Friday, 12 September 2008

Comforting words on offer

Company bosses who are asked to give a guarantee that a supplier is above board could consider offering a few words of “comfort” instead.

Stuart Haynes, who leads our Commercial Team, said some companies may feel uncomfortable giving guarantees about a supplier to a third party.

“An alternative approach would be to offer a comfort letter, which does just as its name suggests. It provides comfort to a third party, usually a bank or another supplier, about the company’s financial standing and its ability to honour any proposed contracts.

“But the bonus is, that unlike a guarantee, if things go wrong later on, it should mean there is no comeback against your company or any of your directors. The whole point of this kind of letter though is that you don’t cause difficulties for yourself or your company by mistakenly creating a contract.”

He said that to be legally binding, a contract needed four elements: offer and acceptance, consideration (usually money in return for goods/services), and an intention to enter legal relations.

“But if one of these elements is missing, the letter only creates a moral obligation, rather than a formal contract.”

Stuart said it was important to make it clear that the information was not intended to be of legal effect, and to avoid giving any binding undertakings or making any promises.