A bank has confirmed an L/C in accordance with issuing bank instructions: "Pls advise L/C adding your confirmation". The beneficiary has accepted L/C in question but rejected the confirmation.
Question: Which party is to pay the confirmation commission if according to L/C terms:
1) commission and charges are for the beneficiary's account;
2) commission and charges are for applicant's account.
about commissions under confirmed L/C
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DmitriyDorofeev
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hatemshehab
- Posts: 220
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about commissions under confirmed L/C
We need more information on this. Did the beneficiary reject confirmation upon advising of the credit? This would mean that the credit was not really confirmed by the issuing bank. The bank advised his willingness to confirm the credit but the beneficiary rejected that. There is no issue of confirmation charges in this case.
Banks, generally, do not confirm and even advise credits unless they collect their charges from the beneficiary’s account if the credit so stipulate
Anyway please remember that article 18 (c) provides:
ii A party instructing another party to perform services is liable for any charges, including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions.
ii. Where a Credit stipulates that such charges are for the account of a party other than the instructing party, and charges cannot be collected, the instructing party remains ultimately liable for the payment thereof.
As for if these charges are for applicant then article 18
a. Banks utilising the services of another bank or other banks for the purpose of giving effect to the instructions of the Applicant do so for the account and at the risk of such Applicant.
Banks, generally, do not confirm and even advise credits unless they collect their charges from the beneficiary’s account if the credit so stipulate
Anyway please remember that article 18 (c) provides:
ii A party instructing another party to perform services is liable for any charges, including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions.
ii. Where a Credit stipulates that such charges are for the account of a party other than the instructing party, and charges cannot be collected, the instructing party remains ultimately liable for the payment thereof.
As for if these charges are for applicant then article 18
a. Banks utilising the services of another bank or other banks for the purpose of giving effect to the instructions of the Applicant do so for the account and at the risk of such Applicant.
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AbdulkaderBazara
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about commissions under confirmed L/C
Although I agree with Hatem that generally banks don’t add confirmation to the LC unless they collect their charges or beneficiary agrees to have such charges deducted from proceeds at the time of settlement, problems as indicated in the query may arise.
If the bank adds its confirmation to a credit and the charges are on applicant’s account, normally, there should not be any problem. The beneficiary would rarely request for deletion as long as somebody else pays the charges. However, when the charges is to be borne by the beneficiary following two scenarios may occur:
1)The LC may expire un-utlized. In this case, usually, the beneficiary ignores the confirming bank’s claim for the confirmation charges. As stated by Hatem, by virtue of article 18c the issuing bank has to then pay the confirming bank.
2)Upon receipt of the LC, the beneficiary may advise the confirming bank that it does not need the confirmation and thus doesn’t want to incur the associated charges. The confirming bank may, however, state that it has added its confirmation and must be paid. If this happens, the issuing bank may not have a way out except to negotiate the charges with the confirming bank since, in principles, confirmation is no more required and would not be extended for the lifetime of the credit.
Confirming banks that insists for payment of their charges usually argue that they have done some work, like studying the financials of the issuing bank, rating of the issuing bank’s country, established lines etc and they have to be compensated.
To avoid being in such situation, some bank’s incorporate a clause similar to the following instead of an outright request to the confirm and advise the LC to beneficiary:
Quote
You may add your confirmation to the LC provided beneficiary pays your charges.
Unquote
If the bank adds its confirmation to a credit and the charges are on applicant’s account, normally, there should not be any problem. The beneficiary would rarely request for deletion as long as somebody else pays the charges. However, when the charges is to be borne by the beneficiary following two scenarios may occur:
1)The LC may expire un-utlized. In this case, usually, the beneficiary ignores the confirming bank’s claim for the confirmation charges. As stated by Hatem, by virtue of article 18c the issuing bank has to then pay the confirming bank.
2)Upon receipt of the LC, the beneficiary may advise the confirming bank that it does not need the confirmation and thus doesn’t want to incur the associated charges. The confirming bank may, however, state that it has added its confirmation and must be paid. If this happens, the issuing bank may not have a way out except to negotiate the charges with the confirming bank since, in principles, confirmation is no more required and would not be extended for the lifetime of the credit.
Confirming banks that insists for payment of their charges usually argue that they have done some work, like studying the financials of the issuing bank, rating of the issuing bank’s country, established lines etc and they have to be compensated.
To avoid being in such situation, some bank’s incorporate a clause similar to the following instead of an outright request to the confirm and advise the LC to beneficiary:
Quote
You may add your confirmation to the LC provided beneficiary pays your charges.
Unquote
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
about commissions under confirmed L/C
Abdulkader
Just for the sake of discussion and to keep a fair balance this is a note to the confirming bank.
What if the to-be-confirming bank approached the beneficiary upon advising the L/C to ascertain of his willingness to confirm the credit and the beneficiary gave his approval for that however later on the beneficiary failing to utilize the L/C did not indemnify the bank for his confirmation charges? What would be the effect of your phrase “You may add your confirmation to the LC provided beneficiary pays your charges” is the issuing bank liable for reimbursing the confirming bank for such charges? It could be that the beneficiary abstained from paying all charges to the confirming bank; would that entitle the confirming bank to claim all his charges including the confirmation charges?
I believe that in view of your phrase article 18 c (ii) is not applicable for the confirmation charges only but the same article will remain in force for other charges and the issuing bank will remain liable for those charges towards the confirming bank.
Although I do not practically believe that this will be a cause of serious concern to the banks and that it will give rise to debate, however one do not know what may come next after seeing many trivial issues raised and debated for several months.
See how dangerous you could be if the confirming bank did not take note of this.
Regards
Hatem
Just for the sake of discussion and to keep a fair balance this is a note to the confirming bank.
What if the to-be-confirming bank approached the beneficiary upon advising the L/C to ascertain of his willingness to confirm the credit and the beneficiary gave his approval for that however later on the beneficiary failing to utilize the L/C did not indemnify the bank for his confirmation charges? What would be the effect of your phrase “You may add your confirmation to the LC provided beneficiary pays your charges” is the issuing bank liable for reimbursing the confirming bank for such charges? It could be that the beneficiary abstained from paying all charges to the confirming bank; would that entitle the confirming bank to claim all his charges including the confirmation charges?
I believe that in view of your phrase article 18 c (ii) is not applicable for the confirmation charges only but the same article will remain in force for other charges and the issuing bank will remain liable for those charges towards the confirming bank.
Although I do not practically believe that this will be a cause of serious concern to the banks and that it will give rise to debate, however one do not know what may come next after seeing many trivial issues raised and debated for several months.
See how dangerous you could be if the confirming bank did not take note of this.
Regards
Hatem
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
about commissions under confirmed L/C
Hatem,
May interpretation to the clause is as follows:
1) The confirming may add its confirmation after obtaining the consent of the beneficiary.
2) The confirming bank has to either obtain its charges up front from the beneficiary or come into agreement with beneficiary to collect such charges at later stage. This agreement, in relation to the collection of the confirmation charges, is between the confirming bank and the beneficiary and is separate and independent of the credit.
3) Pursuant to article 18c, in such LC's, the confirming bank may claim, from the issuing bank, all its charges not forthcoming from the beneficiary who has not utilized the letter of credit except the confirmation charges. The confirming bank may also claim, from the issuing bank, its unpaid charges, except the confirmation charges, if the beneficiary has either directly approached the issuing bank or utilized the service of any other bank in presentation of documents to the issuing bank.
May interpretation to the clause is as follows:
1) The confirming may add its confirmation after obtaining the consent of the beneficiary.
2) The confirming bank has to either obtain its charges up front from the beneficiary or come into agreement with beneficiary to collect such charges at later stage. This agreement, in relation to the collection of the confirmation charges, is between the confirming bank and the beneficiary and is separate and independent of the credit.
3) Pursuant to article 18c, in such LC's, the confirming bank may claim, from the issuing bank, all its charges not forthcoming from the beneficiary who has not utilized the letter of credit except the confirmation charges. The confirming bank may also claim, from the issuing bank, its unpaid charges, except the confirmation charges, if the beneficiary has either directly approached the issuing bank or utilized the service of any other bank in presentation of documents to the issuing bank.
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
about commissions under confirmed L/C
Extremely perfect, this is exactly what I was suggesting. In fact I just wanted to clarify this position to the banks who receive such credits containing the phrase you mentioned.
In line with your point 3, I always prefer to state, “unless otherwise stated herein, this credit is subject to UCP ……” this is just to reiterate the fact that some UCP articles have been superceded.
Best regards
In line with your point 3, I always prefer to state, “unless otherwise stated herein, this credit is subject to UCP ……” this is just to reiterate the fact that some UCP articles have been superceded.
Best regards