In this article following topics will be explained:
- What is the definition of confirmation in letters of credit?
- What are the advantages of confirmation?
- Is possible to confirm a bank guarantee?
- If confirmation does not exist in bank guarantee transactions, what is the alternative?
- What are the differences between confirmed letter of credit and counter-guarantee?
What is the Definition of Confirmation in Letters of Credit?
Letter of credit rules define confirmation as a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
Honour means either to pay at sight if the credit is available by sight payment, or to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment, or to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
We understand from the above definitions that confirming banks and issuing banks are equally responsible for against the beneficiaries under letter of credit rules.
A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.
Even if the issuing bank does not pay the credit amount against the complying presentation, the confirming bank has to pay either to the beneficiary or another nominated bank.
What are the Advantages of Confirmation?
- By paying a confirmation fee and having the letter of credit confirmed, beneficiary will be able to eliminate insolvency risk of the issuing bank.
- By the help of the confirmation, beneficiary could avoid country risk of the issuing bank.
- Beneficiary may be able to receive the reimbursement faster under confirmed letters of credit.
Is Possible to Confirm a Bank Guarantee?
It is not possible to confirm a bank guarantee, because latest version of bank guarantee rules, URDG 758, do not contain any confirmation definition.
If Confirmation Does Not Exist in Bank Guarantee Transactions, What is the Alternative?
- In bank guarantee transactions, counter-guarantee is an alternative approach to the confirmation.
- Counter-guarantee defined under bank guarantee rules and confirmation is defined under letter of credit rules.
- Please keep in mind that confirmation and counter-guarantee are not the same concepts, as there are structural differences exist between a counter-guarantee and a confirmation.
What are the Differences Between Confirmed Letter of Credit and Counter-Guarantee?
- Original letter of credit and confirmed letter of credit are the same document, covering the same terms and conditions. Confirming banks add their confirmations to the very same credit, which was originally issued by the issuing banks.
- Counter-guarantee, on the other hand, is issued by the instructed bank, which is usually located in the same country as the principal, in order to persuade guarantor bank, which is usually located in the same country as the beneficiary, to issue a bank guarantee in favor of the beneficiary. As a result counter-guarantee and bank guarantee are two separate and independent facilities.
It is not possible to confirm a bank guarantee as per URDG 758, which is the latest version of bank guarantee rules. Instead of confirmation, bank guarantee rules define counter-guarantee. But confirmation and counter-guarantee are not the same concepts.