Basic Contents of a Confirmed Letter of Credit

(1) Confirmed Letter of Credit

A Confirmed Letter of Credit refers to a letter of credit issued by the issuing bank that is confirmed by another bank, which guarantees to honor the drafts drawn by the beneficiary.

A bank that states in the letter of credit its willingness to undertake confirmation is called the Confirming Bank, which is usually the advising bank.

The UCP stipulates regarding confirmed letters of credit that if the issuing bank authorizes or requests another bank to confirm an irrevocable letter of credit, the bank that agrees to confirm shall undertake the responsibility of negotiating, accepting, or paying sight or usance drafts drawn by the beneficiary.

A confirming bank must collect margin deposits and bank charges before add its confirmation to a letter of credit issued by another bank. If the issuing bank fails to provide the margin, the confirming bank may require the issuing bank to provide reciprocal confirmation obligations as a condition for undertaking the confirmation responsibility.

Whether a letter of credit needs confirmation is decided by the exporter and importer through negotiation. If the importer agrees to add confirmation to the letter of credit, generally, the confirmation fee charged by the bank is borne by the importer.

If the issuing bank entrusts the advising bank to add confirmation, it is called "Mandated Confirmation". However, there are special circumstances where the confirming bank is designated by the exporter to confirm the letter of credit, and this confirming bank is not designated by the issuing bank, known as "Non-mandated Confirmation". This practice is only possible if the issuing bank is a reputable bank.

(2) Trade Conditions for Using Confirmed Letters of Credit

In trade practice, the use of confirmed letters of credit may be considered under the following circumstances:

1. When the importer cannot open the letter of credit from the bank designated or confirmed by the exporter; or the issuing bank has no business relationship with any bank in the exporter's locality; or the political or economic conditions in the issuer's location are unstable; or the contract amount is large, exceeding the general payment capacity of the issuing bank, etc.;

2. When exporter and importer are geographically distant, and there are special local laws and regulations, along with differences in commercial practices and procedures, etc.

If, under the above trade conditions in import/export trade, both parties act in good faith to conclude the transaction for import/export goods, a confirmed letter of credit may be used. This ensures secure receipt of payment for the exporter and allows the importer to purchase urgently needed imported goods. Under such circumstances, both parties will consent to using a confirmed letter of credit.

(3) Functional Terms in the Issuing Bank's Mandate for Confirmation

To indicate that the letter of credit requires confirmation, the following clauses should be included:

1. Mandating the advising bank to confirm.

2. This bank (Issuing Bank) authorizes your bank (Advising Bank) to add confirmation to this letter of credit.

3. Please advise the beneficiary that this letter of credit bears an addition of confirmation from your bank (Advising Bank).

4. The advising bank is hereby authorized to add confirmation to letter of credit No. ______.

To achieve the confirmation function of a letter of credit, it must be explicitly stated that the letter of credit is irrevocable for confirmation to be possible. Therefore, in practice, only irrevocable letters of credit can be confirmed.

(4) Functional Terms for Confirming Bank's Responsibility

When the issuing bank arranges for the advising bank to add confirmation to a letter of credit during conformation, the advising bank must agree to assume the responsibilities and obligations of confirmation. Both must consent clearly to effect but this agreement's required scope of confirmation and the advising bank's exact liability.

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