Documentary Credit World

 UCP600 Article 8 relates to a confirming bank’s undertaking where an issuing bank has requested or authorized another bank to add its confirmation to a letter of credit. When an issuing bank does not request or authorize an advising or nominated bank to add its confirmation, but the beneficiary is seeking an undertaking from its bank, it may ask for a “silent confirmation”. It is silent to the issuing bank which did not specifically request a bank to add its confirmation.  It represents a bank’s agreement to “honour” or “negotiate” (both terms defined in UCP600 Article 2) a beneficiary’s complying presentation under an LC.

In Commonwealth Bank of Australia v. Greenhill International Pty Ltd,₁  the Full Court of the Supreme Court of South Australia determined that silent confirmations fall outside UCP600 and are governed purely by the express and implied terms agreed to by the silent confirming bank and the beneficiary.  This may or may not be correct. Let’s explore.

Based on my knowledge of the industry, silent confirmations, or commitments to either pay, purchase, honour or negotiate, were widely common but not discussed in the UCP rules, in any manner. However, beginning with UCP500 while the term silent confirmation was not discussed, Article 10(c) afforded protections to a nominated bank:

Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Bank’s receipt of and/ or examination and/or  forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. [emphasis added]

Under UCP500, a nominated bank which provided its undertaking to a beneficiary and then, depending on an LC’s terms, either: paid, incurred a deferred payment undertaking, accepted drafts; or negotiated, is afforded many of the same protections that are provided to a confirming bank. While the term “Silent Confirmation” came about via marketing efforts to convey what service a bank was providing to a beneficiary under prior UCP versions (400 and earlier), UCP500 brought the practice to light and gave nominated banks protections for providing the service so long as the issuing bank nominated it. When aligned with UCP, a silent confirmation is a commitment for a nominated bank to “honour” or “negotiate” (terms defined in UCP600 Article 2).  When not following UCP mandates, it remains separate and apart; a side agreement between only the beneficiary and the bank providing its silent confirmation.

The major issuers of LCs which did not request banks to add their confirmation were banks in Asia and the Middle East. British banks (with their Head Offices in the UK) mostly filled the void and they had representative offices in these locations in the past. To support their beneficiary clients they would provide their silent confirmation. However, with the imposition of sanctions on certain issuing banks and the British banks’ closure of their representative offices in certain places, such silent confirmation undertakings became less common.

Silent confirmation fees were a reliable source of income for the banks which provided the service and beneficiaries continue to have a need. Since 2022, the current markets being sought by beneficiaries for silent confirmations are with LC issuers in Asia.

The 2023 edition of ICC’s annual Trade Register report₂  suggests in its trade data for 2022 that default rates for export LC payments increased slightly. In my opinion, this may increase demand for silent confirmations.

What  are  the  benefits of silent confirmation to  the  beneficiary?

The advantages of silent confirmation available to beneficiaries often include:

1. Mitigates issuing bank and issuing bank’s country risks;
2. Allows a beneficiary to honour or negotiate complying document presentations without recourse or with limited recourse (discussed later in this article);
3. Ensures their bank will examine a presentation locally providing the peace of mind that its presentation complies with the terms and conditions of the credit prior to the forwarding of documents by the silent confirming bank to the issuing bank;
4. Improved cash flow; a silent confirmer may pay before a presentation’s due date on a discounted/prepaid  basis.

Is  the  compliance review process undertaken by the  silent confirming bank different when silently confirming such  credits which are  not  recognized under  UCP?

In my opinion, silent confirming banks perform a more stringent review of the beneficiary, its line of business, and conduct a check of negative news in public domains. Silent confirming banks also review the past performance of transactions between the beneficiary and the applicant (if any), including a review of past presentations. As regards to the nature of underlying transactions they back, silent confirming banks tend to prefer goods and services that support the infrastructure of the importing country.

What  are  the  key  factors for  silent confirming banks to  consider?

1. A silent confirming bank should be a nominated bank or the LC should be freely available with any bank. This is an important requirement as then that bank is a party to the transaction once it honours or negotiates. UCP600 Article 12(a) states: “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.” This provides protections to the bank which elects to honour or negotiate. A silent confirmer is truly acting outside of UCP and will not have any of its protections, including presentations which are lost in transit between the silent confirmer and the issuing bank.
2.  Most often a silent confirming bank is the first advising bank. However, another advising bank may provide its silent confirmation. Any second advising bank should consider requesting the issuing bank to authenticate the LC and provide an accounting of all the amendments to the LC as of the date of presentation of documents by the beneficiary.
3. Silent confirming banks will follow its internal policies to ensure that such undertaking is an approved product with necessary “sign off” from parties such as the “Product Head”, compliance, risk, and legal, and ensure a thorough review of sanction laws relative to the two countries. Moreover, the silent confirming bank should also thoroughly consider the type of goods called for under the credit. (Goods that are supportive of a country’s infrastructure such as roads, bridges, dams, canals, railways, and machinery should be given top priority.)
4. Silent confirming banks should also take into consideration the expiry dates, verify parties (applicant, shipping company), and verbiage of the LC including, but not limited to, sanction clauses.
5. The expiry date and place of presentation should be local to the bank adding its silent confirmation.
6. Each LC’s tenor and reimbursement terms: Normally, terms of the agreement would obligate the silent confirming bank to pay under a sight LC after a predefined period and taking into account the reimbursement terms, the date of receipt of the documents by the issuing bank and its subsequent determination of the documents to be complying and expected reimbursement
   date.

Is  ‘silent confirmation’ a  legal contract?

A “silent confirmation” is a commitment to honour or negotiate a complying presentation and whether contract law or other specific LC law should be applied will depend largely on its governing law and how the agreement is structured.  The agreement between the beneficiary and the silent confirming bank often remains confidential between those two parties and is most often subject to the applicable law of the silent confirming bank. This product should only be offered to beneficiaries which are customers who are fully on-boarded and have executed a Master Agreement. Agreement considerations should cover: honour or negotiation with/without  recourse, each LC’s tenor and reimbursement conditions pre-acceptance financing (if allowed), and post-acceptance financing (if any).

In most cases, the beneficiary will pursue a silent confirmation by contacting several banks where it has a relationship to ascertain banks’ willingness to undertake a silent confirmation and their pricing. The decision of a beneficiary in selecting a bank involves a host of factors as it does not solely depend upon pricing, but also depends upon other considerations such as the speed of document checking, full or limited right of recourse by the bank, and other ancillary services.

Verbiage of  the  silent confirmation agreement

The wording of the agreement is vital in confirming an LC on a silent basis. Different banks have different verbiage covering the agreement for silent confirmation. Some of the important points that the agreement would address are:

1. Some banks will not take document examination risk. The agreement would essentially state that once documents are received by the issuing bank and found to be in order by the issuing bank, then it will pay only after XX days have passed from the date of receipt of documents by the issuing bank and/or  acceptance of the documents has been provided by the issuing bank to them. It is noted that no examination occurs by the bank adding its silent confirmation; it will lose its UCP protections.
2.  Limiting recourse in the event that payment is not made by the issuing bank due to a quality dispute between the parties and/or  due to a court injunction restraining the issuing bank from making payment.
3. At the time of its presentation of documents, the beneficiary acknowledges it has no knowledge of any court injunction or interlocutory proceeding that could affect the LC.
4. The beneficiary has the right to draw under the LC and all signatures to the documents including financial documents are signed by an authorized and empowered representative.
5. The beneficiary will not accept any amendment to the LC received after signing the agreement without the written consent of the silent confirming bank.
6.  By its presentation of documents, the beneficiary asserts that contractual obligations have been performed and no dispute exists in terms of quality, quantity, etc, which could restrain the issuing bank from making payment by virtue of quality dispute/court  injunctions.

When  should  honour  or  negotiation happen?

Negotiation can happen anytime but in any event no later than the reimbursement date by the issuing bank.

UCP600 Article 2 defines “honour” and “negotiation”. Negotiation can have sight or time requirements and does NOT mean that value should be provided immediately upon the determination of a presentation’s compliance by the nominated bank. Instead, negotiation means that the negotiating bank pays or undertakes to advance funds to the beneficiary by agreeing to a funding date set at or before the anticipated reimbursement date. The UCP600 meaning of negotiation was affirmed in Fortis Bank v. Indian Overseas Bank₃  where Fortis Bank (nominated bank) paid funds according to the agreed date. IOB (issuing bank) contested that Fortis did not negotiate the documents and stated:

1.  in no case does it appear that Fortis (as they were obliged to do under the terms of the LC) paid or negotiated on sight;
2. in a number of cases, no negotiation was made until more than five days after presentation of the documents, and negotiation was thus outside the terms of UCP Article 14(b); and
3. in a number of other cases, payment was not made until after IOB had rejected the documents and therefore after the date for reimbursement under the LC. Such a payment would be contrary to the requirements for a negotiation in UCP Article 2.

However, the Judge rejected those arguments and stated: “Under the UCP the (issuing bank’s) obligation to reimburse the nominated bank arose if it honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. In the present case, Fortis did negotiate … a complying presentation and did forward the documents to IOB. What mattered was the fact of honouring or negotiating a complying presentation.”

Non-payment by the  issuer

What happens when payment is not received by the beneficiary under a sight LC or on the due date under a usance credit that was silently confirmed? It depends on whether the bank which added its silent confirmation has done so in accordance with UCP600 Article 12(a). If a silent confirmer is not following the UCP in cases where, say, an LC is restricted to/available  only with the issuing bank, then a silent confirming bank must be aware that it has no rights to challenge the issuer for non-payment. However, under the agreement, the beneficiary may be mandated to take legal action against the issuer while the legal cost would be borne by the silent confirming bank.  Often the silent confirming bank will subrogate the rights of the beneficiary to sue to issuing bank. For example, in Greenhill International,₄  the relevant term provided:

“By accepting this offer, the company agrees to: …

Assign and subrogate all rights and proceeds to which you are entitled or will become entitled under the relevant Documentary Credit to [silent confirming bank], including (but not limited to) your rights against the Issuing Bank, all title and interest in the documents under the Credit and goods to which the documents relate and all proceeds of sale of the goods ... .”

Conclusion

The silent confirmation market is still active and prevalent for LCs in Asian countries as silent confirmation is one of the means for a beneficiary to mitigate issuing bank and country risk when it does not want other banks to confirm its credit. Silent confirmation has also proved to be a good source of income for banks that have successfully undertaken such transactions. When the transaction runs smoothly, it is beneficial to the silent confirming bank and the beneficiary. Conversely, if the transaction is improperly handled, then legal costs would exceed the income and likely bring reputational risk to the silent confirmer.

* Zahoor Dattu is a Senior Trade Services Specialist at Wells Fargo Bank NA, USA. The views expressed are those of the author and do not represent the views of Wells Fargo Bank.

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