Article 8, UCP-600, Confirming Bank Undertaking

A bank that adds its confirmation to a documentary credit, upon the authorisation or request of an issuing bank which provides a beneficiary with an additional irrevocable and independent undertaking to cover the credit risk of an issuing bank and their country, difference between an issuing and confirming bank’s undertaking are, an issuing bank bears the credit risk of applicant and confirming bank bears the credit risk of issuing bank, an issuing bank only honours the complying presentation wherein a confirming bank may negotiate as well. It is common for a confirming bank to also act in the role of an advising bank and nominated bank, but this is not an absolute requirement of UCP 600.

Because an issuing bank issues an irrevocable undertaking and liable to honour the complied presentation from or on behalf of beneficiary, cannot negotiate, wherein, a confirming bank issues similar separate undertaking by confirming the credit, however,  this article of UCP 600, provides an advantage to confirming bank to negotiate as well if the draft is drawn other than that confirming bank or on the basis of complied documents. 

A confirming bank must have to honour or negotiate if complied document presented, Most of the cases, a confirming bank is situated in country of beneficiary, however, if a confirming bank is situated other than the country of beneficiary and letter of credit shown field 41a is available with a separate nominated bank, beneficiary can bypass that nominated bank and present documents directly to confirming bank and confirming bank will have to honour the complied presentation as per letter of credit terms and UCP 600 if subject to these rules.

Article 8, Confirming Bank Undertaking

a. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

i. Honour, if the credit is available by

a. Sight payment, deferred payment or acceptance with the confirming bank;

Sight payment means to make payment to the beneficiary upfront/immediately upon receipt of the complied document within maximum a 5 banking days. A Deferred payment option is a right to defer payments till a maturity date as per tenure stated in USANCE letter of credit, it is mostly used in jurisdiction where custom duties are high for bill of exchange wherein “available by acceptance” has the same meaning as deferred payment, added bill of exchange drawn on confirming bank which gives an additional security to beneficiary.

b. sight payment with another nominated bank and that nominated bank does not pay;

If a nominated bank is not the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed in written by that nominated bank and so communicated to the beneficiary.

As we have already discussed and understand an obligation of a nominated bank, liability to settle beneficiary is on confirming bank if letter of credit is confirmed and it gives an additional security to beneficiary to avoid the payment risk, so if a letter of credit is “available with” a nominated bank for immediate settlement and nominated bank does not pay, a confirming bank must need to honour.

c. deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;

Same as above if available with nominated bank by deferred payment and that nominated bank does not incur its deferred payment undertaking or already given communicated to beneficiary regarding their deferred payment incurrence but default to pay on maturity due to various reason, in that case again liability will come to confirming bank in case of confirmed letter of credit and confirming bank has to make the payment to beneficiary.

d. Acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;

A letter of credit is available with nominated bank and draft is drawn on same, however, they deny to accept the USANCE draft upon complied presentation or already accepted but neglected to make payment to beneficiary on maturity date then a confirming bank will have to make the payment to beneficiary.

e. Negotiation with another nominated bank and that nominated bank does not negotiate.

“Negotiation’ as the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

If a nominated bank does not negotiate, confirming bank must have to honour the complied presentation, an issuing bank cannot negotiate.

ii. Negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

Understanding Recourse and without recourse:

Under "With Recourse," if a bank cannot collect on their payment from the party ultimately responsible for payment (issuing bank/confirming bank etc.) of the financial obligation, the bank can go back to the beneficiary to seek payment on the amount which they paid.

“Without-Recourse” is a type of commercial remittance that if a bank pays or settles due account of beneficiary entitles after satisfying with terms and conditions of the payment, cannot recall or seek funds back from beneficiary.

A confirming bank once paid upon complied presentation and forwarded the documents to the issuing bank and if an issuing bank finds the discrepancy and communicates same to confirming bank as per article 16 of UCP 600, reject to honour or pay to that particular confirming bank then confirming bank has to bear the loss and cannot recall the funds back from beneficiary as their payment is remitted on “without recourse” basis.

b. A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

A confirming bank is irrevocably bound to honour or negotiate once they add their confirmation to the credit.

c. A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank's undertaking to reimburse another nominated bank is independent of the confirming bank's undertaking to the beneficiary.

This sub article is very similar to sub article 7-c, it reflects the obligation of a confirming bank when another nominated bank has acted on its nomination and honored or negotiated and is expecting to be reimbursed according to the terms and conditions of the documentary credit. This undertaking to reimburse a nominated bank is an independent undertaking than undertaking given to beneficiary through confirmation.

d. If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.

A bank can take the decision at their sole discretion considering the credit facility and exposure blocked for an issuing bank, if a bank is not ready to add its confirmation due to any reason, must need to inform the issuing bank immediately and may advise the credit without confirmation.

There are a number of reasons why a bank may not be prepared to add its confirmation. Some of the more common ones are that:

-The limit available under its own guidelines for issuing bank risk may already have been reached.

-Not ready to take the country risk of an issuing bank.

-Terms and conditions of the documentary credit not be acceptable to the bank.

There are many similarities between an issuing bank and confirming bank undertaking which we can easily identify comparing the above article with article 7 of UCP 600.

Confirmation instruction is given in field 49 of letters credit, Strange, this is a mandatory field and one of the following codes must be used:

Confirm-A request is an instruction in the documentary credit for a bank, usually the advising bank, to add confirmation.

May add-An authorisation is an instruction in the documentary credit to add confirmation.

Without-No confirmation required.