Letter of Comfort: Definition, Uses, and How It Differs from a Guarantee

What is a letter of comfort?

A letter of comfort (also called a letter of intent or solvency opinion, and sometimes a keepwell agreement when issued by a parent company) is a written statement that provides assurance—often limited—that an obligation will be met. It is typically issued by auditors, parent companies, or other third parties to reassure lenders, underwriters, suppliers, or counterparties about a borrower’s or subsidiary’s financial position or intentions.

Common uses

• Auditors to lenders or underwriters: express an opinion about solvency or confirm that preliminary financial statements align with GAAP and will not materially change.
• Parent company to lenders or suppliers: assist a subsidiary in obtaining credit or honoring large purchase orders.
• Parties in a transaction: outline agreed steps during due diligence and specify certain interim obligations or protections.

Typical contents

A letter of comfort often:
* States a general assurance that obligations will be met or that a company appears solvent.
* Outlines non-binding steps parties will take toward completing a transaction.
* May include specific, binding clauses—such as confidentiality, non-competition, or a pre-agreed compensation amount if a party withdraws.
* Confirms the scope of any investigation or review performed (e.g., reasonable investigation of financial reports).

Benefits

• Provides a quick, written expression of support or intent that can facilitate financing, underwriting, or commercial deals.
• Helps counterparties decide whether to proceed with transactions or invest time in further due diligence.
• When it includes targeted binding provisions, it can protect parties during negotiation and interim phases.

Legal effect and how it differs from a guarantee

• Letters of comfort are typically opinions or moral assurances, not legally enforceable guarantees. Language is often deliberately vague to avoid creating a binding obligation.
• A guarantee creates a clear, enforceable obligation by the guarantor to pay or perform if the primary obligor defaults. A letter of comfort generally does not have that legal force unless it contains explicit, binding terms.
• Because wording matters, poorly drafted letters of comfort can be interpreted by courts as creating enforceable obligations in some circumstances.

Risks and special considerations

• Issuers risk unintended liability if wording is ambiguous or overly affirmative.
• Recipients relying on a letter of comfort should be cautious—these letters may not provide full legal protection if the underlying party defaults.
• Final contract terms supersede the letter of comfort. Relying solely on a letter without completing formal agreements can be risky.
• Companies usually avoid issuing letters of comfort unless necessary because of potential financial or legal exposure.

Best practices

For issuers:
* Use clear, deliberate wording that limits legal exposure (state intent and scope explicitly).
* Avoid blanket promises—specify what is binding and what is not.

For recipients:
* Treat letters of comfort as interim assurances, not substitutes for definitive contracts or guarantees.
* Seek expressly binding commitments (guarantees, indemnities) where full protection is required.
* Request clarification of the letter’s scope and, if necessary, obtain legal counsel to assess enforceability.

Key takeaways

• A letter of comfort provides reassurance but is usually an opinion or moral commitment rather than a legally enforceable guarantee.
• It can facilitate financing and transactions but must be drafted and interpreted carefully.
• When legal enforceability is required, obtain a formal guarantee or incorporate binding terms into a final contract.