, and who was also indebted to the bank to the amount of about £1100 in respect of certain accommodation bills, requested G., an acquaintance who had no knowledge of his financial position and in particular of his indebtedness to the bank, to guarantee his account to the extent of £300. The latter expressed to the bank-agent his willingness to undertake a guarantee to that amount, and was informed by the agent that a guarantee of £300 might not assist the principal debtor, as that sum would be taken up by the bank. The agent, however, did not make any disclosure of the principal’s further indebtedness of £1100 under the bills, and G., believing an overdraft of £300 to be the sole debt, granted a guarantee for £500.
 The principal having failed to discharge his debt to the bank, G. resisted an action for payment under the guarantee, on the ground that he had been persuaded to undertake it under essential error induced by the failure of the bank-agent to discharge his duty of disclosing the existence of the principal’s indebtedness under the bills.

 Circumstances in which held ( rev. judgment of Lord Cullen) that there was no such duty of disclosure, and decree for payment granted.