Letter of comfort is not a guarantee where there is no clear undertaking to pay a borrower's default.

A letter of comfort did not create a contract of guarantee under Section 126 of the Indian Contract Act, 1872 because it contained no clear undertaking by the appellant to discharge the borrower's liability on default. The document only referred to the borrower as an associate company and expressed that reasonable steps would be taken to ensure its financial and contractual obligations, which amounted to an assurance rather than a binding guarantee. Liability as guarantor or surety cannot extend beyond the express terms of the engagement. The Karnataka HC therefore held that the appellant was not liable for the borrower's debt, and the liability fastened on it was set aside.

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Issues: Whether the document described as a letter of comfort created a contract of guarantee making the appellant liable for the borrower's default.

Analysis: A contract of guarantee under Section 126 of the Indian Contract Act, 1872 requires an undertaking to perform the promise or discharge the liability of a third person in case of default. The document relied upon merely stated that the borrower was an associate company and that reasonable steps would be taken to ensure that it met its financial and contractual obligations. Read as a whole, it did not contain any specific undertaking by the appellant to repay the loan on default. The document was therefore only an assurance or recommendatory letter and not a guarantee. The guarantor or surety cannot be made liable beyond the express terms of the engagement.

Conclusion: The letter of comfort did not amount to a guarantee, and the appellant was not liable for the borrower's debt.

Final Conclusion: The liability fastened on the appellant was set aside, while the order continued to operate against the remaining respondents.

Ratio Decidendi: A person cannot be treated as a guarantor unless the document contains a clear undertaking to discharge the third party's liability on default, and liability cannot extend beyond the express terms of the engagement.

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