As we have discussed earlier there are some risk factors exist for each party in a letter of credit transaction. When we look at the risk issue from the beneficiaries' perspective, we will observe two main risk factors that beneficiaries must bear ; the country and the insolvency risk of the issuing bank. Confirmation can be seen as a security mechanism which works in favour of the beneficiaries that eliminates these two risk factors.
Let us look at the definitions of confirmation and confirming bank from the UCP 600 ;
"Confirmation means a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation."
"Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank's authorization or request."
As can be seen on the above definitions confirming bank adds its undertaking to the letter of credit in addition to that of the issuing bank. In this way beneficiaries receive a second payment guarantee from another bank. Insolvency risk of the issuing bank is eliminated by addition of this second payment guarantee to the letter of credit.
Mostly confirming banks and the beneficiaries are located in the same country and when this is the case the country risk of the issuing bank is eliminated as a bank which locates in the same country with the beneficiary adds its undertaking to the letter of credit in addition to that of the issuing bank.
Confirmed Letter of Credit
After discussing the benefits of the confirmation in a letter of credit transaction, let us examine the points that need to be take into consideration regarding the confirmed letters of credit.
During the issuance phase of a letter of credit, the issuing bank should "authorize or request" the potential confirming bank to add its confirmation to the letter of credit.
No bank can be forced to add its confirmation to any letter of credit.
If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation. (UCP 600 article 8 ii-d)
Confirming a letter of credit does not mean that confirming bank is obligated to confirm any subsequent amendment or amendments.
A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the letter of credit. (UCP 600 article 8 ii-b )