ICC Digital Library Forum

I received the following interesting question in relation to the confirmation of a transferrable credit - I welcome your thoughts and opinions on same:

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We issued a transferable letter of credit available with a nominated
bank in USA for USD400,000. We also requested the nominated bank to add their confirmation to the irrevocable transferable letter of credit.

The nominated/transferring bank added their confirmation to the Credit, then advised it to first beneficiary for full amount and then subsequently on request from First Beneficiary transferred the Credit in favour of the second beneficiary for USD350,000.00

However, the transferring bank did not add their confirmation to the
transferred portion of the credit (USD350.000.00)

Is it ok for the them to add their confirmation to the credit as advised to First Beneficiary but not to extend that confirmation to the transferred fraction of the Credit.


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[edited 2/18/03 4:41:06 PM]

Here is my answer based on the question as submitted.

In the case of Transferable Documentary Credit there is only one Documentary Credit issued - simple but important.

From what I have read, in this case the Issuing Bank issued a transferable credit through and available with the Nominated Bank.

Upon the request of the First Beneficiary the Nominated Bank must have agreed to transfer the Credit in favour of the Second Beneficiary and the transfer was then effected.

However, the Credit can be transferred only on the terms and conditions
specified in the original Credit as issued by the Issuing Bank apart from exceptions specified in UCP 500 sub-article 48 (h).

Finally, it is important again to emphasise that there is only one
Documentary Credit and to deal with the issue relating to the
confirmation.

In this instance a Credit was issued by an issuing bank for USD400,000.00,
then the Credit is for USD400,000.00 notwithstanding that fact that it
may have been transferred as USD350,000. to a Second Beneficiary.

The Credit is for USD400,000.00

UCP 500 sub-article 9 C
“(i)If another bank is authorised or requested by the Issuing Bank to add
its confirmation to a Credit but is not prepared to do so, it must so inform the Issuing Bank without delay.”

Sorry for going on so long in the answer – hope it is worth it at the end!

So!

In simple terms if the Credit was issued for USD400,000. and the
confirming bank is authorised or requested to add their confirmation and
is prepared to do and actually adds their confirmation, then the
Credit for USD400,000 is confirmed.

If the confirming bank is not prepared to do so (confirm the Credit )
then the confirming bank must inform the Issuing Bank without delay.

From information provided the Confirming Bank having added their
confirmation to the Credit should not have effected a transfer without
adding their confirmation (UCP 500 sub-article 9 (b)..... definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented...) in favour of the second beneficiary.

Hope this is of assistance!

Vin



[edited 2/19/03 2:33:50 PM]

Leo,

It is my opinion that the position of the transferring bank as a nominated bank under sub-Art. 10(b), (c) & (d) has been mixed up with the bank’s position under Art. 48. The transferring bank should have added its confirmation to the transferred credit too.

Dimitri

The nominated bank has added its confirmation to the letter of credit and has agreed to transfer the credit. Therefore, it is transferring a confirmed letter of credit. If the transferring bank missed to indicate that in the transferred credit, the 1st beneficiary should instruct the bank to state so in the transferred credit.

From most of the posts, I understood that the transferring bank should have advised the letter of credit to the second beneficiary with adding its confirmation thereon. While I do understand that this might be a course of normal action this issue is not covered specifically in UCP 500 as such.

The transferring bank, while willing to favour the first beneficiary with its definite undertaking to pay regardless of the financial standing of the issuing bank later on, may not want to do so for an unknown second beneficiary. The transferring bank may want to limit such an undertaking to a known party to him due to many reasons. Therefore I wonder why every one assumed that it should be a de facto that the transferring bank should have confirmed the transferred portion of USD 350,000

There is nothing under article 48 that necessitates such action as it is purely left for the discretion of the transferring bank. If the first beneficiary submits the documents to the transferring / confirming bank in order then it must pay, however if the second beneficiary does that, then the nominated bank will reimburse under so capacity without any further obligation.

My understanding of the sub article 48 (h) “The Credit can be transferred only on the terms and conditions specified in the original Credit, with the exception of …” is that the transferring bank has to respect all otherwise condition of the credit however being nominated to be a confirming bank does not bind the bank to confirm the credit, simply as being a nominated bank does not bind him to so be. Having agreed to transfer the credit, the bank has agreed to act in the capacity of a nominated bank only and not a confirming bank.

It might also be note worthy to probe into the wording of the following paragraph under article 48 especially the capitalized in italics.

“When a Credit has been transferred and the First Beneficiary is to supply his own invoice(s) (and Draft(s)) in exchange for the Second Beneficiary's(ies) invoice(s) (and Draft(s)) but fails to do so on first demand, THE TRANSFERRING BANK HAS THE RIGHT TO DELIVER TO THE ISSUING BANK THE DOCUMENTS received under the transferred Credit, including the Second Beneficiary's(ies) invoice(s) (and Draft(s)) without further responsibility to the first Beneficiary.”

It doest not say to pay , incur a deferred payment..., but to deliver which hold open the possibility by the transferring bank to abstain from being a confirming bank although in the original instrument he was requested so to be and has agreed so to be.
firm the credit, simply as being a nominated bank does not bind him to so be. Having agreed to transfer the credit, the bank has agreed to act in the capacity of a nominated bank only and not a confirming bank.


Hatem Shehab

[edited 2/24/03 9:38:44 PM]

Thank you for your replies to this question.

There is one ICC Opinion that hits upon the subject - R482. This Opinion would appear to indicate that in the normal course of events if the transferring/confirming bank extends its confirmation to the credit, then it does so for both first and second beneficiary.

The following is taken from the conclusion of R482:

A) A transferring bank when issuing its advice of transfer to the second beneficiary provides either an unconfirmed or a confirmed credit. The type of advice is dependent on the instructions in the original credit as to whether or not the credit was to be confirmed and whether the advising and nominated transferring bank agreed to such a request. If the transferring bank has not added its confirmation to the transferred credit, it has no obligation to effect payment. If it has confirmed then it must honour the drawing of the first and second beneficiary, notwithstanding the position of the issuing bank and its ability to provide reimbursement. In any case, the documents belong to the second beneficiary until the presentation is honoured. If the transferring bank has taken up documents, i.e. negotiated or forwarded them without the authorization of the presenter, it would be liable for payment.

(B) See comments under (A) above.

(C) If the transferring bank has made a promise to pay the beneficiary at maturity, it has presumably added its confirmation to the credit. This is a documentary risk that any bank which adds its confirmation takes. In the event of a dispute as to the acceptability of the documents presented (under a transferred credit which is confirmed), it is to be resolved between the issuing bank and the transferring bank, without the involvement of the first or second beneficiary.

I agree with mr.Hatem Shehab. in my opinion transferring bank has choice to add its confirmation or not for the portion to be transferred to the second beneficiary. Swift formats also allow this requirement. where a transferring bank is in willing to transfer a part of the credit to the second beneficiary by swift, then has the possibility to use field 40b of mt720 for his purpose to choice one code either "adding our confirmation" or "without adding our confirmation" . Consequently, while 49 field 49 reflecting the "confirm" field 40b shall reflect the "without adding our confirmation" as to the case may be. if this is not the case, in my opinion, there will be inconsistancy in the body of a mt720 if had been used in a manner detailed above.
regards.
abdurrahman ozalp

Dear Leo

I have thoroughly revised the ICC banking commission opinion R482 and found it to support my views expressed inhere that the transferring bank is under no obligation to confirm the referred portion of a credit. The transferring bank also could not confirm such portion unless the original credit instructs so indicate.

I am afraid to say that your quotation of the R482 was not appropriate under the current debate as it relates to a different scenario.

Look into the following statement which I think simply holds open the possibility for the transferring bank to either confirm or unconfirm the transferred portion”

“A transferring bank when issuing its advice of transfer to the second beneficiary provides either an unconfirmed or a confirmed credit.

The following excerpt acknowledges the fact that if the transferring bank wishes to consider the confirming such a portion, it should have specific instruction in the original credit to so confirm such portion, otherwise it may effect a silent confirmation outsider the letter of credit mandate”

“The type of advice is dependent on the instructions in the original credit as to whether or not the credit was to be confirmed and whether the advising and nominated transferring bank agreed to such a request”


I think what you need to look at carefully is the following excerpt that have led you to your conclusion that confirming original credit is an inference that the transferred portion is automatically confirmed.

“If the transferring bank has not added its confirmation to the transferred credit, it has no obligation to effect payment. If it has confirmed then it must honour the drawing of the first and second beneficiary, notwithstanding the position of the issuing bank and its ability to provide reimbursement.”

The statement is precisely constructed to mean that confirming the transferred portion means that the transferring bank should effect payment for second beneficiary but if its not then no liability arises on the part of the transferring bank.

Please remember that the ICC response was to three scenarios on the transferring banking being
1. Transferring bank only.
2. Nominated bank to pay, to accept or to negotiate and a transferring bank.
3. Transferring bank and confirming bank for the second beneficiary(ies).
So I believe that the transferring bank having confirmed the original credit is under no obligation to confirm any transferred portion thereof. I also believe that the transferring bank having not confirmed the original credit may, for reasons, confirm the transferred portion only to the second beneficiary while the original credit was not confirmed.

As for SWIFT format, I think it construction support this conclusion.

Hatim,

Hope you are fine.

An extract from opinion R482 states the following:
The type of advice is dependent on the instructions in the original credit as to WHETHER OR NOT THE CREDIT WAS TO BE CONFIRMED AND WHETHER THE ADVISING AND NOMINATED TRANSFERRING BANK AGREED TO SUCH A REQUEST.

Here it talks about the credit as a whole whether it is transferred or not. If the advising and nominated transferring bank agreed to the confirmation request then it is hooked throughout the life and stages of the credit. If it has doubts on the 2nd beneficiary for any reasons whatsoever, it should not transfer the credit or could decide not even add its confirmation to the transferable credit.

A confirmed credit by its simple definition provides assurance of two parties i.e. the issuing bank and the confirming bank (article 9b). By transferring the credit, the equilibrium does not change.

In addition the confirming bank cannot tell the 1st beneficiary (who paid the confirmation charges for full value of the LC) that if you transfer the LC, I will be liable for your margin only - meaning if the LC is transferred for 90%, the confirming bank will only be liable for 10% because that it is the amount the 1st beneficiary will be paid from the whole LC value.

Maybe it would be more visible if we look at it in a different way. Suppose we have three banks involved:
1) issuing bank
2) confirming bank - (just to elaborate when it confirms the credit it would confirm a transferable credit - meaning adds its obligation to a transferable credit. Thus would carry the same obligation of the issuing bank)
3) Advising and nominated transferring bank.

What would the advising and transferring bank inform the the 1st beneficiary and 2nd beneficiary? The advising bank will inform the 1st beneficiary that the credit was issued by X bank and confirmed by XY. When it's requested to transfer the credit it would inform the 2nd bene that the credit being transferred has been issued by X bank and confirmed by XY bank. In other words, it would state that it does not carry my (advisng and nominated transferring bank) engagements but it carries the engagement of the issuing bank (x) and the confirming bank (xy).

regards
[edited 2/27/03 7:34:18 AM]

Thank you for the detailed explanation of your thoughts on this question, Hatem.

I will now try to elaborate on my own thoughts:

- There is only one credit involved in this situation.
- The transferring bank has been requested to confirm the credit. (That is the extent of the confirmation requirements of the original credit.)

- The transferrring bank has the choice to confirm the credit or not to confirm the credit.
- The Credit can be transferred only on the terms and conditions specified in the original Credit, apart from the exceptions outlined in Artcile 48(h).

So, I believe, if the transferring bank chooses to confirm the credit, the transferred credit (there is only one credit) should reflect this.

I do not believe that there is an ICC Opinion that covers this situation exactly, however, R482 does hit upon the subject and contains a couple of sentences which, I believe, support the above reasoning:

"A transferring bank when issuing its advice of transfer to the second beneficiary provides either an unconfirmed or a confirmed credit. The type of advice is dependent on the instructions in the original credit as to whether or not the credit was to be confirmed and whether the advising and nominated transferring bank agreed to such a request."

I can see that there is quite a difference between our interpretation (yours and mine, Hatem) of Article 48 and R482 in answering this question.

I welcome further input that might add clarity.
[edited 2/27/03 1:17:48 PM]