Can a confirmation be added to cover only the risk on the Issuing Bank and its country, without covering the documentary risk?
In this case, the Confirming bank cleary communicates in its covering letter to the beneficiary that the confirmation does not cover documentary risk.
The stand the Confirming Bank would take in this case is: We undertake to pay only if the Issuing Bank becomes bankrupt or the country of the Issuing Bank collapses. We shall forward the documents to the Issuing Bank for their payment and if they point out any discrepancy which we have not noticed, we will not pay. There is no upfront payment by the confirming bank to the beneficiary. There is no negotiation of documents in the true sense; it is jsut examination of documents.
We are of the view that such partial confirmation is possible. Any views on this, please?
[edited 7/29/2006 5:34:54 PM: To mention its stand in its covering letter to the beneficiary.]
Confirmation of L.C
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PromodNimkar
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KimChristensen
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Confirmation of L.C
My personal view is that this is absolutely possible – and is being done frequently. The tricky part of course is that the UCP does not cover this (does not forbid it either) – therefore you must be very sure that you have a watertight agreement with the beneficiary.
If the confirming bank does not negotiate (as if I knew what that meant) this is also an element to consider – but then again if no payment is made until received from issuing bank only limited risk for the “confirming” bank. The beneficiary should of course consider carefully if this “confirmation” is acceptable – since the number one risk, is that the documents is refused – based on valid, almost valid or not valid discrepancies – and only very seldom on bankruptcies. I think the confirming bank has a big responsibility in advising the beneficiary before entering into this.
Best regards
Kim
[edited 7/29/2006 10:33:30 PM]
If the confirming bank does not negotiate (as if I knew what that meant) this is also an element to consider – but then again if no payment is made until received from issuing bank only limited risk for the “confirming” bank. The beneficiary should of course consider carefully if this “confirmation” is acceptable – since the number one risk, is that the documents is refused – based on valid, almost valid or not valid discrepancies – and only very seldom on bankruptcies. I think the confirming bank has a big responsibility in advising the beneficiary before entering into this.
Best regards
Kim
[edited 7/29/2006 10:33:30 PM]
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AbdulkaderBazara
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Confirmation of L.C
I agree with Kim that this is possible but again the confirming bank should be very clear in his confirmation note to the beneficiary. This is a type of cover which is usually customary in open account deals where sometimes a bank or an insurance company insures the country risk and the risk of loss due to the bankruptcy of the buyer.
On the other hand I have seen cases where the confirming bank is not that clear. It adds its confirmation and instructs the nominating bank (other than the confirming bank) to send the documents directly to the issuing bank and claim reimbursement as indicated in the credit. The problem here is that the issuing bank may raise discrepancies as indicated in Kim’s posting and the nominated bank might go through the hardship, delay and risk of loss of documents in transit in getting back the documents from the issuing bank and sending it to the confirming bank for re-examination.
regards
On the other hand I have seen cases where the confirming bank is not that clear. It adds its confirmation and instructs the nominating bank (other than the confirming bank) to send the documents directly to the issuing bank and claim reimbursement as indicated in the credit. The problem here is that the issuing bank may raise discrepancies as indicated in Kim’s posting and the nominated bank might go through the hardship, delay and risk of loss of documents in transit in getting back the documents from the issuing bank and sending it to the confirming bank for re-examination.
regards
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JudithAutié
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Confirmation of L.C
Hi
I have also seen this kind of confirmation but usually it is a "silent" confirmation i.e. not at the request of the Issuing Bank, but at the request of the beneficiary who wishes to cover the political risk, rather than the "financial risk" of the IB or Applicant going bankrupt.
Once again, in my experience, there are really only two major reasons for a final rejection of documents : a commercial dispute between the applicant and the beneficiary (which can include past and/or present transaction) or applicant's financial difficulties, or in very rare cases IB financial difficulties. KYC is important here as always.
This kind of "silent" confirmation is often cheaper and quicker than any kind of export insurance which almost always entails a waiting period before claims can be made or paid.
Regards
Judith
I have also seen this kind of confirmation but usually it is a "silent" confirmation i.e. not at the request of the Issuing Bank, but at the request of the beneficiary who wishes to cover the political risk, rather than the "financial risk" of the IB or Applicant going bankrupt.
Once again, in my experience, there are really only two major reasons for a final rejection of documents : a commercial dispute between the applicant and the beneficiary (which can include past and/or present transaction) or applicant's financial difficulties, or in very rare cases IB financial difficulties. KYC is important here as always.
This kind of "silent" confirmation is often cheaper and quicker than any kind of export insurance which almost always entails a waiting period before claims can be made or paid.
Regards
Judith
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PromodNimkar
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Confirmation of L.C
Kim's observation - " the tricky part is of course is that the UCP does not cover this (does not forbid it either)" is absolutely true. Please compare this with Article 48 (c) that states " The transferring Bank shall be under no obligation except to the extent and in the manner expressly consented to by such bank." So conditional transfer has the approval of UCP; this is not availabe to conditional confirmation. Of course apples and oranges can not be compared.
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KimChristensen
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Confirmation of L.C
I guess we can discuss this for a long time. First of all I do not think it is makes much sense to use article 48 in this context.Besides this it would – in my view – depend on the credit:
If – as Judith indicates – it is silent confirmed – then I think this is possible based on UCP 500 sub-article 10(c):
“Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Banks receipt of and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate.”
This means as I see it that the nominated bank can agree whatever he chooses with the beneficiary … but it is the responsibility of the nominated bank to make that agreement clear.
If the nominated bank is authorized to confirm, then you could say that in this case it is only “soft confirmed” – and could argue that the nominated bank has not followed the authorization. My view however is that if (again) the agreement with the beneficiary is clear, then I consider the risk very limited – and I fail to see that the issuing bank should have any reservations in that respect.
In any case the issuing bank is obligated to pay once credit compliant documents are presented – and that is the key to both scenarios: Both “confirmations” are based on that obligation – so for the issuing bank I can not see any problem. For the nominated bank, the risk may in fact be increased depending on the credit, customer etc. but surely that should be taken into account when the agreement is being made.
And again – I can not see that such set-up is prohibited by the UCP – the fact that it is not covered is not the same as it is forbidden.
Best regards
Kim
Confirmation of L.C
I also see this as a kind of silent confirmation, although most silent confirmations I have seen would provide for commited negotiation, but with recourse. Sometimes recourse is allowed in the case of non-reimbursement based on the issuing bank's claim of discrepancy, particularly if the nominated bank disagrees with the discrepancy claim.
Under the UCC and UCP this type of undertaking might qualify as an enforceable, independent undertaking of the nominated bank to the beneficiary, but it probably would not qualify as a "confirmation". There is a risk that it would be treated as an ordinary guarantee, which would complicate the very first legal question--is the undertaking governed by the law of the place where the issuing bank is located or where the nominated bank is located.
Regards, Jim Barnes
Under the UCC and UCP this type of undertaking might qualify as an enforceable, independent undertaking of the nominated bank to the beneficiary, but it probably would not qualify as a "confirmation". There is a risk that it would be treated as an ordinary guarantee, which would complicate the very first legal question--is the undertaking governed by the law of the place where the issuing bank is located or where the nominated bank is located.
Regards, Jim Barnes