0408 Comfort letter or sponsorship letter. Concept and purposes.

What is a comfort letter?

A comfort letter or sponsorship letter is a commercial contract, by virtue of which one of the parties (issuer or sponsor) responds and/or guarantees the other (beneficiary or sponsored party) against third parties and regarding specific obligations. It would fall within the legal business of guarantee. It is also sometimes referred to as a “comfort letter”.

Where is it regulated in Spanish law? What types of comfort letters are there?

Although the comfort letter or letter of sponsorship is a very common figure in financial and capital market transactions, it does not have an established framework in Spanish legislation beyond the rules on obligations and contracts (and especially the principle of the autonomy of the will of the parties) regulated in our Civil Code.

Having said this, there is an express recognition of this legal figure in case law; specifically in the Supreme Court Judgment of the 13th of February 2007 (STS 96/2007), which is precisely the one that distinguishes between two types of comfort letter or letter of sponsorship:

a) Weak: they consist of a mere recommendation by the issuer of the sponsorship letter (sponsor) and its sponsored party, e.g.: confidence in a certain management team, in the technical/economic solvency of the company being recommended, etc..

b) Strong: these are genuine personal guarantee contracts that bind the issuer or sponsor, with specific financial transactions or payment obligations, with respect to obligations assumed by the beneficiary or sponsored party with third parties.

What are its purposes? Although in commercial practice the issuance of a comfort letter often refers to the financial guarantee operations of a parent company for its subsidiary or between companies of the same group, we can apply and find this legal tool of a comfort letter for other uses, in which basically, one entity is liable for another, such as:

a) Comfort letter issued by a law firm to approve the due diligence carried out on a company that aspires to be listed on the Alternative Investment Market (“Mercado Alternativo Bursátil” (MAB)).

b) Comfort letter answering for the veracity and analysis contained in the issuance of a technical report.

David Devesa Rodríguez.

Founding partner – CEO of Devesa & Calvo Abogados.

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