Joel is a former law clerk to the Hon. Charles H. Tenney (U.S.D.J., S.D.N.Y.) and AV peer-rated litigator at Dentons. He represented large corporations in federal and state courts at both the trial and appellate level. Joel’s academic focus is on business and corporate law; international economic law; corporate governance; and global governance. Publication venues include both peer-reviewed journals: Chinese Journal of International Law; Chinese Journal of Comparative Law; Hong Kong Law Journal (forthcoming); Chinese Journal of Global Governance; and the Journal of World Trade. Student-edited journals venues include: Tsinghua China Law Review; Georgetown Journal of International Law (twice); University of Penn. Journal of Business Law (twice); Delaware Journal of Corporate Law; Review of Banking and Financial Law and the Fordham International Law Journal.
Chinese state-entity issued comfort letters and the essential security exception
Debt is often accompanied by a statement or assurance provided to a creditor relating to the debtor. Commonly referred to as keep-well agreements or comfort letters, such statements do not contain any express promises or specific debt payment guarantees nor do they generally allude or reference any specific details such as an amount of debt or a payments schedule. However, such statements generally evince an intent (or a commitment) to provide sufficient liquidity to the debtor to maintain the debtor’s solvency. The statement-issuer thus provides “comfort” to the creditor serving as an inducement to provide the capital. If debtors cannot repay debt, creditors will endeavor to obtain payment from the letter issuer. In the Chinese context, such statements are generally provided by an onshore parent to an offshore subsidiary memorializing the parent’s intent to prevent the insolvency of the offshore subsidiary seeking to borrow capital. Comfort letters issued by a state-linked parent present an intriguing legal issue. Can a sovereign (state-linked entity) issuing the letter invoke the essential security exception of an investment treaty to override the letter? An economic crisis or national emergency might be claimed by the sovereign as constituting a threat to an essential security interest that justifies jettisoning the comfort letter. Clearly, the question triggers the conflicting interests between fulfilling contractual obligations versus defending the national bastion. Should letters issued by state-linked entities impact the question? Does good-faith play a role? Moreover, given the incipient re-conceptualization of security, what are the parameters of essential security and how does that (or should) effect comfort letters? The slope is slippery and an excessively expansive definition can result in the dishonoring of contracts. This paper will examine the impact of comfort letters and the interplay with the essential security exception in international economic law in times of crisis.