Justification for Adding Confirmation

moyaz · Post by **moyaz** » Fri Oct 29, 2010 10:13 pm

If a credit stipulates that the issuing bank will reimburse the negotiating bank upon presentation of complying docs at issuing bank's counter, then what is the justification for adding confirmation to the LC?

abrar · Post by **abrar** » Sat Oct 30, 2010 1:04 pm

It is unlikely that any nominated bank being instructed to add confirmation would ever confirm under such circumstances. The nominated bank which is being instructed to add confirmation would only consider such a request if it is able to either debit an account, or claim reimbursement, certifying compliance with LC terms and despatch of documents to the issuing bank. However, although the reimbursement could also come from the issuing bank, the nominated bank would never confirm on the basis of the issuing bank having received the documents and then determining compliance.

It should also be remembered that as per Art.35 whether confirmed or not, the issuing bank is bound to honor a nominated bank, even if the documents do not arrive at the issuing bank's counters due to loss in transit. The only exception to this is if the LC is payable at the issuing bank's counters. But this would of course, defeat the purpose of confirmation.

iLC · Post by **iLC** » Sat Oct 30, 2010 7:25 pm

personally i have never seen a Confirmed letter of credit without allowing the confirming bank to reimburse itself. however theoritycally there is a no problem. this is a good example where theory is over written by reality

cristiand969 · Post by **cristiand969** » Wed Nov 03, 2010 4:02 pm

This reimbursement clause is invariably stated when a credit is available by ONLY BY NEGOTIATION with confirming bank. Consistent with the term of negotiation the issuing bank inserted the correct reimbursement clause and I would like to quote this from ICC Banking Commission Opinion TA569 : A letter of credit that is stated to be available by negotiation with a nominated bank, should not include any reference to claiming reimbursement from a reimbursing bank or indeed any reference to the debiting of the issuing bank's account held with the nomincated bank. This form of structure is a payment letter of credit. A negotiation letter of credit should specify that the nominated bank is to send documents to the issuing bank and upon issuing bank ascertaining that it complies with the terms and conditions of the credit, the issuing bank will reimburse in accordance with the instructions of the negotiating bank.
Hope it helps
Cheers
Cristian

S.Khalili · Post by **S.Khalili** » Thu Nov 04, 2010 12:48 pm

All the three answer are diverse in nature hence confusion. Whis is the correct answer? In my humble opinion answer of M/S Christian969's appear to be correct.

Expert opinion on correct answer is requestd, pls.

abrar · Post by **abrar** » Thu Nov 04, 2010 4:58 pm

Not necessarily any conflict between the responses.

From my point of view, I was addressing the original question, which from my interpretation, queried why a negotiating bank would want to add confirmation to an LC which is reimbursable only on receipt and examination of documents by the issuing bank. My view was that a bank being requested to add confirmation would only do so, provided it is in a position to obtain direct reimbursement, or authority to debit, against examination of documents to be in compliance.

The other responses referred to the concept of "negotiation"vs "payment", under which, for an unconfirmed LC[/i], it is made clear that under an LC available by negotiation, a negotiating bank must pay first and then wait for documents to be received and examined by the issuing bank, before payment is made/authorised by the issuing bank. Payment by the nominated bank is effected with recourse. The final settlement may be effected by debit of the issuing bank's account. or through claiming reimbursement from a third party, but the important point is that this must be done only after the issuing bank finds the documents to be compliant. Under an LC available by "payment" with the nominated bank, the issuing bank must provide the nominated bank with direct reimbursement provision.

It can be seen from this that where a bank is requested to add confirmation, whether under a "negotiation" credit, or a "payment" credit, since the bank would be entering into a separate financial commitment to the beneficiary, it will only be prepared to add confirmation, provided it has the means to reimburse itself at "sight" (or incur a future payment obligation) independent of the issuing bank providing authority to the "confirming" bank to do so. This can be through the process of the nominated bank claiming reimbursement from a third party, or from the issuing bank, or by debit to the issuing bank's account with the nominated bank.

moyaz · Post by **moyaz** » Wed Nov 10, 2010 11:53 pm

Actually it is the usefulness of adding confirmation which I am concerned with. Please tell me what makes the confirmed LC a better one if the docs are not complying, and what makes the not confirmed LC a worse one if the docs are complying...

cristiand969 · Post by **cristiand969** » Thu Nov 11, 2010 4:32 pm

I thought we were talking about of confirmation where it is applicable , i.e. complying presentation made to confirming bank counters.
Your latest scenarios seem to be irrelevant for this topic. However it is self understood that a complying presentation binds at least one bank to effect payment (issuing bank) .

abrar · Post by **abrar** » Thu Nov 11, 2010 4:45 pm

moyaz wrote:Actually it is the usefulness of adding confirmation which I am concerned with. Please tell me what makes the confirmed LC a better one if the docs are not complying, and what makes the not confirmed LC a worse one if the docs are complying...

If the documents are not complying, the undertaking from the confirming bank (and the issuing bank) and therefore, the benefit is lost, and so you are in no better position than if the LC had not been confirmed.

In respect of a complying presentation under an unconfirmed LC, there is no undertaking of payment by any bank other than the issuing bank, so of course, this position is not advantageous to the beneficiary if it is looking to speed up payment from a bank in its own country; mitigate FX risks; cross-border risks, political risks, financial risk of the issuing bank, e.t.c.

sansahay · Post by **sansahay** » Sun Nov 14, 2010 11:31 am

abrar wrote:
moyaz wrote:Actually it is the usefulness of adding confirmation which I am concerned with. Please tell me what makes the confirmed LC a better one if the docs are not complying, and what makes the not confirmed LC a worse one if the docs are complying...
If the documents are not complying, the undertaking from the confirming bank (and the issuing bank) and therefore, the benefit is lost, and so you are in no better position than if the LC had not been confirmed.

In respect of a complying presentation under an unconfirmed LC, there is no undertaking of payment by any bank other than the issuing bank, so of course, this position is not advantageous to the beneficiary if it is looking to speed up payment from a bank in its own country; mitigate FX risks; cross-border risks, political risks, financial risk of the issuing bank, e.t.c.

==> Abrar's response could not have been better stated. I may add that when a bank confirms a LC, it steps into the shoes of the opening bank and takes on various risks such as country risk on it own account. Hence the premium charged for confirmation. However, as Abrar rightly points out, the benefits of confirmation accrue to the beneficiary only on submission of credit complied documents.