Article Two of the Uniform Commercial Practice (“UCP”) 600 defines “Confirmation” as a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation. This article defines a “Confirming Bank” as any bank that adds its confirmation to a letter of credit upon the issuing bank’s authorization or request.
In its simplest terms, a confirmed Letter of Credit (“LC”) can be defined as a second guarantee by the confirming bank. The primary guarantee is made by the issuing bank which commits to pay the beneficiary of the Letter of Credit upon fulfillment of its terms. In fact, the very nature of an LC is that it is a guarantee by the issuing bank that payment will be made regardless of the financial ability of the applicant to pay. By adding its confirmation, the confirming bank is providing an additional guarantee that assures the beneficiary that payment will be made regardless of the issuing bank’s ability to pay.
In all cases, payments made under letters of credit are conditioned upon the terms described within the instrument. Only presentations that comply with the terms of the LC are considered “complying presentation[s]” for the purposes of UCP 600. If any of the terms are not fulfilled, neither the issuing bank nor the confirming bank are obligated to pay unless the applicant agrees to waive discrepancies and has sufficient credit or cash lines to effect payment.
Normally, when a letter of credit is issued, the issuing bank assumes the risk of honoring payment upon receipt of a complying presentation. . Unless otherwise specified, a standard letter of credit is treated as unconfirmed by default. However, sometimes the the parties to the LC are not satisfied with the adequacy of the issuing bank’s guarantee and/or they are uncomfortable with the country where the issuing bank is situated (typically because of high political or economic insecurity). In such cases, a confirmed letter of credit is often requested.
With a confirmed Letter of Credit, another bank, the “Confirming Bank”, usually sited in the same country that the beneficiary of the LC is located, will add its own “confirmation” to LC. By adding its confirmation, the Confirming Bank undertakes to honor the beneficiary’s claim under the instrument, provided that such beneficiary has complied with all terms and conditions of the particular Letter of Credit. If confirmation is added, the credit should be made available with the Confirming Bank for honor or negotiation. This allows the confirming bank to make payment prior to the issuing bank’s effecting of payment.