Article

by Haluk Erdemol

I refer to the "Documentary dialogue" section in DCInsight's Oct - Dec 2009 issue in which Mr Kenny Wang and Ms Ofei discussed, in separate articles, the roles of two banks in a credit, one being a confirming bank and the other "another nominated bank", although the latter is not so referred to in both articles despite the fact that its status is recognized in UCP 600 article 8.

Both commentators appear to have shared the view that the statement reading "It should be noted that, subject to the structure of the documentary credit, a confirming bank may not be a nominated bank", which appears in the Commentary on UCP 600 under Article 12 (page 53). This, when read in conjunction with sub-article 7 (c) reading: "An issuing bank undertakes to reimburse a nominated bank ..." is said to create an ambiguity as to whether the issuing bank is responsible for reimbursing the con firming bank. Ms Ofei adds that, due to the absence of the issuing bank's definite promise to reimburse the confirming bank, this would need to be settled by an agreement between the confirming bank and the issuing bank, without which the confirming bank would remain without protection for the reimbursement. Mr Wang is also in favour of such an agreement, possibly by obtaining a message from the issuing bank confirming its responsibility to reimburse. He sees the issuance of an ICC opinion as the simplest way to resolve the ambiguity in question.

Examples

I do not agree with the views and conclusions of both commentators and submit my remarks below with reference to the examples given by Mr Wang (I have obtained the correct versions of said examples since, in the published article, they did not correlate with respective explanations, possibly due to a misprint).

Example A

41a: Any bank by ..

49: Confirm

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

Example B

41a: Bank B by ...

49: Confirm

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

Mr Wang states: "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: Bank X by ...

49: Confirm

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

Mr Wang states: "Only Bank X is the nominated bank according to the defi- nition in UCP 600, whereas Bank C is a bank authorized and requested 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 ...

49: Confirm

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

Mr Wang states: "this credit is a straight credit that only the issuing bank would be able to honour. According to the defini tion in UCP there is no nominated bank in this credit at all. Therefore, Bank D is only a confirming bank, not a bank nomi nated to pay, incur a deferred payment obligation or create an acceptance."

Disagreements

My comments on the foregoing examples and statements are as follows:

Examples A and B

According to the definition in UCP 600, the nominated bank is any bank in the case of a credit available with any bank. So Bank A is not necessarily a nominated bank unless it elected to assume the role of the nominated bank as a result of the beneficiary's preference in this regard. Presuming that it has done so, the situation would be identical to the one in Example B, which means that both Bank A and Bank B are nominated banks that are requested to add their confirmation to these credits. The commentators agree that in these two examples there is no ambiguity whether the issuing banks would reimburse the confirming banks, since they are also the nominated banks and, under sub-article 7 (c), the issuing bank must reimburse them.

Example C

According to both commentators, the ambiguity, which is the subject of their articles, emerges here where the confirming bank is different from the nominated bank. Their rationale is that the issuing bank, under sub-article 7 (c), is responsible to reimburse the nominated bank, but that an identical responsibility towards the confirming bank is nowhere to be found in UCP 600.

In my view, the foregoing rationale originates from the commentators' failure to consider both banks as nominated banks vis-à-vis the issuing bank. In this example, it should be noted that the issuing bank has, in fact, nominated both banks to honour or negotiate, with an additional nomination to the confirming bank to add its confirmation to the credit. Can one say that the confirming bank cannot be considered as a nominated bank because it is not named in field 41a? I do not think so.

Identical to the situation of the nominated bank, the credit is available also at the counters of the confirming bank since, in order to discharge its obligation arising from its confirmation, the confirming bank is responsible for examining the documents it received from the other nominated bank if the latter has honoured or negotiated as a result of its acting on its nomination. The chain of this process is clearly reflected in sub-article 8 (c), which appears to have been disregarded by the commentators.

In this regard, the confirming bank is the nominated bank which has confirmed the credit, and the nominated bank named in the Field 41a is the "other nominated bank". Hence, as far as reimbursement is concerned, against a com pliant presentation the so-called other nominated bank is reimbursed by the confirming bank, which, in turn and under its status as the nominated bank that con- firmed the credit, is reimbursed by the issuing bank. It appears that in their rationale the commentators have taken into consideration only the issuing bank's reimbursement obligation towards the "other" nominated bank, not the confirming bank's obligation towards the other nominated bank and the latter's getting reimbursed by the issuing bank under its status as the bank nominated to confirm.

Example D

This example reflects a badly issued credit. When an issuing bank nominates a bank to confirm a credit, the credit must be available with the confirming bank along with an expiry date in order to be valid at the latter's place or country. Otherwise, what would be the role of a confirming bank if only the issuing bank would be able to honour? Mr Wang states: "According to the definition in UCP 600, there is no nominated bank in this credit at all." I do not agree. There is a nominated bank; it is the issuing bank itself by the definition in UCP 600.

Conclusion

In my opinion, there is no ambiguity regarding an issuing bank's responsibility balancing the strict compliance to reimburse a confirming bank. The statement quoted from the Commentary on UCP 600 means that a confirming bank may not be a nominated bank vis-à-vis the beneficiary, and it has been misinterpreted by the commentators at the cost of disregarding the relationship between the confirming bank and another nominated bank set out in article 8.

Haluk Erdemol is a member of the ICC Banking Commission and ICC's Turkish National Committe. His e-mail is herdemol@yahoo.com