The letter of intent is a mechanism frequently encountered in the business world, particularly within groups of companies. However, its precise legal nature and the real scope of the commitment it represents are often misunderstood. Is it simply a moral declaration or a truly binding obligation? The purpose of this article is to demystify the letter of intent in French law, and to set out its characteristics, legal value and practical consequences for companies that use it or benefit from it. A good understanding of this tool is essential for securing your commercial and financial relations. Article 2322 of the French Civil Code defines it concisely as follows "an undertaking to do or not to do, the purpose of which is to support a debtor in the performance of his obligation to his creditor"..
What exactly is a letter of intent?
Definition and context of use
In the legal sense that interests us here, a letter of intent is therefore a document in which a third party, called the "supporter", expresses his intention to support a debtor, the "supported", so that the latter can fulfil his commitments to a creditor.. This reinforces the creditor's confidence in the debtor.. It is important not to confuse this with the "letters of intent" sometimes exchanged during the negotiation phase of a contract (talks), which are intended to provide a framework for these discussions without necessarily creating an obligation to conclude..
Its use developed in France from the 1970s, inspired by Anglo-Saxon practice ("letter of comfort").. It is particularly prevalent in intra-group relations, where a parent company sends a letter to a bank in support of its subsidiary's request for credit.. The objective is clear: to reassure the lender of the subsidiary's ability to repay, thanks to the implicit or explicit support of the parent company. The perceived value of the letter depends largely on the reputation and financial strength of the lender..
A variable legal nature: beware of the pitfalls
Not all letters of intent have the same legal effect. It is essential to distinguish between several situations.
Some letters may express a purely moral commitment, a sort of "gentlemen's agreement".. The sponsor indicates its support without incurring any legally sanctionable obligation.. The absence of a direct legal sanction does not mean that it is totally ineffective: failure to comply with such a commitment can seriously damage the commercial reputation of the comforting party..
At the opposite extreme, the wording of a letter of intent may amount to a disguised guarantee.. This is the case if the guarantor clearly undertakes to take the place of the debtor in the event of the latter's default, for example by promising to pay in his place.. Case law does not hesitate to reclassify such acts. For example, a letter in which a parent company undertook, if necessary, to stand in for its subsidiary to meet its commitments was analysed as a guarantee (Com. 21 Dec. 1987, no. 85-13.173).. The consequence of this reclassification is the application of the entire legal regime governing surety bonds, which may result in the nullity of the deed if it does not comply with the conditions of form or authorisation specific to surety bonds..
Between these two extremes lies the true letter of intent in the legal sense: one that creates a legally binding commitment, but which is distinct from a guarantee.. The guarantor assumes real obligations, but without promising to pay someone else's debt.. The Court of Cassation confirmed its validity as early as 1987 (Com. 21 Dec. 1987, no. 85-13.173).. It is considered to be a unilateral contract: only the person giving the comfort commits himself, but the acceptance of the recipient creditor is necessary to form the contract..
What obligations does the letter of intent create?
The main commitment: to do or not to do
The fundamental distinction between a (valid) letter of intent and a surety bond or autonomous guarantee lies in the nature of the guarantor's obligation.. Whereas a guarantor undertakes to pay a sum of money (obligation to give)In the case of a bond, the bondholder undertakes to perform an action (obligation to do) or to refrain from an action (obligation not to do).. It never promises to pay the debt of the person it is helping directly.. If he is required to pay money, it will be by way of damages to compensate for the loss caused by the breach of his obligation to do or not to do something..
The obligations to perform can be varied. The most common are for a parent company to undertake to maintain its shareholding in its subsidiary, or to ensure that the subsidiary has the necessary financial resources to meet its obligations.. Other examples include: monitoring cash flow or managing the subsidiarycover a cash shortfallor provide a replacement guarantee in the event of the sale of the subsidiary. Sometimes the wording is more general, such as a commitment to "take all necessary steps to ensure" that the subsidiary complies with its commitments..
Obligations not to act mainly include undertakings not to dispose of or reduce the shareholding in the subsidiary.. We could also imagine a commitment not to change the registered office or legal form of the subsidiary..
Obligation of means or obligation of result: a decisive distinction
Case law has long made a distinction between letters of intent creating an obligation to do or not to do, depending on the intensity of the commitment: is it an obligation of means or an obligation of result??
In the case of an obligation of means, the grantor undertakes only to use all reasonable efforts to achieve an objective (for example, to use its "best efforts" to ensure that the subsidiary has sufficient cash).. The creditor will then have to prove that the grantor did not implement the promised means to engage its liability..
In the case of an obligation of result, the binder promises to achieve a specific result: typically, that the debtor will be able to pay his debt.. Undertaking to provide the subsidiary with sufficient cash has often been interpreted as an obligation of result (see e.g. Com. 17 Dec. 2002, no. 00-11.566; Com. 17 May 2011, no. 09-16.186).. In this case, the mere default of the debtor is sufficient to establish the fault of the supporting party, except in the case of force majeure..
This distinction was of considerable importance before the 2006 reform of security law. In particular, it conditioned the burden of proof and, above all, the application of the rules of prior authorisation by the Board of Directors in public limited companies: only letters creating an obligation of result were considered as "guarantees" subject to this authorisation. The interpretation of the terms used ("to do what is necessary", for example) has given rise to hesitations in the case law, a source of uncertainty (compare Com. 23 Oct. 1990, no. 89-12.924 and Com. 26 Jan. 1999, no. 97-10.003, then Com. 26 Feb. 2002, no. 99-10.729)..
Since the Order of 23 March 2006, article 2287-1 of the Civil Code expressly describes letters of intent as "personal sureties".. This legal qualification tends to make the means/results distinction less decisive for certain questions, such as that of prior authorisation (any security being a guarantee within the meaning of the Commercial Code).. However, it remains relevant for assessing the fault of the support provider and the burden of proof.
How is a letter of intent formed and terminated?
Validity conditions to be checked
As with any contract, the letter of intent must comply with the conditions of validity under ordinary law. The consent of the parties (grantor and beneficiary creditor) must be free and informed.. The ability to commit is required. The object of the comfortor's obligation (the obligation to do or not to do something) must be determined or determinable, possible and lawful.. The question of the cause of the commitment has given rise to little debate in practice.. The economic interest of the transaction for the group is generally sufficient to justify it.. Lastly, the letter of intent is a consensual document: no particular formalities, in particular no handwritten mention as for the guarantee, are required for its validity..
In addition, specific conditions apply when the sponsor is a company. The commitment must be consistent with the corporate purpose, although this requirement is limited in scope in limited-risk companies (SARLs, SAs, SASs) where the company is committed even by acts outside the corporate purpose, unless the third party can be shown to be acting in bad faith.. Compliance with the company's interests is also a condition, but its breach does not render the undertaking null and void vis-à-vis third parties in SARLs and probably in sociétés par actions..
A key point for sociétés anonymes (and by extension SAS and SCA): Article L. 225-35 of the French Commercial Code requires prior authorisation from the Board of Directors or Supervisory Board for "sureties, endorsements and guarantees" given by the company.. Since the letter of intent is now classified as a personal suretyThis authorisation is required regardless of the intensity of the obligation (means or result).. The authorisation must be given before the letter is signed, must be limited in amount and must be for a maximum period of one year (even if the letter itself covers a longer period).. Failure to obtain authorisation does not invalidate the letter, but rather renders it unenforceable against the company: the creditor cannot invoke it against the company.. It is difficult to hold an executive liable for signing without authorisation on this basis alone..
The end of the commitment: when does the letter of intent expire?
The comforting party's commitment is terminated in accordance with the ordinary law of obligations.. If a fixed term was agreed, the expiry of the term extinguishes the obligation for the future.. If the term is indefinite, the grantor (like the creditor) may terminate it unilaterally, subject to reasonable notice..
The extinction of the principal obligation guaranteed (for example, repayment of the loan by the subsidiary) also has an impact. As the purpose of the letter of intent is to guarantee the performance of this obligation, if it disappears (payment, limitation period, cancellation of the main contract, etc.), the creditor no longer suffers any loss as a result of any breach by the guarantor. The latter can therefore no longer be held liable.. This is not an 'accessory' extinction as in the case of suretyship, but the disappearance of a condition of liability..
What happens if the link between the supporter and the recipient disappears after the letter has been signed (for example, the parent company sells its subsidiary)?? In principle, this circumstance alone does not release the sponsor from its commitments.. The disappearance of the initial motive (the capital link) does not affect the validity of the contract already formed.. It would be too easy to allow the contributor to free himself by simply selling his shareholding.. It is therefore prudent, in the interests of comfort, to stipulate explicitly in the letter that his commitment is conditional on the maintenance of this link..
What are the consequences if something goes wrong?
The comfort provider's liability in the event of non-performance
If the sponsor does not comply with the obligations to do or not to do as stipulated in the letter (for example, it sells its shareholding when it had undertaken to maintain it, or it does not provide the financial support promised), it incurs contractual liability towards the beneficiary creditor..
However, this liability is only incurred if two conditions are met:
- Fault: the grantor has failed to perform its obligation (or has failed to use its best endeavours if it was a best endeavours obligation).
- Damage to the creditor: typically, non-payment of the debt by the debtor.
- A causal link between the fault and the loss: the creditor must prove that it was the breach by the grantor that caused or contributed to the debtor's default. This link is not always easy to establish, particularly if the obligation was not to sell its shares.
If liability is established, the supporting party will be ordered to pay damages.. The amount is intended to compensate the creditor in full for the loss suffered.. It may be equal to the amount of the unpaid debt, but it may also be less (if the creditor has committed a fault that has contributed to the damage, or if the debtor has only lost a chance). or even higher (if the default has caused additional damage to the creditor). The principle that the guarantee may not exceed the principal debt (Art. 2290 C. civ.) does not apply here..
Possible means of defence
There are a number of defences available to the comfort provider in a liability claim. He may first contest the existence of fault on his part, in particular if he proves that he used all the means required by a best endeavours obligation.. It may also invoke force majeure (an external, unforeseeable and irresistible event that prevents it from performing its obligation, such as a serious threat to its own financial survival if it helped the subsidiary).or the seizure of funds made available by another creditor ) or the wrongful act of the creditor contributing to the damage.
As regards defences arising from the relationship between the creditor and the principal debtor (nullity of the principal contract, payment already made, prescription of the debt, etc.), the grantor cannot raise them directly as a surety would (because the letter of intent is not accessory).. However, if these exceptions eliminate the creditor's prejudice, the comforting party can no longer be held liable for lack of prejudice to be compensated..
On the other hand, the supporting party may never invoke the benefits of discussion (obliging the creditor to sue the debtor first) or division (obliging the creditor to divide his proceedings between several supporting parties).. These mechanisms are specific to surety bonds.
Remedies available after compensation
When a supporting party has compensated the creditor after being held liable, does he have any recourse against the supported debtor whom he has indirectly "helped"? The law is silent.
The majority of the doctrine accepts the existence of a personal recourse by the grantor against the debtor receiving the grant.. This recourse could be based on business management (the grantor managed the grantee's business by paying in his place, even if it was by way of damages) or on a more general theory of personal sureties.. It would enable the grantor to claim repayment from the debtor of sums paid to the creditor.
The question of a subrogatory recourse is more debated. Subrogation allows the person who pays someone else's debt to take the place of the original creditor and benefit from all his rights and guarantees against the debtor (Art. 1251 old, 1346 f. new C. civ.).. However, the supporting party is paying a debt which is personal to him (his debt for damages), and not the debt of the supported party.. Despite a broad interpretation of subrogation by case law for other guarantors, it is doubtful whether it applies to a guarantor who pays not in performance of his principal obligation, but as a sanction for his failure to perform it.. Personal recourse seems more appropriate.
The letter of intent is a useful but complex instrument. Imprecise drafting or a misunderstanding of its implications can have far-reaching consequences. To secure your commitments or analyse the scope of a letter of intent that you have received or signed, our firm is at your disposal for appropriate advice.
Sources
- Civil Code (including former art. 1129, 1234, 1251, 1326, 1372, and current art. 1415, 2287-1, 2290, 2298, 2303, 2305, 2306, 2313, 2314, 2322)
- Commercial Code (in particular art. L. 110-3, L. 221-5, L. 223-18, L. 225-35, L. 225-56, L. 225-68, L. 226-7, L. 227-6, L. 232-1, R. 225-28, R. 225-53)
- Order no. 2006-346 of 23 March 2006 on securities
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