LC confirmation

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.

Understanding Confirmed Letters of Credit: Key Insights, Benefits, and UCP 600 Guidelines

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Confirmation of a letter of credit (LC) means that another bank, in addition to the issuing bank, promises to pay the beneficiary (exporter). This extra assurance is given by a bank usually located in the exporter’s country, known as the confirming bank.

How Documents Move Under a Confirmed Letter of Credit

When an LC is confirmed, the typical process involves:

  1. Issuance: The issuing bank in the importer’s country issues the LC and sends it to the confirming bank in the exporter’s country.
  2. Advising: The confirming bank advises the LC to the beneficiary adding confirmation.
  3. Shipment and Documentation: The beneficiary ships the goods and prepares the necessary documents as required by the LC.
  4. Presentation: The beneficiary presents the documents to the confirming bank.
  5. Examination and Payment: The confirming bank checks the documents. If they are compliant, the confirming bank pays the beneficiary (or agrees to pay at a later date).
  6. Forwarding Documents: The confirming bank forwards the documents to the issuing bank.
  7. Reimbursement: The issuing bank reimburses the confirming bank after verifying that the documents are in order.

Who is the Confirming Bank and What is Its Role?

The confirming bank is the bank that adds its confirmation to the LC at the request of the issuing bank. Its roles include:

  1. Guaranteeing Payment: Provides an additional guarantee of payment to the beneficiary.
  2. Document Examination: Reviews the documents presented under the LC for compliance.
  3. Payment: Pays the beneficiary if the documents are in order, regardless of whether the issuing bank has paid or not.
  4. Advising: Communicates the LC to the beneficiary.

How to Identify Confirmation in an MT700 SWIFT Message

In an MT700 SWIFT message, which is used for issuing LCs, confirmation details are found in:

  • Field 49 (Confirmation Instructions): Indicates whether the LC is available with the confirming bank and specifies the type of confirmation.
    • CONFIRM means the confirming bank is adding its confirmation.
    • MAY ADD means the bank may add its confirmation at its discretion.
    • WITHOUT means no confirmation is added.

Pros and Cons of Adding Confirmation to an LC

Benefits:

  1. Risk Reduction: Lowers the risk of non-payment for the beneficiary as they have assurance from both the issuing and confirming banks. Incase issuing bank does not pay, confirming bank is already liable to make payment.
  2. Trust: Increases the beneficiary’s confidence in the transaction, especially when the issuing bank is in a country with higher political or economic risks.
  3. Financing: Facilitates access to pre-shipment or post-shipment financing as banks view confirmed LCs as less risky.

Cons:

  1. Cost: Adds to the costs since the confirming bank charges a fee for its confirmation.
  2. Complexity: Adds an additional layer of complexity in terms of documentation and procedures.

Relevant UCP 600 Article on Confirmation

Article 8 of UCP 600 deals with confirmation:

  • Article 8 (a): Defines the obligations of the confirming bank, stating that it undertakes to honor or negotiate if the documents comply with the terms and conditions of the credit.
  • Article 8 (b): Obligates the confirming bank to pay the beneficiary, irrespective of reimbursement from the issuing bank.

Example of a Confirmed Letter of Credit

Imagine Company A in India wants to purchase goods from Company B in Germany. Company A’s bank (issuing bank) issues an LC for $100,000 and requests a German bank (confirming bank) to confirm the LC. The confirming bank agrees and advises the confirmed LC to Company B.

  1. Company B ships the goods and presents the documents to the confirming bank.
  2. The confirming bank examines the documents and finds them compliant.
  3. The confirming bank pays Company B.
  4. The confirming bank forwards the documents to the issuing bank.
  5. The issuing bank reimburses the confirming bank after its own document examination.

In the MT700 SWIFT message, Field 49 will show CONFIRM, indicating that the LC is confirmed.

This process ensures Company B receives payment even if there are issues with Company A or its bank, as the confirming bank has guaranteed the payment.

You may also refer below Youtube video for explanation –