What Protective Clauses Does a Confirming Bank Require Before Adding Its Confirmation?

A reader recently asked whether a confirming bank typically requires an issuing bank to incorporate protective clauses into a documentary credit before agreeing to add its confirmation. The question focused on clauses relating to sanctions compliance, force majeure, fraud or illegality, and country and transfer risk.

This is an interesting practical question because, in international banking practice, confirming banks generally seek to avoid clauses that may undermine the certainty of their reimbursement rather than requesting the addition of new protective clauses. The following answer shares my views based on banking practice and the principles of UCP 600.

Question

Hi Mr. Old Man,

I hope you are doing well.

I have a question regarding the protective clauses that a confirming bank may require before agreeing to add its confirmation to a documentary credit.

From your experience, what wording or clauses does a confirming bank typically request the issuing bank to incorporate into the credit before adding its confirmation? I am particularly interested in clauses relating to:

• Sanctions compliance
• Force majeure
• Fraud or illegality
• Country and transfer risk

If possible, I would greatly appreciate it if you could share some sample wording or examples commonly used in international banking practice.

Thank you very much for your time and guidance.

Kind regards,

Balakrishnan Somasundaram

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Answer

Dear Balakrishnan,

Thank you for your question.

My practical experience in this area is somewhat limited. However, in my opinion, a confirming bank is generally more likely to request the issuing bank to remove or amend clauses relating to sanctions, force majeure, fraud, or similar matters, rather than asking the issuing bank to add such clauses to the documentary credit.

The reason is that broadly worded protective clauses may allow the issuing bank to refuse reimbursement to the confirming bank after the confirming bank has honoured or negotiated a complying presentation. Such clauses could therefore undermine the value of the confirmation.

For example, consider the following sanctions clause:

“We (the issuing bank) comply with the international regulatory laws and regulations issued by the United States of America, the European Union and the United Nations (as well as local laws and regulations applicable to the issuing branch) and, in furtherance of those laws and regulations, we have adopted policies which, in some cases, go beyond the requirements of applicable laws and regulations. Therefore, we undertake no obligation to make any payment under this letter of credit if any person (natural, corporate or governmental) involved is listed under the sanctions imposed by the USA, the EU, the UN, or applicable local authorities…”

A confirming bank would normally be reluctant to add its confirmation to a credit containing such a clause unless the clause is removed or suitably amended.

Country and transfer risk are generally managed through the confirming bank’s internal country limits, risk appetite, and credit policies rather than through special wording inserted into the documentary credit. If the perceived country or transfer risk is considered unacceptable, the confirming bank is more likely to decline adding its confirmation than to seek additional protective clauses.

It should also be noted that the ICC has consistently expressed the view that sanctions clauses and other non-documentary conditions should not be drafted in a manner that is inconsistent with the independent documentary nature of a letter of credit or that undermines the operation of UCP 600.

Best regards,

Mr. Old Man

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Further Question

Can we (the confirming bank) request the issuing bank to incorporate the following wording in field 47A of the MT700?

“The Issuing Bank agrees that the Confirming Bank shall not incur liability where honour, negotiation or reimbursement is prevented or delayed due to applicable sanctions, exchange control regulations, transfer restrictions, governmental actions, or other country risks beyond the Confirming Bank’s control.”

Answer

You may certainly request the issuing bank to incorporate such wording into the documentary credit.

However, whether the issuing bank and, more importantly, the beneficiary would agree to a confirmed credit containing such a clause is another matter. A beneficiary generally expects a confirmation to provide an independent and reliable payment undertaking. A clause that significantly limits the confirming bank’s liability may reduce the value of that confirmation and could therefore be unacceptable to the beneficiary.

In practice, if a confirming bank considers the sanctions or country risk unacceptable, it is often more straightforward to decline adding its confirmation than to request the inclusion of a clause that substantially qualifies its undertaking.

Best regards,

Mr. Old Man