Case law Developments in PIL

Take no Comfort in Comfort Letters: Mind the Competent Court!

Through a comfort letter, one party promises to indemnify a creditor if the latter’s debtor does not pay. This is a means for improving the credit of another party. Particularly widespread are comfort letters issued by a parent company for its subsidiary or vice versa.

But where can the creditor sue if the comfort letter is not honoured? And which law applies to these instruments?

These questions were addressed in a decision by the Court of Appeal of Brandenburg dated 25 November 2020 (reprinted in IPRax 2022, pp. 175 et seq., with a comment by Maximilian Pika, id. pp. 159 et seq.).

Facts

A company incorporated under Danish law and headquartered in Copenhagen had provided a comfort letter for one of its subsidiaries in Germany who operated an airport there. Subsequently, insolvency proceedings over the subsidiary were opened in Germany. The insolvency administrator sued the Danish parent company in a German court on the basis of the comfort letter.

In deciding whether it has jurisdiction to hear the case, the Court of Appeal of Brandenburg first discards the insolvency exception in Art 1(2)(d) Brussels I bis Regulation. It argues – quite correctly – that this exception only covers claims that are grounded in insolvency law, but not those under general civil and commercial law. The present claim was one under general civil and commercial law, independently of the fact that it was brought by the insolvency administrator, and thus fell inside the scope of the Brussels Ibis Regulation.

How to Characterise a Comfort Letter?

The Court toys with the idea to characterise the comfort letter as a contract for the “provision of services”, which could potentially lead to the Court’s jurisdiction under Art 7(1)(b) Brussels I bis. However, the Court underlines that in this case, the place of performance would not be in its district, but in that of the debtor’s domicile, as the obligation arising from the comfort letter would have to be paid there.

The same would be true, according to the Court, if the comfort letter were to be considered as a simple contract for payment, which would fall under Art 7(1)(a) Brussels Ibis. This provision requires to determine the place of performance under the applicable law (see on its forerunner, Article 5(1) Brussels Convention, CJEU, Tessili, para. 15).

In this context, the Court takes the view that the comfort letter, regardless of whether it is seen as a unilateral declaration of the creditor or a contract, falls under the Rome I Regulation.

In the opinion of the court, the comfort letter had been submitted to German law, as clearly demonstrated by the circumstances of the case, in particular the choice of the German language, the fact that it was issued for the benefit of a German debtor, and that it was submitted to German air traffic authorities to maintain the license of the debtor. Under German substantive law (sec. 269 German Civil Code), payment obligations have to be performed at the creditor’s domicile. Hence, Danish and not German courts would have jurisdiction under Art 7(1)(a) Brussels I bis as well.

Assessment

Under an autonomous European interpretation, the notion “contracts of services” has to be defined broadly. The Court could have been courageous and just applied Art 7(1)(b) Brussels Ibis. This would have made things much simpler.

However, there is little to quarrel with the result the court has reached. Comfort letters are performed at the domicile of the issuer, or one of the three places mentioned in Art 63(1) Brussels Ibis in case of a company as an issuer, and actions based on them have to be brought there.

This result will be little comfort for those who have received a comfort letter. They should make sure that the letter states a suitable place of performance. Even better is to insist on the insertion of a choice-of-forum clause.

1 comment on “Take no Comfort in Comfort Letters: Mind the Competent Court!

  1. Dear Matthias,

    Thanks for this interesting report.

    I think that the characterisation of letters of comfort for purposes of Art. 7(1) is far from being settled. There is a service provided by the parent company. But what is the remuneration?

    Also, a big difference if we characterise the letter of comfort as a provision of service in the meaning of Art 7(1)(b) is that German law becomes irrelevant to assess the place of performance. The CJEU would almost certainly adopt an autonomous characterisation.

    Gilles

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