Guide to Operating 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 further confirmed by another bank, guaranteeing to pay the drafts drawn by the beneficiary. This is called a Confirmed Letter of Credit.

The bank that agrees to undertake the confirmation within the letter of credit is called the Confirming Bank. The confirming bank is usually the advising bank.

The UCP stipulates the following regarding confirmed letters of credit: If the issuing bank authorizes or requests another bank to confirm an irrevocable letter of credit, the bank that agrees to add its confirmation shall assume the responsibility for negotiating, accepting, or paying sight or usance drafts drawn by the beneficiary.

The confirming bank must collect margin deposits and bank charges for adding confirmation to a letter of credit issued by another bank. If the issuing bank does not provide margin, the confirming bank may require a reciprocal confirmation obligation from the issuing bank as a condition before undertaking the confirmation responsibility.

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

If the issuing bank requests the advising bank to add confirmation, it is called "Authorized Confirmation." However, there are special cases where the confirming bank is a bank designated by the exporter to confirm the letter of credit, and this confirming bank is not designated by the issuing bank. This is called "Unauthorized Confirmation." This practice is only possible under the condition that the issuing bank has a credible reputation.

(2) Trade Conditions for Using a Confirmed Letter of Credit

In trade practice, a confirmed letter of credit may be considered under the following circumstances:

1. If the importer cannot open a letter of credit with a bank approved or designated by the exporter; or if the issuing bank has no business relations with any bank in the exporter's location; or if the political or economic situation in the issuing bank's country is unstable; or if the contract amount is large, exceeding the issuing bank's general payment capability, etc.

2. If the importer and exporter are geographically distant, and there are specific legal and regulatory stipulations in their respective locations, along with differences in business practices and methods.

If trade is conducted under the above conditions, and both parties have the intention to conclude the transaction for export and import goods, a confirmed letter of credit can be adopted. For the exporter, this ensures safe receipt of payment; for the importer, it allows the purchase of urgently needed import goods. Under such circumstances, both the importer and exporter would agree to adopt a confirmed letter of credit.

(3) Functional Clauses of Confirmation Requested by the Issuing Bank

To indicate that a letter of credit has the function of confirmation, it should bear the following clauses:

1. Requesting the advising bank to confirm.

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

3. Please advise the beneficiary that this letter of credit is confirmed by your bank (the Advising Bank).

4. The advising bank is hereby authorized to add its confirmation to Letter of Credit No. ________.

For a letter of credit to realize its confirmatory function, it must be explicitly identified as irrevocable to be eligible for confirmation. Therefore, in practice, only an irrevocable letter of credit can be confirmed.

(4) Functional Clauses for the Confirming Bank Undertaking Confirmation

When the issuing bank requests the advising bank to add confirmation to the issued letter of credit, the advising bank must agree to assume the responsibility and obligation of confirmation. Both must match each other for the confirmation function to be effective.

The responsibility and obligation of the advising bank acting also as the confirming bank are usually indicated in the "Advising Bank's Notification Column" at the lower right-hand corner of the letter of credit. In this column, the advising bank must make a written statement agreeing to the terms of confirmation. These terms are called "Constitute a definite undertaking of the Confirming Bank in addition to the undertaking of the Issuing Bank." The text is as follows:

1. This bank (the Advising Bank) is instructed by the correspondent bank (the Issuing Bank) to add its confirmation to this letter of credit and hereby undertakes that all drafts drawn by your company (the Beneficiary) in accordance with the terms of this letter of credit will be honored by this bank upon presentation.

2. At the request of the correspondent bank (the Issuing Bank), we hereby confirm this credit and thereby undertake to your company (the Beneficiary) that drafts drawn in conformity with the terms of this credit will be paid when presented.

3. This credit bears our confirmation and we hereby undertake to negotiate or accept drafts presented to us in compliance with the terms of the credit.

4. We have been instructed to add our confirmation to this letter of credit and we undertake to honor all drafts drawn in accordance with its terms.

(5) Irrevocable Documentary Confirmed Letter of Credit

1. There are two methods for establishing a confirmed letter of credit:

(1) After negotiations, the importer and exporter agree to use a confirmed letter of credit. The issuing bank opens a confirmed letter of credit. In the "Advising Bank's Notification Column" at the lower right-hand corner of the credit, the confirming bank notes its confirmation undertaking and then transmits it to the beneficiary. Whether a margin is required depends on the situation.

(2) The issuing bank opens a letter of credit, sends the original to the advising bank, and requests the confirming bank to issue a separate confirmed credit based on the terms of this credit.

This type of confirmed credit issued by the confirming bank must contain a specific wording to evidence it: "This bank (the Advising and Confirming Bank) acting on the instructions of the Issuing Bank, hereby issues this confirmed letter of credit in accordance with the terms of Letter of Credit No. __ issued by the Issuing Bank."

This method is adopted when the importer has an account and deposits with the confirming bank. The actual practice adopted in a given situation depends on the circumstances.

2. Confirmation is not a Guarantee

In international trade practice, when a confirmed letter of credit is used, the responsibility of confirmation differs from that of a general guarantee.

The responsibility of a Guarantor is to assume joint liability when the original principal cannot perform their obligations. That is, when the principal fails to meet their responsibility, the guarantor must assume that responsibility.

In a confirmed letter of credit, it is clear that the confirming bank is directly responsible to the beneficiary; that is, the confirming bank acts as the primary obligor. In other words, the confirming bank acts and assumes the role of the first party liable for payment. The beneficiary does not first seek payment from the issuing bank and, only after being refused, then seek compensation from the confirming bank. A confirmed credit should not be considered a Stand-By Credit.

3. Confirmation Charges

The confirming bank uses its credit to provide confirmation and assumes risks, therefore it will inevitably charge confirming fees (Confirming Charges or Confirmation Charges).

The amount of fees charged is generally determined by the validity period of the letter of credit. Typically, the confirmation fee is collected every three months. The fee rate is either based on the bank's regulations or negotiated amounts.

Who pays the confirmation fee is determined according to the terms agreed upon in the letter of credit.

4. Unconfirmed Letter of Credit

Any letter of credit that does not contain the wording "Confirmed Credit" is an "Unconfirmed Credit."