ICC Digital Library Forum

We are being asked to confirm credits (first confirmation) issued by some banks in Africa. With our confirmation added, these credits are then advised through us to the beneficiary’s bank in a third country, as per the issuing banks’ instructions. The beneficiary’s bank is also asked by the issuing bank to add its confirmation (second confirmation), which is subsequently done. These issuing banks have an account relationship with us and test key arrangements, which is not the case with beneficiaries’ banks. In short, the beneficiary’s bank will not be able to add its confirmation unless we add ours for obvious reasons, i.e. sovereign (country) & counter-party (bank) risks.
In the end, it is the beneficiary’s bank that performs the document examination function and makes a reimbursement claim on our bank.

Conclusion: Our bank does not pay against documents, which appear on their face to be in compliance with the terms and conditions of the credit. According to Art. 10(d), “… by authorizing or requesting another bank to add its confirmation, the Issuing Bank authorizes such bank to pay …, against documents … and undertakes to reimburse such bank in accordance with the provisions of these Articles”. We rather provide reimbursement, which could have alternatively been done under Art. 9 of URR 525, i.e. by having provided our irrevocable reimbursement undertaking.

Question: Since our function (first confirmation) is not performed as per Art. 10(d) of UCP 500, what is our liability under such credits? Note: I have looked into the ICC BC’s opinion R.92 but it does not seem to shed enough light on this.

Dimitri

Dimitri,

As I see it, your liability is the same as with any DC confirmed by you. However, there are some subtle differences -

1. Since you say that you act as reimbursing bank, presumably the second confirming bank is the drawee nominated in the DC. Thus if documents were presented directly to you, it would be pointless as you would have to defer to the 2nd confirming bank.
2. The beneficiary has the option of presentation to any one of the three banks involved, but there would appear to be no benefit to them avoiding presentation to the 2nd confirming bank.
3. This case is similar to a DC using two advising banks. It is likely that one of them is the negotiating bank, in which case the other collects its fee merely from performing perfunctorily. In the case of two confirming banks, the one which does not directly receive a documentary presentation also acts in this way, but is still entitled to collect its confirmation fee, as its liability remains extant for the life of the DC, even though it is unlikely that presentation will be made to this bank.

The obvious question which arises is why such an arrangement is requested. It seems apparent to me that your bank's standing is significant in comparison to both the issuing bank and the second confirming bank. Thus the beneficiary pays your confirmation charge for security and the second confirmation charge for convenience.

In the event that the second confirming bank is unable or unwilling to negotiate documents presented to them for whatever reason, the beneficiary has the alternative of presenting to you, but this may be complicated if, for example, B/L is consigned to order of the 2nd confirming bank. From your position, therefore, I suggest that you only confirm DCs containing B/L consigned to order or to order of the issuing bank.

Laurence

Dimitri,

I’ve bashed this out fairly hastily. Therefore, it may be far from perfect.

We certainly do our best to avoid acting as ‘first’ confirming bank given the delays that can occur in getting the documents to the issuing bank (logic would seem to suggest that documents should be presented to the ‘first’ confirming bank by the ‘second’ confirming bank in order that the ‘second’ confirming bank can determine if it has a liability), the potential difficulties that could occur if documents are not presented to the first confirming bank but direct to the issuing bank (see below), and the existence of the far more appropriate URR reimbursement undertaking.

As to your question, I believe it will depend to what extent the contract between the first and second confirming banks is expressly (or impliedly; thereby leaving scope for dispute) modified in relation to sub-Art 9b. In the absence of a statement to the contrary, by adding its confirmation the first confirming bank is, I believe, giving an undertaking that ‘provided that the stipulated documents are presented ……. to any other Nominated Bank (e.g. a second confirming bank) and that the terms and conditions of the Credit are complied with’ to settle a complying presentation.

Therefore, if complying documents are presented direct to the issuing bank by the second confirming bank and are not settled by the issuing bank, the first confirming bank is obliged to make settlement. The question then is, if the documents are with the issuing bank or even applicant (e.g. ‘usance’/‘term’ credit etc), what evidence -if any- does the second confirming bank have to present to the first confirming bank in order to trigger the first confirming bank’s obligation? Copy documents, a mere assertion of compliance etc? I do not pretend I know the answer with certainty (although I can see this situation as being analogous to documents being lost between the nominated bank and issuing bank) and hence regard it as best to avoid being in this situation in the first place.

Also, if the issuing bank refuses the documents, on the basis of what are in fact invalid discrepancies, is the second confirming bank then entitled to demand payment from the first confirming bank (including perhaps presenting the documents to the first confirming bank)? On the face it, the second confirming bank is so entitled.

As I say, acting as first confirming bank, where documents are not required to be presented to the first confirming bank, has potential difficulties that are best avoided unless the obligations of the first confirming bank are clearly set-out in the credit, which given the alternative of the URR reimbursement undertaking seems fairly pointless..

Jeremy

[edited 8/9/02 11:46:53 AM]
[edited 8/9/02 11:48:13 AM]

Jeremy,

if, as you say, the issuing bank does not settle, this can only happen if the documents are claimed to be discrepant by the issuing bank, in which case the bank must hold them at the disposal of the presenter. This, therefore, allows the second confirming bank (sic) to retrieve the presentation from the issuing bank and present to the first confirming bank, seeking payment. The first confirming bank must then decide, based on the presentation alone, whether the documents are discrepant or not, and if not either pay or commit to pay on the due date.

If the issuing bank claims discrepancies, it may seek a waiver from the applicant, but the presenter is entitled to choose the return of the documents for presentation to the first confirming bank, or, upon instructions from the beneficiary, return them to the bene.

Laurence

Laurence,

It is not the case that non-settlement by the issuing bank can only take place where the documents are discrepant (otherwise credits would not ever need to be confirmed!). Also, if non-settlement does occur it is by no means certain the documents will be available. For example, the credit in question may be available by deferred payment, acceptance or ‘non-sight’ negotiation, the issuing bank take up and release the documents and then at maturity be unable to effect settlement as a result of -for instance- financial difficulties, government action (e.g. moratorium on external debt) or legal action (e.g. injunction preventing payment).

Jeremy

Jeremy,

thanks for the clarification. I agree with you that if there is a term draft involved, and the issuing bank is not in a position to pay at maturity, this is a major problem. However, this is true whether or not more than one confirming bank is used.

The logic of the situation where both the issuing bank and second confirming bank are seen as a financial/country risk demands that the draft be discounted. From the previous postings, if the second confirming bank discounts, it would seem to have a more secure option by claiming reimbursement from the first confirming bank, than the issuing bank. Alternatively, it may elect to have the draft avalised by the first confirming bank and sold on the bills market.

Laurence

In addition to whatever said so far, I believe there should be a separate contract between the issuing bank and the first confirming bank to cover such transactions. A request in the LC to merely authorize the first confirming bank to add its confirmation and also authorizes the 2nd confirming bank to subsequently add its confirmation would not, in my opinion, sufficient to cover the first confirming bank that pays claims received from the 2nd confirming bank that, in compliance with LC terms, has forwarded documents directly to the issuing bank.

Unlike the reimbursement undertaking covered under article 9 of URR 525 that provides an expiry date by which claims have to be made, the 1st confirming bank, here, observes article 9(b) of UCP 500 (i.e. role of confirming bank covering presentation to other nominated bank) and article 7 of URR 525 (role of reimbursing bank) and pays claims received after the expiry date of the credit that it has confirmed.

Furthermore, in my opinion, the 1st confirming bank may not accept amendment or cancellation to the reimbursement authorization without obtaining the approval of the other parties involved in the credit i.e. the issuing bank, the 2nd confirming bank and the beneficiary. In this regard, I believe the 1st confirming bank will apply the guidelines stipulated in article 9 of URR 525 since it has added its confirmation to the credit and has explicitly agreed to reimburse the 2nd confirming that has forwarded documents directly to the issuing bank. That is upon receipt of its claim. Therefore, the special contract between the issuing bank and the 1st confirming bank, among other things, must cover such understanding / risks.

As for the beneficiary, he /she has to comply with the LC terms and conditions and, in normal circumstances, presents complying documents to the place stipulated in the credit and within the period specified therein. From the details provided, it is presumed that the credit is available with the 2nd confirming bank and therefore, the place of presentation and expiry would naturally be the counters of the 2nd confirming bank.

There are also other similar cases where the confirming bank authorizes the advising / negotiating bank (that has not added its confirmation) to forward documents directly to the issuing bank and claim reimbursement from the confirming bank. In these cases, as well, I believe a separate agreement between the issuing bank and the confirming bank must be in place since such instructions are usually initiated by the issuing bank and therefore must bear the consequences.

regards

[edited 8/11/02 12:28:42 AM]

We do not wish to add anything more to those opinions from “frequent visitors” members. Let us join in from a new angle.

WHY NEEDS TWO CONFIRMING BANKS?

We doubt the need for bringing in two confirming banks.

Firstly, why we need a confirming bank?

Because the beneficiary is not feeling comfortable with the issuing bank for many reasons, such as its “payability”, the foreign law system that is not familiar to the beneficiary, and other risks, such as country risk. Otherwise there is no need to spend extra charges for a second confirming bank to add a payment undertaking for the same debt under the same DC.

ONE COFIRMING BANK IS ENOUGH

So one confirming bank should be enough. Despite having two confirming banks and one issuing bank, the beneficiary can only make one drawing for the DC amount, and not three drawings for three times the DC amount. When one drawing is paid, the others are to stand void.

Let us image that all the banks in the issuing bank’s country and in the beneficiary’s country are not reliable, then the beneficiary should ask for one confirming bank in a country where the banks are reliable and the law is also familiar to the beneficiary. Even for this peculiar situation, there is no need for two confirming banks.

A CONFIRMING BANK CANNOT REPLACE ISSUING BANK FOR CERTAIN DUTIES

Two confirming banks have handicaps in reimbursements and in waivers. Only the issuing bank can initiate the reimbursing undertaking. And only the issuing bank can approach the applicant for a waiver. The first confirming bank cannot replace the issuing bank for these duties although the first confirming bank has an independent payment undertaking same as the issuing bank.

www.tolee.com

[edited 8/11/02 2:47:06 AM]

Lawrence,

I agree that the situation is the same as if there is only one confirming bank plus an additional nominated bank. Thus the question is also the same: what are the legal obligations of a confirming bank to a non-confirming nominated bank where it is envisaged documents are not presented to the confirming bank?

Similarly, to me, sub-Article 9b requires such a confirming bank to settle a complying presentation made to the non-confirming nominated bank. The question then is: how is the confirming bank’s obligation legally invoked by the non-confirming nominated bank, particularly in the absence of the original documents (a distinct possibility)?

You mention discounting and avalising. However, I do not see that there is any obligation on the issuing bank or (first) confirming bank to do these things. Their obligation is simply to effect settlement at maturity.

You also say the second confirming bank would seem to have a more secure option by claiming reimbursement from the first confirming bank, than the issuing bank. But this begs the question: what obliges the (first) confirming bank to honour the claim (whether under a sight or ‘term’ credit) in the absence of anything other than an assertion the documents comply?

Jeremy

Jeremy,

the Confirming bank is at liberty to contract on any terms it pleases, but is not obliged to confirm, having received the DC. My recommendation to such a bank would be not to confirm except on condition that docs were presented in order to them, or the issuing bank indicated docs in order. However, one has to wonder why docs would bypass the Confirming bank and go to the issuing bank. If this was the intention, why use a confirming bank in the first place ? The only answer I can come up with is a "case of need" where payment is sought directly from the issuing bank in the first instance, but if not forthcoming, docs could be withdrawn and presented to the Confirming bank.
The Confirming bank may, by no more than coincidence, be acting as a reimbursing bank also and in this case takes its instructions to pay based on instructions in the DC or direct instructions from the issuing bank. Acting only in this role, it may facilitate payment, but it must be clear in which role it acts if it makes payment and seek clear instructions in this role which do not conflict with its role of confirming bank.

I have not suggested that avalising, discounting or selling the B/E on the market is required, but that in the context of a situation where the applicant/bene deem it necessary to confirm with two banks, it seems logical that they would do so. If so, it moves us away from a situation where payment is awaited at maturity. Since the applicant/bene calls for confirmation of the DC, there may be some question on the long term viability of the issuing bank or there may be political or economic risks in that country. In such circumstances it would not make sense for a bene to await payment at maturity from the issuing bank. Since it has been stated that a similar question hangs over the second confirming bank, again it makes no sense to seek or await payment other than from the first confirming bank.

Laurence