Kleinwort Benson Ltd v Malaysian Mining Corporation Bhd [198...

Facts

• Kleinwort Benson Ltd, a merchant bank, provided loan facilities to a subsidiary of Malaysian Mining Corporation Bhd (MMC).
• The loan was not secured with a direct guarantee; instead, MMC issued two letters of comfort to Kleinwort Benson.
• The first letter, for a £5 million facility, stated it was MMC's policy to ensure its subsidiary could meet its liabilities to the bank; a similar letter accompanied the facility increase to £10 million.
• These letters did not explicitly guarantee repayment but indicated MMC’s commitment to supporting its subsidiary’s financial obligations.
• The subsidiary later encountered financial difficulties and went into liquidation.
• Kleinwort Benson sought to recover outstanding sums from MMC, relying on the comfort letters.
• MMC argued the letters were not intended to create legally binding obligations or serve as guarantees.

Issues

1. Whether the letters of comfort issued by MMC constituted a legally binding promise to ensure the subsidiary would meet its liabilities.
2. Whether the language and context of the comfort letters demonstrated an intention to create legal relations.
3. Whether, absent express guarantee language, a commercial comfort letter could be interpreted as a binding contractual commitment.

Decision

• The court found that the language in the comfort letters did not amount to a legal promise by MMC to guarantee the subsidiary’s debt.
• The statements were determined to be declarations of current policy, not binding undertakings of future financial responsibility.
• The commercial context alone did not create a presumption of an intention to be legally bound in the absence of explicit commitment.
• The comfort letters were thus not enforceable as guarantees, and MMC was not liable to cover the subsidiary’s debts to Kleinwort Benson.
• Judgment was in favour of Malaysian Mining Corporation.

Legal Principles

• The intention to create legal relations is determined objectively by examining the language and context of the agreement.
• Commercial context does not automatically establish a presumption of legal intent where the wording is insufficiently clear.
• Comfort letters, absent precise and binding language, constitute statements of policy or moral responsibility rather than legal guarantees.
• Courts will not infer a legally binding obligation where parties have not clearly expressed such intent, especially in formal commercial transactions.

Conclusion

The court clarified that, in commercial contracts, only explicit and unequivocal wording demonstrates an intention to create legal relations; comfort letters, if framed as statements of policy without direct contractual language, do not amount to legally enforceable guarantees.