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Top tips; the value of LC confirmation
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Top tips; the value of LC confirmation

Posted on the 15th Dec 2014 in the category Letters of Credit

Unconfirmed letter of credit ("LC")

An LC which is not confirmed carries only the undertaking of the issuing bank (buyer's bank) to honour or make payment to you, as the exporter, on receipt of a complying set of documents at its counter. You are thus exposed to the following risks:

  • The issuing bank is unable to make payment and transfer monies in the currency of the LC for the benefit of you as the LC beneficiary upon presentation of complying documents (in the case of an LC available by payment at sight) or on the due date for payment after a complying presentation of documents (in the case of a term or usance LC)
  • The country of the issuing bank is not able to transfer monies in the currency of the LC for the benefit of you as the beneficiary
  • The issuing bank interprets the documents received at its counter as discrepant (not complying with the LC) and rejects the documents and refuses to honour or pay the LC

Confirmed LC

A bank that has added its confirmation to an LC has added its own undertaking to honour or negotiate a complying set of documents, in addition to that of the undertaking of the issuing bank

Subject therefore to its receipt of a set of documents which fully complies with the terms and conditions of the LC, the confirming bank MUST honour the LC, if available with it by sight payment, deferred payment, or acceptance (determined by how the LC availability has been structured), and negotiate (pay you as the beneficiary without recourse) if the LC is available by negotiation with the confirming bank

 

Benefits of confirmation

We recommend that our clients seek an LC confirmed by an appropriate bank (our next top tip will explain how to choose and control which bank adds its confirmation), for the following reasons:

 

  • The payment undertaking from the confirming bank is independent to the issuing bank (the buyer's bank) unless the LC is confirmed by the local branch of the issuing bank
  • The confirming bank will examine the documents and honour the presentation and pay you as the benefciary based solely on its own interpretation of whether the documents presented comply with the LC. This enables you to work closely with the confirming bank to check its interpretation of what is required. This is particularly important if the LC has terms and conditions which are unclear or ambiguous
  • Subject to a fully complying presentation of documents, the confirming bank should honour and pay you as the beneficiary without recourse. This is important. Should the issuing bank subsequently claim that documents received from the confirming bank are discrepant and refuse to reimburse the confirming bank, the confirming bank cannot reclaim the money back from you (unless fraud is cited)

If you wish to receive any further information, and/or wish to receive future editions from our series "top tips on letters of credit", please email stephen@axstradefinance.co.uk or complete our enquiry form on our "contact us" page


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