Confirming Bank

UCP600 Article 2 Explanation – CDCS Guide: Definitions

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1. Advising Bank

  • Clause: The bank that advises the credit at the request of the issuing bank.
  • Explanation: The advising bank serves as the intermediary between the issuing bank and the beneficiary. It is responsible for transmitting the credit and any amendments to the beneficiary without any obligation on its part.
  • Example: If Bank A (issuing bank) in the USA issues a letter of credit (LC) for a beneficiary in India, Bank A may request Bank B (advising bank) in India to advise the credit to the beneficiary. Bank B will inform the beneficiary of the LC details.

2. Applicant

  • Clause: The party on whose request the credit is issued.
  • Explanation: The applicant is the buyer in a trade transaction who requests the issuance of a letter of credit in favor of the seller (beneficiary).
  • Example: In an export-import transaction, an importer in India requests their bank to issue a letter of credit in favor of an exporter in China. The importer is the applicant.

3. Banking Day

  • Clause: A day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.
  • Explanation: A banking day refers to any day when banks are open to conduct regular business. This is crucial in determining deadlines for presentations and payments under a letter of credit.
  • Example: If a presentation is due on January 1st, but this is a public holiday in the bank’s location, the presentation would be due on the next banking day.

4. Beneficiary

  • Clause: The party in whose favour a credit is issued.
  • Explanation: The beneficiary is the seller or exporter who will receive payment under the letter of credit once they comply with its terms.
  • Example: In a trade between a US buyer and an Indian seller, if the buyer issues an LC, the Indian seller is the beneficiary.

5. Complying Presentation

  • Clause: A presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules, and international standard banking practice.
  • Explanation: A complying presentation occurs when the beneficiary submits documents that fully meet the requirements set out in the letter of credit, ensuring that payment will be made.
  • Example: If an LC requires a commercial invoice and a bill of lading, a complying presentation will include these documents, exactly as specified.

6. Confirmation

  • Clause: A definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
  • Explanation: When a confirming bank adds its confirmation to a letter of credit, it takes on the responsibility to pay the beneficiary even if the issuing bank fails to do so. This adds extra security in the LC. Confirming bank generally located in the country of beneficiary however it can be in the different country also. When a beneficiary does not have confident on issuing bank or country of issuing bank due to sanction or political risk or any other reason, then beneficiary opt for confirmation.
  • Example: If a bank in Germany issues an LC, but the seller in India wants more security, a confirming bank in India might confirm the LC, guaranteeing payment.

7. Confirming Bank

  • Clause: The bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
  • Explanation: The confirming bank provides an additional level of assurance to the beneficiary by guaranteeing payment if the issuing bank fails to do so.
  • Example: An exporter in Brazil might require a confirming bank in their country to confirm an LC issued by a bank in Nigeria, ensuring that they will get paid.

8. Credit

  • Clause: Any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.
  • Explanation: The term “credit” refers to the letter of credit itself, which is an irrevocable commitment from the issuing bank to pay the beneficiary if they comply with the terms.
  • Example: A bank issues an LC for $100,000 to a beneficiary; this document is the “credit” which guarantees payment upon compliance.

9. Honour

  • Clause:
    • a. To pay at sight if the credit is available by sight payment.
    • b. To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
    • c. To accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
  • Explanation: Honour refers to the actions a bank must take under different types of letters of credit—paying immediately, deferring payment, or accepting a draft for future payment. Please refer “Available By” field in the LC.
  • Example:
    • a. Sight Payment: A beneficiary presents documents and is paid immediately.
    • b. Deferred Payment: Documents are presented, and payment is made after 90 days basis deferred payment undertaking. In deferred payment draft is not presented.
    • c. Acceptance: The bank accepts a draft and pays the beneficiary at maturity.

10. Issuing Bank

  • Clause: The bank that issues a credit at the request of an applicant or on its own behalf.
  • Explanation: The issuing bank is the financial institution that creates the letter of credit, committing to pay the beneficiary once they comply with the LC terms.
  • Example: A bank in Japan issues an LC to a US exporter; this bank is the issuing bank.

11. Negotiation

  • Clause: The purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
  • Explanation: Negotiation involves the nominated bank purchasing documents or drafts from the beneficiary before payment is due, essentially providing an advance.
  • Example: A bank in the UK buys a draft from a beneficiary in South Africa under a complying presentation and advances payment before the due date.

12. Nominated Bank

  • Clause: The bank with which the credit is available or any bank in the case of a credit available with any bank.
  • Explanation: The nominated bank is authorized by the issuing bank to handle the presentation of documents and make payments under the letter of credit. We need to refer “Available With” field in the LC.
  • Example: An LC issued in Canada might nominate a bank in Mexico to handle document presentations and payments.

13. Presentation

  • Clause: Either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.
  • Explanation: Presentation refers to the submission of documents required by the letter of credit to the relevant bank for review and payment processing.
  • Example: A beneficiary submits the required commercial invoice and shipping documents to the nominated bank as a presentation under the LC.

14. Presenter

  • Clause: A beneficiary, bank, or other party that makes a presentation.
  • Explanation: The presenter is the entity that submits the documents under the letter of credit, which could be the beneficiary, a bank, or another involved party.
  • Example: A freight forwarder submits the required documents on behalf of the beneficiary to the issuing bank. Then freight forwarder is presenter.

UCP600 Article 8 Explanation – CDCS Guide: Confirming Bank Undertaking

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Article 8: Confirming Bank Undertaking

Clause a

Clause:
Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

i. honour, if the credit is available by –

a. sight payment, deferred payment or acceptance with the confirming bank;

b. sight payment with another nominated bank and that nominated bank does not pay;

c. deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity; d. acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;

e. negotiation with another nominated bank and that nominated bank does not negotiate.

ii. negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

Explanation:
This clause outlines the conditions under which the confirming bank must honor or negotiate the credit. If the stipulated documents are presented and they comply with the terms of the credit, the confirming bank has specific obligations to fulfill. Honour means fulfilling the obligations i.e. issuing acceptance or doing payment as per applicable scenario.

Examples:

  1. Sight payment with the confirming bank: The confirming bank in India must pay the exporter immediately upon presentation of compliant documents if the credit specifies sight payment.
  2. Sight payment with another nominated bank: If the UK bank (another nominated bank) fails to pay under a sight payment arrangement, the confirming bank in India must still pay the exporter.
  3. Deferred payment with another nominated bank: If the UK bank fails to honor a deferred payment at maturity, the confirming bank in India must pay the exporter.
  4. Acceptance with another nominated bank: If the UK bank fails to accept a draft or pay it at maturity, the confirming bank in India must step in and honour.
  5. Negotiation with another nominated bank: If the UK bank fails to negotiate the documents and pay to exporter, the confirming bank in India must honour the documents.
  6. Negotiate, without recourse, if the credit is available by negotiation with the confirming bank: The confirming bank in India must negotiate the documents without recourse if the credit is available by negotiation with confirming bank. (“Without recourse” here means incase issuing bank defaults to reimburse confirming bank then confirming bank would not be able to claim the funds back from beneficiary)

Clause b

Clause:
A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

Explanation:
Once a confirming bank adds its confirmation to a letter of credit, it is irrevocably obligated to honor or negotiate the credit. This clause provides certainty and assurance to the beneficiary of the letter of credit.

Example:
When the confirming bank in India adds its confirmation to a letter of credit, it is legally bound to pay or negotiate according to the terms of the credit, giving the exporter confidence in receiving payment.

Clause c

Clause:

Confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a
complying presentation and forwarded the documents to the confirming bank. Reimbursement for the
amount of a complying presentation under a credit available by acceptance or deferred payment is due at
maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming
bank’s undertaking to reimburse another nominated bank is independent of the confirming bank’s
undertaking to the beneficiary.

Explanation:
The confirming bank must reimburse another nominated bank that honors or negotiates a complying presentation. The reimbursement is due at maturity for credits available by acceptance or deferred payment, regardless of whether the nominated bank prepaid or purchased before maturity. This reimbursement obligation is independent of the confirming bank’s undertaking to the beneficiary.

Example:
If another bank in the UK honors a deferred payment and forwards the documents to the confirming bank in India, the confirming bank must reimburse the UK bank at maturity. It is additional obligation of confirming bank apart from the obligations we read in previous clauses which were obligations towards beneficiary.

Clause d

Clause:

If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so,
it must inform the issuing bank without delay and may advise the credit without confirmation.


Explanation:
If a bank is asked to confirm a credit but is unwilling, it must promptly inform the issuing bank and may still advise the credit without confirmation. This ensures clarity and timely communication between banks.

Example:
If the confirming bank in India is requested to confirm a credit but chooses not to, it must inform the issuing bank in the UK immediately and can advise the credit without adding its confirmation.

UCP600 Article 12 Explanation – CDCS Guide: Nomination

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Clause a

Text:
“Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary.”

Explanation:
This clause means that if a bank is nominated to honour or negotiate a letter of credit (L/C) but is not a confirming bank, it is not automatically obliged to honour or negotiate unless it has agreed to do so and has informed the beneficiary. A confirming bank is one that adds its confirmation to the credit, thereby confirming bank is bound to honor or negotiate the documents if the terms of the L/C are met.

Example:
A beneficiary receives an L/C from Bank A, which nominates Bank B to honour or negotiate (this happens when LC is restricted to bank B). However, Bank B has not added its confirmation to the L/C. In this case, Bank B is not obligated to pay the beneficiary unless it has expressly agreed to do so and communicated this to the beneficiary.

Clause b

Text:
“By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.”

Explanation:
When an issuing bank nominates another bank to accept a draft or take on a deferred payment undertaking, it is giving that nominated bank the authority to prepay or purchase the accepted draft or the deferred payment undertaking. This means the nominated bank can advance funds based on the draft or deferred payment undertaking.

Example:
Bank A issues an L/C and nominates Bank B to accept drafts (this happens when LC is restricted to bank B). In time of advising the LC Bank B communicates the beneficiary that they will prepay against presentation of complied documents. The beneficiary then presents a draft along with other documents as per LC, Bank B can then decide to prepay the draft amount to the beneficiary or purchase the draft, providing immediate funds to the beneficiary.

Clause c

Text:
“Receipt or examination and forwarding of documents by a nominated bank that is not a confirming bank does not make that nominated bank liable to honour or negotiate, nor does it constitute honour or negotiation.”

Explanation:
If a nominated bank that is not a confirming bank receives, examines, and forwards documents under the L/C, it is not liable to honour or negotiate the credit. Simply handling the documents does not mean the nominated bank has undertaken the responsibility to pay the beneficiary.

Example:
Bank A issues an L/C and nominates Bank B. The beneficiary submits documents to Bank B, which then examines and forwards them to Bank A. Since Bank B is not a confirming bank, it is not obligated to pay the beneficiary; it is merely acting as an intermediary in the document handling process.

UCP600 Article 15 Explanation – CDCS Guide: Complying Presentation

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Clause a: When an issuing bank determines that a presentation is complying, it must honour.

Explanation: An issuing bank, upon receiving the documents under a letter of credit (LC), has the responsibility to check if the documents comply with the terms and conditions of the LC. If the documents are found to be in compliance, the issuing bank must honor its commitment to pay the beneficiary immediately or accept the documents and pay on due date.

Example: An exporter in India ships goods to an importer in the USA under an LC issued by an American bank. The exporter presents the required documents to the issuing bank. After examination, the bank finds all documents in compliance with the LC terms. The issuing bank then proceeds to honor the payment, transferring the funds to the exporter’s account.

Clause b: When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.

Explanation: A confirming bank adds its confirmation to an LC, providing an additional payment guarantee to the beneficiary. If the confirming bank determines that the presented documents comply with the LC terms, it must either honor or negotiate (purchase the documents) and then forward the documents to the issuing bank for reimbursement.

Example: An exporter in Germany receives an LC confirmed by a German bank. The exporter presents the documents to the confirming bank, which checks and finds them in compliance. The confirming bank pays the exporter (honours) and then forwards the documents to the issuing bank in the USA for reimbursement.

Clause c: When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.

Explanation: A nominated bank is authorized to pay, accept, or negotiate under an LC. If the nominated bank finds the documents compliant and decides to honor or negotiate, it must forward the documents to the confirming bank (if there is one) or the issuing bank.

Example: An exporter in China ships goods under an LC issued by a UK bank, with a nominated bank in China. The exporter presents the documents to the nominated bank in China. The bank reviews and finds the documents in compliance, pays the exporter, and then forwards the documents to the issuing bank in the UK for reimbursement.