Abstract This chapter explains why financial contracts often allow participants a measure of discretion as to whether to honor or repudiate them. An example is the “comfort letter” used by a parent company to assure the subsidiary’ s lenders that the parent will support it in financial distress. The British High Court recently ruled that comfort letters represent nothing more than a moral commitment (see American Banker, 6 June 1989), thereby reversing an earlier ruling by a lower court (see Rene Sacasas 1989). Another example is the “highly confident” letter with which the investment banker promises to provide credit, but the promise is typically not legally enforceable. Other examples of such contracts are discussed in Section III.
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