The role of guarantees and comfort letters in a project finance transaction

Guarantees (which often include indemnity provisions) are typically used in finance transactions (including project finance transactions) as a form of collateral for a debt. In such circumstances, they are a contractual arrangement where one party (the guarantor) agrees to answer for the liability of another party (the principal) to another party. They do not create rights over property. In this context, guarantees are characterised as quasi-security.

On occasions where a lender is not able to obtain a guarantee, comfort letters are often used. Comfort letters are generally intended to be non-legally binding, however, in certain cases, they may contain features that indicate that they are legally binding.

This guidance note explores the use of guarantees and indemnities and comfort letters in a project finance transaction. See The role of guarantees and comfort letters in a project finance transaction.