Article

"Where in UCP 600 is there a specific obligation for the issuing bank to reimburse the confirming bank?"

by Wangkewei (Kenny Wang)

In UCP 600 article 2, there are two definitions that draw our attention: one is "Confirming Bank", the other is "Nominated Bank". From the two definitions, a question arises: is a confirming bank a nominated bank or not? An earlier draft of the UCP 500 revision indicated that a confirming bank was also a nominated bank. Regretfully, these words disappeared in subsequent versions and in the final UCP 600. In the Commentary on UCP 600, the UCP Drafting said the following: "It should be noted that, subject to the structure of the documentary credit, a confirming bank may not be a nominated bank."

Two single definitions

The two definitions mentioned above are independent of one another, so why should we be concerned to distinguish between them? Because a definition is a formal and concise statement of the meaning of a word, phrase, etc., and when we judge what a bank's role is, the basis of that should be found in the definitions.

In different languages or situations, the same word, phrase or item maybe have different interpretations. For example, in the field of international trade, payment in advance (PIA) means a payment to the vendor before the service is performed or the commodity is received. But under Chinese foreign exchange regulations, there are two different interpretations of PIA. Therefore, a banking practitioner in China has to distinguish between the two in order to apply the term correctly.

Structure of the documentary credit

SWIFT MT700 field 41a, "Available With" concerns the bank with which the credit is available (the place for presentation) and an indication of how the credit is available. Therefore, the information about the nominated bank and compliance with UCP 600 article 6 should be stated in this field. Field 49, "Confirmation Instructions", should contain confirmation instructions for the receiver of the SWIFT message. Therefore, it can happen that the confirming bank is not a nominated bank if the receiver (assuming the receiver would like to add its confirmation to the credit) is not the bank stipulated in field 41. For example:

Example A:

41a: Bank B by payment/deferred payment/accept/negotiation

49: confirmation

The receiver of this credit is Bank B, which is requested to add its confirmation to this credit.

Example B:

41a: Bank X by payment/deferred payment/accept/negotiation

49: confirmation

The receiver of this credit is Bank C, which is requested to add its confirmation to this credit.

In Example A, the nominated bank is any bank as in the 41a field, so Bank A is the nominated bank according to the way nominated bank is defined in UCP 600. In the same way, Bank B in Example B is also a nominated bank.

Example C:

41a: Issuing Bank I by payment/deferred payment/accept

49: confirmation

The receiver of this credit is Bank D, which is requested to add its confirmation to this credit.

In Example C, only Bank X is the nominated bank according to the definition in UCP 600, whereas Bank C is a bank authorized and required to add its confirmation to the credit by the issuing bank, and this credit is restricted to Bank X.

Example D:

41a: Issuing Bank I by payment/accept

49: confirmation

The receiver of this credit is Bank D, which is requested to add its confirmation to this credit.

In Example D, the credit is a straight credit that only the issuing bank would be able to honour. According to the definition in UCP 600, there is no nominated bank in this credit at all. Therefore, Bank D is only a confirming bank, not a bank nominated to pay, incur a deferred payment obligation or create an acceptance.

Is it important or necessary that we discuss this issue? Yes, because UCP 600 stipulates the issuing bank's responsibility to reimburse the nominated bank and beneficiary in article 7; however, there are no rules for reimbursing the confirming bank.

When UCP 500 was being applied, there was no need to pay more attention to this issue for two reasons: one, UCP 500 didn't contain an article on definitions, and the nominated bank was first mentioned in sub-article 10 (b); two, the obligation of the issuing bank to reimburse the confirming bank had been laid out in sub-article UCP 500 sub-article 10 (d).

The risk

Sub-article 7 (c) in UCP 600, which updates the related rule in UCP 500, contains only part of UCP 500 article 10, namely the part that says the issuing bank must reimburse the nominated bank. The language concerning reimbursing the confirming bank has been dropped. In fact, we could not find any language in UCP 600 indicating that the issuing bank must undertake to reimburse the confirming bank.

Therefore, though evidence may be presented that a confirming bank is a nominated bank (or a special nominated bank), one could still ask: where in UCP 600 is there a specific obligation for the issuing bank to reimburse the confirming bank? If bankers cannot back up their claim for reimbursement with explicit language in the UCP, how can they convince a judge that the issuing bank has this responsibility? Consider the famous cases of Banco Santander SA vs Banque Paribas (1999) and Rabobank vs Bank of China (1999). Both Banco Santander and Rabobank lost their lawsuits because their actions did not comply with precise wording in UCP 500, even though their actions reflected common sense.

In Examples A and B, when Banks A and B honour or negotiate the documents complying with the credit, the two banks are assuming two roles at the same time - as a nominated bank and a confirming bank.

According to UCP 600 sub-article 7 (c), the issuing bank must undertake to reimburse Banks A and B. Furthermore, the reason the issuing bank does so would not be based on its identity as a confirming bank, but as a nominated bank. And if the issuing bank were forbidden to pay the credit by a local court because of fraud, Banks A and B could apply the "fraud exception" principle to plead an injunction, since they are nominated banks complying with UCP 600. Identifying them as confirming banks only permits them to honour or negotiate the complying documents presented by the beneficiary, presenter or nominated bank.

In Example C, only Bank X is the nominated bank; however, if the confirming bank, Bank C, presented the complying documents to the issuing bank, Bank C would comply with the definition of "Presenter" in UCP 600. Based on subarticle 7 (c), the issuing bank should undertake to reimburse the nominated bank, Bank X, if the complying documents were presented by Bank X, which has honoured or negotiated them with the confirming bank, Bank C. The other option would be to reimburse the beneficiary if the documents were presented to Bank C by the beneficiary directly or if Bank X didn't honour or negotiate them.

In Example D, based on sub-article 7 (a) (i), the issuing bank must honour the complying documents presented by the confirming bank, Bank D, that is a presenter for the beneficiary.

But if the issuing bank were forbidden to honour the credit by a local court due to fraud, Banks C and D couldn't apply the fraud exception principle to plead for an injunction, since they are not the nominated banks complying with UCP 600. Even though they have confirmed the credit, they are presenters only based on the definitions in UCP 600.

Covering the risk

The simplest way to resolve the ambiguity would be for ICC to clarify the situation by an opinion stating the principle that the issuing bank must reimburse the confirming bank, whether it is a nominated bank or not. Another solution, less attractive, would be for a court to decide that such a reimbursement should be made. Regretfully, there have been no ICC official opinions on this subject up to now, nor has there has there been a court case addressing it. In the meantime, there are ways to mitigate the risk. In Examples A and B, there is no problem: the risk has been covered by identifying Banks A and B as nominated banks. In this case, the confirmation is safe.

In Examples C and D, the confirming bank should communicate with the issuing bank either through SWIFT messages or other agreements in order to confirm the latter's responsibility to reimburse. Otherwise, Banks C and D should refuse to add their confirmation to the credit. Of course, it would be preferable if the issuing bank were to state its conditions for undertaking to reimburse the confirming bank in the credit.

Wangkewei (Kenny Wang) is Manager of Trade Bills Department, Bank of Tokyo Mitsubishi UFJ (China), Ltd. Shanghai Branch, China. He is also Executive Deputy Editor of the Chinese Web Magazine "International Settlement and Trade Finance (ISTF)" (www.sinobankers. com). His e-mail is Kennynuny@hotmail.com

"A confirming bank is a special nominated bank"

by Wangxuehui (English name Ofei)

Both Wangkewei, who wrote the above article, and I think the important issue is whether the confirming bank can be protected by the issuing bank, i.e., whether the confirming bank can be reimbursed fully by the issuing bank provided the documents are complying. Unfortunately, UCP 600 seems to avoid the issue. Sub-article 7 (c) only states: "An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank." This language does not make clear whether the so-called nominated bank includes the confirming bank. Therefore, it is crucial to make sure the confirming bank is a nominated bank. If it is not, this will discourage banks from accepting the issuing bank's authorization to add its confirmation.

As Wangkewei noted in his article, in the Commentary on UCP 600, the UCP Drafting Group said the following: "It should be noted that, subject to the structure of the documentary credit, a confirming bank may not be a nominated bank." This comment reminds us that we have to rethink the role of the confirming bank, especially when the confirming bank has acted with the authorization of the issuing bank. In such a case, if the issuing bank applies for an injunction from a court, will the confirming bank still be protected? This is crucial for the confirming bank.

Different roles of confirming banks

Wangkewei used several examples to question whether the confirming bank is a nominated bank. In his Examples A and B, there is no reason to doubt that the confirming bank is a nominated bank as well. What he fails to explain clearly is his Example C. In this example, it may appear that Bank X is the nominated bank and Bank C is a confirming bank. But since the confirming bank bears the same liability as the issuing bank, the beneficiary may present documents directly to Bank C instead of Bank X. If that is the case, can one still say that Bank C is not a nominated bank?

In Wangkewei's Example D, the credit is available only with the issuing bank and Bank D adds its confirmation to that of the issuing bank. Hence, Wangkewei believes there is no nominated bank under such a straight credit. In Examples C and D, won't the confirming bank be aware of the risks? Will it still add its confirmation in view of the fact that it might difficult to obtain reimbursement from the issuing bank? If one does not consider the confirming bank to be a nominated bank in these latter two examples, then I'm afraid few confirming banks will accept to add their confirmation.

UCP 600 remains silent as to whether the issuing bank must reimburse the confirming bank, but perhaps we can find answers elsewhere.

The Uniform Commercial Code

Let's consider the same question by looking at the US's Uniform Commercial Code (UCC). Article 5 -102(11) stipulates that a "Nominated person means a person whom the issuer (i) designates or authorizes to pay, accept, negotiate, or otherwise give value under a letter of credit and (ii) undertakes by agreement or custom and practice to reimburse."

Article 1-204 gives the definition of value: "Except as otherwise provided in Articles 3, 4, [and] 5, [and 6], a person gives value for rights if the person acquires them: (1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; (2) as security for, or in total or partial satisfaction of, a preexisting claim; (3) by accepting delivery under a preexisting contract for purchase; or (4) in return for any consideration sufficient to support a simple contract."' Therefore, if a confirming bank has honoured the beneficiary's complying presentation, we can say that it has given value in return for any consideration sufficient to support a simple contract. Such an action would comply with the definition of a "Nominated person" in the UCC.

Meanwhile, Article 5-102(4) in the same article states that a "Confirmer means a nominated person who undertakes, at the request or with the consent of the issuer, to honor a presentation under a letter of credit issued by another." This stipulation further emphasizes that a confirming bank is also a nominated bank. Article 5-107 further states:

"(a) A confirmer is directly obligated on a letter of credit and has the rights and obligations of an issuer to the extent of its confirmation. The confirmer also has rights against and obligations to the issuer as if the issuer were an applicant and the confirmer had issued the letter of credit at the request and for the account of the issuer.

(b) A nominated person who is not a confirmer is not obligated to honor or otherwise give value for a presentation."

Clearly, from the point of view of the UCC, the confirming bank is also a special nominated bank.

ISP98

Article 1.09 of ISP98 states: "Confirmer is a person who, upon an issuer's nomination to do so, adds to the issuer's undertaking its own undertaking to honour a standby." Therefore, with regard to ISP98, one can draw the conclusion that the confirming bank is a nominated bank. This is reinforced by Article 2.04, which states: "A standby may nominate a person to advise, receive a presentation, effect a transfer, confirm, pay, negotiate, incur a deferred payment obligation, or accept a draft." This stipulation further emphasizes that the confirming bank is a nominated person, i.e., the nominated bank.

Fraud exception

A confirming bank may face potential risks if the issuing bank applies for an injunction due to fraud by the beneficiary. Though there are no provisions on fraud in either UCP 600 or ISBP98, the implications of fraud can be extracted from laws or judicial interpretations. Wangkewei worries that Banks C and D (in his Examples C and D) could not apply the principle of the "fraud exception" to plead for an injunction, since they are not nominated banks under UCP 600. I'm afraid I do not agree. In 2005, China set up its Rules of the Supreme People's Court on Hearing Letter of Credit Dispute Cases. Article 10 of the rules states: "Provided that it ascertains the existence of a Credit fraud, a people's court shall order for suspension of the payment under the Credit or adjudicate that the payment shall be terminated, except under any of the following circumstances:

(i) the nominated person, or the authorized person of the issuing bank has made payment in good faith under the instructions of the issuing bank;

(ii) the issuing bank or its nominated person, or authorized person has accepted the bills of exchange under the Credit in good faith;

(iii) the confirming bank has made payment in good faith; or

(iv) the negotiating bank has negotiated the Credit in good faith."

Apparently, in China the confirming bank is protected by the "fraud exception" provided it acts in good faith. This article encourages the confirming bank to accept the issuing bank's authorization to add its confirmation and facilitates the use of L/Cs. I believe there are similar stipulations in other countries' commercial laws as well. Consequently, I believe that Wangkewei's worry about the confirming bank's risks in not being able to plead the fraud exception is overstated. The important question to focus on is whether the issuing bank will reimburse the confirming bank in time.

Conclusion

Though UCP 600 has no stipulation concerning whether the issuing bank must reimburse the confirming bank, I still believe the question can be settled by an agreement between the confirming bank and the issuing bank. As noted, without the promise by the issuing bank that it will definitely reimburse the confirming bank provided there is a complying presentation, the confirming bank will be unlikely to accept the issuing bank's authorization to add its confirmation. If there is an agreement, which must be made between the parties, the confirming bank will be protected. ISP98 and the UCC can serve as references here. In such a case, the confirming bank will be a special nominated bank and will be accorded the protection necessary.

Wangxuehui (English name Ofei) is a Lecturer in the Department of International Trade, School of Economics and Trade at Anhui Agricultural University in Hefei, Anhui, China. Her e-mail is ofeiliya@hotmail.com