A parent company which, in a letter of intent, undertakes to do « what is necessary to ensure that its subsidiary respects its commitments and has sufficient cash » grants to the bank a guarantee with an obligation to achieve a fixed result. C. Cass. Com. 18/12/2019 n°18-12287
The French Court of Cassation, in a decision of 18 December 2019, had the opportunity to qualify the engagement given by a letter of intent.
The letter of intent is a guarantee defined in the Civil Code under Article 2322 since the 2006 reform. This guarantee does not give rise to as much litigation as a surety (cautionnement), another much more commonly used personal guarantee.
« The letter of intent is a commitment to do or not to do, the object of which is to support a debtor in the performance of his obligation towards his creditor. »
In this December 2019 ruling, the Court of Cassation had to qualify a parent company’s commitment to its subsidiary.
A company F , a subsidiary of a company named M, took out a loan of €240,000. As part of the subscription of this loan, the parent company had sent a letter of intent.
The parent company M had undertaken « to ensure that no creditor would incur any loss as a result of its commitments with its subsidiaries » and had assured the bank that it would « in any event, do what is necessary to ensure that its subsidiary respects its commitments and has sufficient cash for this purpose« .
The subsidiary has been placed in compulsory liquidation. The bank therefore logically tried to obtain payment of its debt from the parent company. The bank assigned M to pay the amounts owed by the subsidiary.
M had challenged these claims.
The Court of Appeal found that the undertaking given by the parent company was simply a best-efforts obligation. The bank appealed.
The Court of Cassation overruled the appeal decision and qualified the parent company’s commitment as an obligation of result.
According to the Court of Cassation, the parent company’s commitment to do « what is necessary to ensure that its subsidiary meets its commitments and has sufficient cash » should have been qualified as an obligation of result.
This qualification is not new or does not constitute a new position from the French Supreme court.
The Court of Cassation had already qualified similar commitments as an obligation of result.
In 2005, the French Supreme Court (Cour de cassation) had in fact qualified the following commitments as an obligation of result:
- a commitment to do « everything necessary » to ensure that company D has sufficient cash to meet its obligations. (C. Cass. com., 11 Jan. 2005, no. 02-12370),
- undertake to do whatever is necessary to ensure that Company V meets its commitments to the bank and has sufficient cash for this purpose (C. Cass. com., Apr. 19, 2005, No. 03-11567).
- In 2004, the French Supreme Court (Cour de cassation) had qualified as an obligation of result the commitment of a parent company to maintain its support on a permanent basis so that, in any event, JL would have the necessary funds to ensure the successful completion of this support. (C. Cass. com., Nov. 16, 2004, No. 00-19.829)
This new ruling of December 2019 is therefore a confirmation of previous case law.
This judgment is a good illustration of the effectiveness of certain letters of intent.
In view of this classification of the commitment as an obligation of result, it will be sufficient for the bank to demonstrate that the result to which the parent company had committed itself has not been achieved. The bank’s loss consisting of the unpaid amount of the loan could then be fully compensated.
The letter of intent, when its author consents to an obligation of result, proves to be as effective as the other personal securities, the surety or an on-demand guarantee.
The letter of intent, by the simplicity of its form and the very varied nature of its commitment, may often appear to be weaker than other personal securities.
The letter of intent, when it constitutes an obligation of result, can nevertheless be a strong commitment. While a surety is governed by numerous provisions and rules of form, the letter of intent is a security that is flexible with few regulations but which can prove to be very effective. The December 2019 decision is a good example of this efficiency.
This decision is finally a reminder for parent or holding companies.
Letters of intent can be drafted with a little less care than other guarantees.
The letter of intent is, however, a real guarantee. A company that sends a letter of intent on the terms used will therefore be more or less bound by that letter and can be sued by the creditor receiving that letter.
So be careful when you issue a letter of intent.
Make sure that the commitment given is in accordance with your intentions.