Urgent, Confirmation of a transfer LC
Dear LC experts,
Would like to hear expert opinions on this one.
A transferable LC of EUR 1000 is issued to bank X for advising to first beneficiary.The issuing bank's intructions are 'confirm'. The LC is restricted for transfer to bank X. The LC is to be transferred to second beneficary for EUR 5000.The first beneficiary requests for a confirmation of the LC.
1. To what extent would bank x add its confirmation for the first beneficiary. Would it be for EUR 5000. What good does that make for the bank x to confirm as the performance of the credit would depend on the second beneficiary docs eventually ?
2. Can bank X transfer the credit without adding its confirmation for second beneficiary or does the confirmation of the LC for he first bene automatically forces the bank for second beneficiary as well?.
3. Can a part confirmation be done for the second beneficiary while transfer.
The transfer LC would have to be advised on the same terms as the original LC, (with the exceptions of amount, periods, dates, etc) and this should include the fact that the LC is confirmed. The transferred LC for the lesser amount, should necessarily bear the confirmation of the transferring bank. The underlying obligation or the risk is unchanged from the confirming bank's point of view. If the transferee presents compliant documents, the transferring bank will call for the transferor's invoice, but if not received, it is allowed to forward the transferee's documents to the issuing bank as a valid tender under the LC. Of course, it is understood that it will receive a lesser amount, and this is the amount it will pay to the transferee. Any variations to the terms of the confirmation should be specifically agreed with the transferee.
Dear abrar,
Thanks for the highlight provided by you.
Would like to discuss more with respect to this one
"The underlying obligation or the risk is unchanged from the confirming bank's point of view"
The second beneficiary , assuming is unknown customer and lets say the transferring bank does not want to confirm for the transferred credit amount. It transfers the credit without adding its confirmation , while at the same time adding confirmation for its well known customer the first beneficiary only for the amount he is eligible for after transfer. i.e EUR 5000 in this case.
Suppose, the issuing banks country goes for a turmoil and does not honour the bill presented for EUR 10,000.Now the transfering bank is restricted to a loss of only EUR 5000 .Would it been done for the transferred credit as well, it would have to bear the entire amount and would have to record its risk undertaking for its unknown customers as well. Can the transfering bank reduce its risk this way.
My view is that if the transferring bank agrees to effect transfer, it must do so under the original terms, including the confirmation obligation, in this case to the transferee. However, the confimation is also a contract between the confirming bank and the party to whom the bank is extending the obligation. Any variance to the terms of the confirmation in respect to the transferee must be privately agreed between the two parties. So in this case, the partial confirmation would have to be approved by the first beneficiary, and transferee, and also agreed with the transfering bank. But one should also be aware that in respect of the unconfirmed portion of the transferred LC, the transferring bank may not enjoy the legal protection that it would have enjoyed as a confirming bank, in the event that recourse is needed to be sought against the issuing bank.
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