Can the Second Confirming Bank Claim from the First Confirming Bank?

Intro

In practice, some letters of credit carry dual confirmation — one by the confirming bank nominated by the issuing bank, and another by a local bank in the beneficiary’s country. While this arrangement may look like extra protection, it can also create confusion over reimbursement responsibilities if the chain of document presentation is broken.

 The following case raises a common but tricky question: when both a first and a second confirming bank are involved, can the second confirming bank claim reimbursement from the first if it sends the documents directly to the issuing bank?

QUESTION

Dear Mr. Old Man,

Can you help with my confusion?

An LC was issued by an issuing bank and confirmation added by a confirming bank as requested by the issuing bank. The LC also stated that confirmation could also be added by a second specified confirming bank in the beneficiary’s country if requested by the beneficiary.

The beneficiary requested the confirmation by the second confirming bank, as it was a bank well known to him and located in his country, and he paid confirmation fees to both the first and second confirming banks.

The exporter shipped the goods, presented, and discounted the 180-day deferred payment LC with the second confirming bank without recourse. The documents were then sent by the second confirming bank directly to the issuing bank, bypassing the first confirming bank.

The problem is that the issuing bank did not honour the LC at maturity. The beneficiary has already been paid “without recourse,” so the second confirming bank now bears the loss.

My question is: does the second confirming bank have a claim against the first confirming bank, or is its claim solely against the issuing bank that authorised it to add its confirmation?

Best regards,

S.

______

ANSWER

Dear S.,

Thank you for your question.

As the question does not indicate with which bank the LC is available (a mandatory field under Field 41a of MT 700 format), I assume it is available with any bank by deferred payment. In that case, the second confirming bank acted as a nominated bank, added its confirmation, incurred its own deferred payment undertaking (DPU), and subsequently discounted that undertaking without recourse.

I also assume that the first confirming bank, when adding its confirmation, undertook to reimburse any nominated bank that honoured a complying presentation and forwarded the documents to it.

In this case, the second confirming bank forwarded the documents directly to the issuing bank, bypassing the first confirming bank, and the issuing bank failed to honour at maturity. The key question, therefore, is whether the second confirming bank can now claim reimbursement from the first confirming bank.

Under UCP 600 sub-article 8(c), a confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to it. Reimbursement for a complying presentation under a deferred payment credit becomes due at maturity, whether or not another nominated bank has prepaid or purchased the undertaking before that date.

In light of this rule, the second confirming bank would have been entitled to reimbursement from the first confirming bank only if it had honoured and forwarded the complying documents to that bank. Since it instead sent the documents directly to the issuing bank, the first confirming bank never received them, could not examine them for compliance, and therefore owes no reimbursement to the second confirming bank.

In my view, the beneficiary requests a confirmed LC precisely to avoid issuing-bank risk and country risk. It was therefore imprudent—if not absurd—for the second confirming bank to forward the documents directly to the issuing bank, thereby losing the reimbursement protection normally afforded by the confirmation route.

Lesson learned: In a confirmed LC, the presentation of documents should be made to the confirming bank, whether it is the first or the second confirming bank.

Best regards,

Mr. Old Man