If we admit that sub articles 10c and 10d allow implicitly a nominated bank to undertake to pay, what are then the risks of a silent confirmation that are not covered by the UCP500?
Antoine Samaha
Silent Confirmation
Silent Confirmation
Dear Antoine,
silent confirmation it isn't a confirmation, technical speaking.
a bank that decides to add its silent confirmation act without having the UCP500 protection and consequently cannot invoke art.9b and 9d of UCP500. you can say that the silent confirmation is much more a some kind of guarantee to pay against complying docs.
the risk covered is related only to the bank and the beneficiary.
often (if not always) a bank adding a silent confirmation act so based on a prior agreement between it and the bnf,agreement that is made to protect the bank as much as possible against some risks.
regards,bogdan
silent confirmation it isn't a confirmation, technical speaking.
a bank that decides to add its silent confirmation act without having the UCP500 protection and consequently cannot invoke art.9b and 9d of UCP500. you can say that the silent confirmation is much more a some kind of guarantee to pay against complying docs.
the risk covered is related only to the bank and the beneficiary.
often (if not always) a bank adding a silent confirmation act so based on a prior agreement between it and the bnf,agreement that is made to protect the bank as much as possible against some risks.
regards,bogdan
Silent Confirmation
Antoine,
You will find some discussion on the subject of silent confirmation in the General Discussion Forum under the heading ‘silent confirmation’, the last post being dated 11 Sep. 06.
The ultimate risk of giving -without the express or implied authority of the issuing / confirming bank (the ‘obligor’)- an undertaking to settle a complying presentation is that the silently confirming bank may not be able to claim -in its own right- any rights under the credit against the obligor(s) and have to rely either on an assignment of the beneficiary’s rights against the obligor(s) or even the beneficiary taking action itself against the obligor(s) on behalf of the silently confirming bank.
Whether or not sub-Art 10(c) (I cannot see 10(d) is relevant) gives a nominated bank an implied authority to ‘silently confirm’ at the obligor’s ‘risk’ I would not like to say. To me, the prudent draw up their documentation on the basis that it might not.
Regards, Jeremy
You will find some discussion on the subject of silent confirmation in the General Discussion Forum under the heading ‘silent confirmation’, the last post being dated 11 Sep. 06.
The ultimate risk of giving -without the express or implied authority of the issuing / confirming bank (the ‘obligor’)- an undertaking to settle a complying presentation is that the silently confirming bank may not be able to claim -in its own right- any rights under the credit against the obligor(s) and have to rely either on an assignment of the beneficiary’s rights against the obligor(s) or even the beneficiary taking action itself against the obligor(s) on behalf of the silently confirming bank.
Whether or not sub-Art 10(c) (I cannot see 10(d) is relevant) gives a nominated bank an implied authority to ‘silently confirm’ at the obligor’s ‘risk’ I would not like to say. To me, the prudent draw up their documentation on the basis that it might not.
Regards, Jeremy
Silent Confirmation
I concluded that the silent confirmation agreement should include :
1. benef's assignment of his rights of claim in favour of the silent confirmer
2. a clause that protects the silent confirmer from non payment due to fraud or commercial/legal disputes between the applicant and the benef. or the benef and other third parties.
Regards
Antoine Samaha
1. benef's assignment of his rights of claim in favour of the silent confirmer
2. a clause that protects the silent confirmer from non payment due to fraud or commercial/legal disputes between the applicant and the benef. or the benef and other third parties.
Regards
Antoine Samaha
Silent Confirmation
Antoine,
A nominated bank may be tempted to add silent confirmation to the credit taking comfort from the issuing bank’s authority to reimburse subject to the nominated bank taking up complying documents, but I agree with Jeremy it does imply an authority to “silently confirm” at the obligor’s risk. There are many risks associated with silent confirmation, I have tried to list a view but this could be exhaustive depending on the law of the land.
- Insolvency of the issuing bank prior to presentation;
- Non-repatriation of funds resulting from political unrest or foreign exchange moratorium;
- The issuing bank may use the proceeds to offset its debt against the beneficiary;
-There is possibility of a claim arising from the documentary credit being attached by a creditor of the beneficiary.
Regards
Khalid
A nominated bank may be tempted to add silent confirmation to the credit taking comfort from the issuing bank’s authority to reimburse subject to the nominated bank taking up complying documents, but I agree with Jeremy it does imply an authority to “silently confirm” at the obligor’s risk. There are many risks associated with silent confirmation, I have tried to list a view but this could be exhaustive depending on the law of the land.
- Insolvency of the issuing bank prior to presentation;
- Non-repatriation of funds resulting from political unrest or foreign exchange moratorium;
- The issuing bank may use the proceeds to offset its debt against the beneficiary;
-There is possibility of a claim arising from the documentary credit being attached by a creditor of the beneficiary.
Regards
Khalid
-
KimChristensen
- Posts: 404
- Joined: Fri Apr 05, 2019 5:21 pm
Silent Confirmation
Dear Antione,
Not to try to confuse you, but I guess that I see it a bit differently.
My starting point would be the UCP 500 sub-article 10 (c) which gives the nominated (non-confirming) bank the possibility to agree the level of its commitment with the beneficiary.
Then I would look to sub-article 9(a) which would protect a nominated bank that acts in accordance with its nomination.
Thirdly I would turn to Sub-article 9(d)(i) which reads:
Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary.
This means that a non-confirming nominated bank have no saying over amendments.
So what does this mean: Well first of all – even though you confirm “silent” you may still be protected by the UCP 500. So in far the most cases I see only minor differences.
The differences that I see are the following:
1) What is in fact a silent confirmation?
If you confirm in accordance with the UCP 500, the “confirmation” is defined by the rules. The silent confirmation is not covered by the UCP 500 so you may need to agree in specific exactly what you undertake to do (Are you obliged to examine the documents? Etc).
2) Amendments
You need to agree with the beneficiary that he/she is not permitted to accept amendments until your approval.
3) The I agree with Khalid that in case of a foreign exchange moratorium your position may be better in case of a confirmed LC. This is however very very rare. The only examples I know of reaches back to the seventies.
As for Khalid’s points in general I would like to comment:
- Insolvency of the issuing bank prior to presentation;
I am not sure I see a difference there. If the issuing bank can not pay – then it can not pay, regardless if the LC is confirmed or not. This would most likely be what the confirmation covers (silent or no): you take this exact risk.
(as such I would accept the point that confirmed LCs may have a higher priority in case on insolvency – hence are paid first, but again this is very theoretical – and as far as I know the examples are very old and rare).
- Non-repatriation of funds resulting from political unrest or foreign exchange moratorium;
See comments above
- The issuing bank may use the proceeds to offset its debt against the beneficiary;
This would not be in line with the UCP 500 if e.g. the bank has negotiated (for example paid to the beneficiary), that I would surely think that the bank is protected by the UCP 500
-There is possibility of a claim arising from the documentary credit being attached by a creditor of the beneficiary.
Again if proceeds paid by a nominated bank in accordance with its nomination, then I would think that the bank was (or should be) protected against such actions.
So in my mind when you do silent confirmations you must mainly consider the following:
1) Do I accept the risk on the issuing bank?
2) What is my role in the LC – am I nominated or not?
3) How to structure the agreement with the beneficiary – should it be “I hereby give you an undertaking similar to that of a confirmation authorized by the issuing bank” – or something else?
Long one. So sorry.
Best regards
Kim
Not to try to confuse you, but I guess that I see it a bit differently.
My starting point would be the UCP 500 sub-article 10 (c) which gives the nominated (non-confirming) bank the possibility to agree the level of its commitment with the beneficiary.
Then I would look to sub-article 9(a) which would protect a nominated bank that acts in accordance with its nomination.
Thirdly I would turn to Sub-article 9(d)(i) which reads:
Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary.
This means that a non-confirming nominated bank have no saying over amendments.
So what does this mean: Well first of all – even though you confirm “silent” you may still be protected by the UCP 500. So in far the most cases I see only minor differences.
The differences that I see are the following:
1) What is in fact a silent confirmation?
If you confirm in accordance with the UCP 500, the “confirmation” is defined by the rules. The silent confirmation is not covered by the UCP 500 so you may need to agree in specific exactly what you undertake to do (Are you obliged to examine the documents? Etc).
2) Amendments
You need to agree with the beneficiary that he/she is not permitted to accept amendments until your approval.
3) The I agree with Khalid that in case of a foreign exchange moratorium your position may be better in case of a confirmed LC. This is however very very rare. The only examples I know of reaches back to the seventies.
As for Khalid’s points in general I would like to comment:
- Insolvency of the issuing bank prior to presentation;
I am not sure I see a difference there. If the issuing bank can not pay – then it can not pay, regardless if the LC is confirmed or not. This would most likely be what the confirmation covers (silent or no): you take this exact risk.
(as such I would accept the point that confirmed LCs may have a higher priority in case on insolvency – hence are paid first, but again this is very theoretical – and as far as I know the examples are very old and rare).
- Non-repatriation of funds resulting from political unrest or foreign exchange moratorium;
See comments above
- The issuing bank may use the proceeds to offset its debt against the beneficiary;
This would not be in line with the UCP 500 if e.g. the bank has negotiated (for example paid to the beneficiary), that I would surely think that the bank is protected by the UCP 500
-There is possibility of a claim arising from the documentary credit being attached by a creditor of the beneficiary.
Again if proceeds paid by a nominated bank in accordance with its nomination, then I would think that the bank was (or should be) protected against such actions.
So in my mind when you do silent confirmations you must mainly consider the following:
1) Do I accept the risk on the issuing bank?
2) What is my role in the LC – am I nominated or not?
3) How to structure the agreement with the beneficiary – should it be “I hereby give you an undertaking similar to that of a confirmation authorized by the issuing bank” – or something else?
Long one. So sorry.
Best regards
Kim
Silent Confirmation
There's no easy answer to your question, even assuming, as I do, that a bank would silently confirm only under credits that permit it to negotiate and for a beneficiary that is well known to it.
I have drafted a number of "silent confirmation" agreements for a number of banks. They involve extended questioning of the bankers, because the risks are numerous and can be countered or shifted in various ways. I consider silent confirmation agreements to be among the most sophisticated drafting jobs in the LC business. In my experience, there is not, and should not be, a market standard form of silent confirmation.
Regards, Jim Barnes
[edited 11/8/2006 9:56:25 PM]
I have drafted a number of "silent confirmation" agreements for a number of banks. They involve extended questioning of the bankers, because the risks are numerous and can be countered or shifted in various ways. I consider silent confirmation agreements to be among the most sophisticated drafting jobs in the LC business. In my experience, there is not, and should not be, a market standard form of silent confirmation.
Regards, Jim Barnes
[edited 11/8/2006 9:56:25 PM]