Uncategorized CONDITIONAL CONFIRMATION By Mr Old Man Posted on October 28, 2011 7 min read 8 0 3,458 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr CONDITIONAL CONFIRMATION.by Old Man on Friday, October 28, 2011 at 1:00pm.Dear All, For your information about the practice of adding confirmation to L/Cs at KEB, please find attached below Mr. Old Man’s discussion with Thomas from KEB. Hope it’s informative and useful. ——– Dear Huu Duc, At present, when we confirm an LC, we have a side agreement with the beneficiary to enable us to exercise recourse if payment is not forthcoming from the issuing bank due to discrepancy. If the issuing bank refuses to pay after we have paid the beneficiary as a confirming bank, we would not have a way to receive payment from the issuing bank. Thus the side agreement allowing us recourse to the beneficiary. Our LC confirmation is only in regard to the credit risk of the issuing bank but does not cover the documentary credit risk (i.e. discrepancy). This is contrary to regular confirmation procedure where the payment by confirming bank is final. Recently we negotiated an LC confirmed by a bank in London and issued by its branch in Africa. The negotiating bank was instructed to claim reimbursement on the confirming bank and to send the documents to the issuing bank. In this case, the confirming bank is not presented with the documents and thus it does not face any documentary risk (discrepancy). In this case, the confirming bank is giving assurance to the beneficiary by confirming the LC issued by its African branch but does not actually examine documents and make payment to the beneficiary. This is also different from the regular confirmation practice where the confirming bank examines documents and makes payment. What is your thoughts on the above two kinds of confirmation practice? Thomas ———— Dear Thomas, To my understanding, where the L/C authorizes the nominated negotiating bank to claim reimbursement from the confirming bank and forward the documents to the issuing bank, the negotiating bank SHOULD claim reimbursement if the documents presented are complying. If the documents are not complying the negotiating bank should ask for the issuing bank’s waiver of the discrepancy and authorization to claim reimbursement from the confirming bank. Regarding the side agreement allowing the confirming bank to cover the credit risk of the issuing bank only (and not documentary risk), I think it is quite possible so long as the beneficiary so agrees. However, a wise beneficiary would not agree to such a side agreement. It is advisable that this side agreement apply only to silent confirmation where the confirming bank adds confirmation to the L/C without the issuing bank’s authorization. Best regards, Nguyen Huu Duc —————- If your bank confirms an LC, how do you handle the documentary risk, ie where the issuing bank refuses payment based on a discrepancy where you had paid beneficiary under compliant documents? Thomas ————— Dear Thomas, We only agree to add confirmation (including silent confirmation) to L/C if the following conditions are sastified: – LC issued by a reputable bank that has credit line with our bank or agrees to pledge deposit as security. – L/C available with our bank with TTR allowed or allowing us to debit the issuing bank’s account with our bank. – L/C terms and conditions including documents required easy to comply. – … L/C is an instrument of payment and not an instrument of refusal. More than 99% of discrepant presentations are paid eventually. So far there’s no risk with us. However, to tell the truth, we are also very prudent in L/C confirmation business. Best regards, Nguyen Huu Duc —————- For our part, due to the documentary risk, we do very little confirmation. And even when we do, we require from the beneficiary side agreement to enable us to exercise recourse in case issuing bank does not pay. Our London branch was looking to see whether they can do some lc confirmation business. Unfortuanately due to documentary risk I do not think that they can do much lc confirmation business. With warmest regards, Thomas .
IS THE NOMINATED BANK REQUIRED TO VERIFY WHETHER THE BENEFICIARY HAS AUTHORIZED THE PRESENTING BANK TO PRESENT THE DOCUMENTS?
CAN THE ISUING BANK CITE “LATE PRESENTATION” AS A DISCREPANCY SOLELY BASED ON THE DATE OF THE COVER LETTER?
IS THE NOMINATED BANK REQUIRED TO VERIFY WHETHER THE BENEFICIARY HAS AUTHORIZED THE PRESENTING BANK TO PRESENT THE DOCUMENTS?
CAN THE ISUING BANK CITE “LATE PRESENTATION” AS A DISCREPANCY SOLELY BASED ON THE DATE OF THE COVER LETTER?