When does confirming bank earn its fees?
Hi all,
Bank A: Issuer
Bank B: Advising Bank/ "Confirming" bank
Bank C: Negotiating bank
LC was issued by Bank A and advised through bank B, which added its confirmation. Seller decided that fees were too high and asked for amendment of the LC to delete confirmation. Issuer sent swift message asking bank B to delete confirmation. LC was payable at issuer's counters.
Seller's negotiating bank (Bank C) accidentally sent the docs to Bank B instead of bank A. Docs were discrepant and returned to Bank C.
(Docs were eventually properly sent to bank A and payment was made with no problem)
Bank B is now asking Bank C for the confirmation charge, examination fee and discrepancy fee. Question: Does Bank B have the right to demand these charges? Are confirmation charges earned when confirmation is given, or when docs are presented to confirming bank?
Thank you!
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A confirming bank is due its fees as from the time that the beneficiary receives confirming bank's advice that it has added its confirmation. From such time onwards, the confirming bank provides a separate independent undertaking to pay, and this undertaking is in place until the LC expiry date, or earlier, if the confirming bank has discharged its obligation by honouring a presentation made to it. In consideration of the payment risk undertaken by the confirming bank on the issuing bank, and the payment secutity granted to the beneficiary, it is entitled to charge a fee covering the full life of the LC. These fees are payable, regardless of whether documents are presented to it,and whether documents are found to be discrepant.
Bank B had already added confirmation, and so the fees would have been due, in advance. The fact that the issuing bank had issued an amendment deleting the requirement for confirmation, would only become effective (from the point of view of the confirming bank) as from the time that Bank B advises the amendment to the beneficiary, but my view is that the charges would still have been payable.
It is not clear whether Bank B ever advised the amendment, prior to its receipt of documents. But, even so, and in practice, the confirming bank may still agree to charge from the date of confirmation to the date of rescinding confirmation.
So, my view is that the confirming bank is entitled to its charges (albeit perhaps for a reduced period), including all other attendant negotiation fees and costs.
It's an excellent answer!
Regards,
Nguyen Huu Duc
In practice, an advising bank, before he adds his confirmation to an LC, the beneficiary must give first his request tothe advising for the confirmation of the LC, otherwise the advising bank is not obliged to add his confirmation. Moreover, even the beneficiary has requested for the confirmation of the LC but then the advising bank was unable to do so due to his own reasons(political,country risk ,sanctions,financial risks etc.)an advising bank is not obliged to add his confirmation. In the event that he adds his confirmation to the LC he must collect his charges upfront from the party whose the charges are to be collected (beneficiary or applicant based on the terms of the LC).if charges are for beneficiary's account he must have communicated his charges before adding his undertaking to the LC. As such ,if the beneficiary feels that the charges are so high, he should not have requested that the LC be amended and just inform the advising bank that he doesnt want the LC be confirmed(it's for his protection anyway). Another thing is, when a confirming bank has added his confirmation , he must request that the presentation of documents be restricted or available at his counter enabling him to check whether the documents are complied or not. So in case that beneficiary has presented the documents to Bank C ,still Bank C must forward the documents to Bank B for examination.
Dear cdcspinoy
I mostly agree with your observations, but if I may, I would like to raise a few further comments:
1. Beneficiary requiring to pre-approve adding confirmation : I would not necessarily agree. If the MT700, for example, instructs the receiving bank to add confirmation, such bank would either add confirmation and advise the beneficiary or would revert to the issuing bank and inform that it is not prepared to add confirmation, simultaneously advising the LC without confirmation. For good order sake, it is likely to advise the beneficiary that notwithstanding that it has been requested to add confirmation, it has declined this request. Art. 8d refers. As you, I agree that the beneficiary has the option to decide whether he wants confirmation, and if not, should advise the confirming bank immediately.
2. Whether charges are to be taken up-front : This is a matter of choice on the part of the confirming bank, but the fact is that it is nevertheless payable, whether in advance, at utilisation , or at expiry, (in the eventof non-utilisation). In the event that this rmains unpaid, recourse is on issuing bank.
3. Whether LC should be restricted to a confiming bank's counters : Although not mandatory, no bank requested to confirm a credit would undertake this commitment without requiring that the credit be restricted to its counters. Interestingly, in the above case, it is stated that the LC is payable at the issuing bank's counters, notwithstanding that the credit is to be confirmed by another bank.
4. Whether a bank other than the confirming bank is obliged to forward the documents to such confirming bank for payment : This depends on the instructions given to such bank by the beneficiary. The beneficiary may well choose to use a collecting bank to forward documents on approval to the issuing bank and bypass the confirming bank.
The confirmation agreement is essentially a contract between the beneficiary and the confirming bank, and it is up to the two parties to decide on mutually acceptable terms. If a confirming bank acts on the request of the issuing bank, it is protected under UCP, but if not (i.e a silent confirmation), it is not.
Dear Abrar,
You have a point, however please let me raise some ponits regading your comments:
1. You are right that advising bank may add its confirmation directly upon his advise of the credit if he is prepared to do so. however based on experience beneficiary or the applicant doesn't know the meaning of "confirmation"most of the time instructions to confirm on mt700 is not actually required by the beneficiary as applicant id just ticking on the box _ confirm or _unconfirm on the lc application without knowledge of the meaning of confirmation. The reason why an advising bank would not undertake to an LC if it is not actually required by the beneficiary. The advising bank will just advise the LC without adding their confirmation and stating in the cover leter that in case the beneficiary require that LC be confirmed, they may inform the advising bank. charges also may be indicated in the cover letter.
2. Charges may be taken upront to avoid uncollected confirmation charges in the future. As you have mentioned that it is possible that documents may be presented directly to issuing bank or to other banks as per instructionof the beneficiary. Mostly confirmation of LC is not effective until collection of charges by the confirming bank.
3.I agree with your comment in item 3.
4.While confirming a credit, there are terms and conditions for the beneficiary to follow. The confirmation may not be effective if it is not followed. One point is that he must present the documents to the confirming bank which must be stated in the confirmation advice."if the confirming bank is bypassed inthe presentation of docs. and if such presentationis required because it is also the nominated bank, or if the documentary credit or the terms of the confirmationadvice to the beneficiary require such presentation, the confirmation obligationmay not be effective" The Guide to Documentary Credits 3rd edition-Gary Collyer page 138.
Anyways, why would a beneficiary instruct his bank to submit his documents to the issuing bank or any other bank bypassing the confirming bank, where he can draw or request for payment or undertaking directly from the confirming bank if he knows that his documents are complied. The primary reason for the confirmation is that he might not know fully the applicant credit standing or there is a risk in the bank or country of beneficiary that he might not get the payment even documents are complied.
Thank you all for your help!
In this case, the beneficiary did indeed request confirmation, but changed its mind after confirmation was given. Hence the amendment to cancel confirmation.
In that same amendment notice, the LC was made available only at the counters of Issuer (originally it had been available with confirmer).
The amendment came only 8 days after issuance. Confirming bank however, is demanding confirmation fees for the entire validity period of the LC (Several months). Beneficiary accepts that some fees should be due to confirming bank, but only for the period in which confirmation was effective (i.e., 8 days).
Complicating matters is that Confirming bank was also the paying bank (issuer instructed them to pay the whole amount upon beneficiary's demand)...but confirming bank deducted the entire confirmation charge when they released payment to Beneficiary.
Thanks again!
As a banker, banks will not refund their charges in which they have already provided their services in return.
One example is ..if an applicant requested for an lc for 180 days validity, banks will collect his LC issuance commission for 180 days..in case the applicant has requested that the LC be cancelled after 2 months..banks will not surely refund commission for the remaining months.. The main reason is they have already started to provide their services..their undertaking has commenced in other words.. If in your case , let say that the beneficiary has presented complied documents for the full amount of LC surely the confirming bank is liable even on the very same day that he adds his confirmation..
That is the the fault of the beneficiary..before he enter into a contract or any agreement he must know the underlying terms and conditions.like how much will be the charges? or will i able to refund the charges in case i changed my mind?
The option of the beneficiary is to try negotiating it to the confirming bank if possible..if not..just adjust the selling price of your products as you incurred additional expenses in acquiring the goods. Worst scenario is to request or ask for a discount from the applicant on your next order.
This is an unfortunate situation, and not helped by the confirming bank taking an unreasonable stance.
With the benefit of hindsight, (and this has already been touched on) the beneficiary did not need to request an amendment. The confirmation is a separate contract between beneficiary and confriming bank, so a better option would have been to negotiate the fees with the confirming bank directly, and if this was not successful, instruct the bank to retract the confirmation. This would have saved time and the confirming bank may have been more receptive to either lowering its fees or, in the case of confirmation retraction, waiving them completely.
If the direct approach failed, the confirming bank would simply have written the beneficiary a formal letter indicating that the confirmation had been retracted, and it would also have informed the issuing bank accordingly. The beneficiary would then have the right, and been free to present to the issuing bank directly, without requiring an amendment changing the place of availability.
On an earlier post, it was mentioned that practices in some countries require the confirming bank to reaffirm with the beneficiary whether the beneficiary requires confirmation, even if such direct instructions had been received from the issuing bank. Although, this approach has its merits (in ensuring that the risk of the beneficiary rejecting the confirmation, and thereby realisation of fees, is negated), one has to ask at whose behest the original confirmation request was inserted. Surely, this is driven by the beneficiary through the P/I? And, if so, why would one need to reaffirm, other than to ensure that the beneficiary is agreeable to the tariff?
It's very true that this could have all been avoided if Beneficiary hadn't asked for confirmation in the first place. They don't dispute that.
But Beneficiary DID request the confirmation to be retracted. That message went from issuer (Bank A) to the confirming bank (Bank B), who advised it to Beneficiary.
Beneficiary and Negotiating Bank (Bank C) argue that the
confirmation fees should be prorated for the time confirmation was
effective. That seems to be what commenter Abrar suggests.
Bank B appears to be insisting that once confirmation is given, the entire confirmation fee is due no matter what happens. It appears that's what commenter CDCSPINOY said above as well.
But if this is true, wouldn't this make ANY attempt at retracting confirmation totally futile? Is that correct that in ALL cases of a beneficiary trying to delete confirmation, it's basically useless to even try?
Thank you all!
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