High Court finds Letter of Comfort creates binding guarantee and Ralli Bros principle not engaged where foreign illegality arises from failure to seek regulatory permission

The High Court has considered the application of the principle in Ralli Bros v Compania Naviera Sotay Aznar [1920] 2 KB 287 (which prevents enforcement of a contract if its performance is illegal in the place of performance) on payment obligations under a Letter of Comfort in relation to cross-border lending agreements: IDBI Bank Ltd v Axcel Sunshine Ltd & Anor [2025] EWHC 442 (Comm). 

Letters of Comfort (LoC) are generally used when a holding company is unable or unwilling to give a guarantee, but wishes to give some comfort as to its subsidiary's ability to satisfy its contractual obligations. Often they are not intended to be legally binding, but this will depend on the wording of the specific documentation, as highlighted by the present case.

Here, the court determined that a LoC provided by an Indian holding company was a legally binding document that constituted both a guarantee and an indemnity. Considering the guarantee, the relevant clause was promissory in nature and cast in terms of obligation: "we hereby irrevocably and unconditionally agree, confirm and undertake". The wording could not be construed as providing simply non-obligatory comfort and was intended to create legal obligations. The court also noted that the LoC was essential for the bank's decision to advance the loan, and that the holding company had represented and warranted that it had obtained all necessary authorisations to issue the LoC and was therefore able to do so. In light of the warranty, the holding company was unable to argue that it was prevented from giving the guarantee due to an Indian law requirement to obtain permission from the Reserve Bank of India (RBI), which it did not obtain.

The holding company relied on the same lack of permission to invoke the Ralli Bros principle, arguing that the guarantee under the LoC could not be enforced because its performance was illegal in India in the absence of such permission. However, in the court's view, this was a "licensing" case, where the holding company could have sought retrospective approval of the guarantee from the RBI. Applying Celestial Aviation Services Ltd v UniCredit Bank GmbH (London Branch) [2024] EWCA Civ 628 (see our blog post), a party who can apply for a licence to allow payment under a guarantee must do so, or prove that such an application would have been in vain. In respect of the guarantee, the holding company failed to show that it attempted to obtain approval or that approval would necessarily be refused, and so could not rely on the Ralli Bros principle.

This decision highlights that the enforceability of LoCs in international lending agreements will depend upon the contractual construction of the documentation in question, and the importance of clear language to impose legal obligations on guarantors where that is required. Banks seeking guarantees and indemnities should be aware of the particular risks associated with doing so in cross-border transactions, in circumstances where a foreign guarantor may require regulatory/state permission to enter into the transaction.

Background

In 2014, IDBI Bank Limited (the Bank), an Indian bank operated through its branch in the Dubai International Financial Centre, entered into a Credit Facilities Agreement (CFA) with Axcel Sunshine Limited (Axcel), a company registered in the British Virgin Islands. Under the CFA, Axcel borrowed USD 67 million, which was transferred to Siva Industries and Holdings Limited (Siva), a company registered in India, to discharge previous liabilities owed by Siva group companies to the Bank, which Siva had guaranteed.

Axcel defaulted on the loan leaving approximately USD 143.7 million outstanding under the CFA. The Bank sought to recover this outstanding sum under a Letter of Comfort (LoC), provided by Siva to the Bank's DIFC branch, which the Bank relied upon as a legally binding contract of guarantee and/or indemnity. In respect of the guarantee, the Bank relied on the following provisions at Clause 3:

"…In consideration of the above, we do hereby irrevocably and unconditionally agree, confirm and undertake to IDBI Bank, its successors and assigns that

(a) we shall ensure that the Borrower shall duly and punctually observe and perform all its obligations under and shall comply with all the terms and conditions of the Finance Documents

…

(c) we shall ensure repayment/payment by the Borrower of the said Facility together with interest, further interest, liquidated damages, fees, costs, charges, expenses and other monies…In the event that the Borrower has insufficient funds to meet any such obligations, we shall provide assistance to the Borrower, subject to necessary statutory approvals, to enable it to fulfill its obligations towards IDBI Bank…"

Siva argued that: (1) the LoC was intended only as a paper exercise and was not to be relied upon by the Bank; and (2) enforcing the LoC would contravene Indian law, specifically the Foreign Exchange Management (Guarantees) Regulations 2000 (FEMA Regulations). These regulations prohibit residents in India from giving guarantees for debts owed by residents outside India without special permission from the RBI.

The Bank contested these defences in fact and law, arguing that even if Siva's arguments were valid, Siva remained liable under secondary claims for breach of warranty, misrepresentation and unjust enrichment.

Decision

The High Court found in favour of the Bank in its claim against Axcel and Siva.

Effect and validity of LoC

The court found that the LoC provided by Siva Industries was a legally binding document that constituted both a guarantee and an indemnity. The court rejected Siva's defence that the LoC was merely a paper exercise and not intended to be relied upon, as there was no evidence to support this claim. The court emphasised that the LoC contained clear promissory language and was intended to create legal obligations. It also noted that the LoC was essential for the Bank's decision to advance the loan to Axcel, and that Siva had represented and warranted that it had obtained all necessary authorisations to issue the LoC.

Legality of performance of the LoC under Indian law

The court also dismissed Siva's argument that enforcing the LoC would contravene Indian law, specifically the FEMA Regulations. In coming to its decision, the court considered the Ralli Bros principle (which states that a contract will not be enforced if its performance is illegal in the place where it must be performed) and found that, in this case, the principle did not apply. This was because:

1. The LoC did not necessarily lead to performance which would be illegal. The court accepted that Siva could have sought approval of the guarantee under the FEMA Regulations, and that such approval could be retrospective. Accordingly, this was a "licensing" case. Applying Celestial Aviation v Unicredit, a party who can apply for a licence to allow payment under a guarantee must do so, or prove that such an application would have been in vain. In respect of the guarantee, Siva had failed to show that it attempted to obtain RBI approval or that RBI approval would necessarily be refused and so could not rely on the Ralli Bros principle. In respect of the indemnity, the LoC was not prohibited by the FEMA Regulations at all.
2. The LoC did not necessarily require performance in India. The LoC was addressed to the Bank’s Dubai branch, and it was the Dubai branch that dispersed the loan monies. Therefore, the court ruled that under the CFA, Axcel was required (or at least entitled) to repay the loan to an account in Dubai. This was even the case even though, at the date of the judgment, the Bank had closed its Dubai office.
3. In the court's judgment, an Indian court would enforce the LoC. The court referred to the fact that the Indian court has previously enforced an English court's judgment on very similar facts in Ultrabulk v Jagatramka [2017] EWHC 2792 (Comm).

While the Bank's primary case was successful, the court also considered the Bank's alternative arguments, some of which are considered further below.

Breach of Warranty and Misrepresentation

Clause 7 of the LoC stated that:

"…We represent, warrant, and confirm: …(ii) that we have obtained all…authorizations and taken all other actions required by law to facilitate due execution of this Letter of Comfort…"

The court considered that this expressly placed responsibility for obtaining all relevant authorisations on Siva and failure to do so amounted to a breach of warranty in not obtaining authorisation from the RBI.

The court found that, in the absence of any evidence that Siva thought the representation to be true (as required by section 2(1) of the Misrepresentation Act 1967) and given that the Bank would not have advanced the loan amounts if not for the LoC, the Bank's case in misrepresentation was made out.

Subrogation to claims under the prior guarantees and/or restitution for unjust enrichment

If the LoC was not binding or enforceable, the court found that where a lender's money has been used to repay an earlier lender, the Bank would have been entitled to resurrect the previously discharged guarantee by way of subrogation.

The court also found that Siva was enriched by the disbursement of funds by the Bank under the CFA, by virtue of the discharge of its liability for the previous debts of Siva group companies. As Siva had guaranteed each of those debts, the discharge of the debts thereby reduced Siva's obligations. The court also found that the enrichment was unjust as the package of securities for which the Bank contracted included the LoC and if that was unenforceable, then the basis upon which the Bank paid out money had lost a crucial component. The absence of that component would leave Siva substantially enriched, and the Bank out of pocket.

Therefore, even if there was no subrogation, the Bank would have a personal claim to reverse Siva's unjust enrichment.

Accordingly, the Bank was entitled to the sums claimed under the LoC (approximately USD 143.7 million) and was awarded interest at the rate specified in the CFA until the date of judgment and statutory interest thereafter.