Do Confirming Banks Care About Third-Party References?

Intro

In trade finance, one of the most important principles under UCP 600 is that a credit is independent from the underlying contract of sale or any other agreement on which it may be based. Yet, in practice, many credits do contain references to external contracts. A reader recently asked whether such references affect a confirming bank’s willingness to add its confirmation.

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Question

Hi,

I have a query regarding LC referring to 3rd party contracts. Is there any practice that banks don’t add confirmation in case the LCreferences a 3rd party contract?

Thanks & Regards,

Alok Pathak

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Answer

Dear Alok,

Thanks for your question.

It is the issuing bank that decides whether to issue a credit making reference to a third-party contract. Once issued, the confirming bank’s decision to add its confirmation depends on its assessment of the issuing bank’s standing, the country risk, and the terms of the LC itself — not on the underlying contract to which the LC may refer.

Importantly, Article 4(a) of UCP 600 makes it clear that a documentary credit is, by its very nature, a separate transaction from the contract on which it may be based. Banks are not concerned with, nor bound by, such contracts, even if the LC itself refers to them.

In short: a confirming bank does not refuse to add confirmation simply because an LC refers to a third-party contract. The decision rests on risk considerations and the LC terms, not on the external contract.

Best regards,

Mr. Old Man