Silent Confirmation Of Documentary Credits: It’s Still Happening

The silent confirmation market is still active and prevalent for LCs in Asian countries as silent confirmation is one of the means for a beneficiary to mitigate issuing bank and country risk when it does not want other banks to confirm its credit.

Silent Confirmation Of Documentary Credits: It’s Still Happening

UCP600 Article 8 relates to a confirming bank’s undertaking where an issuing bank has requested or authorized another bank to add its confirmation to a letter of credit. When an issuing bank does not request or authorize an advising or nominated bank to add its confirmation, but the beneficiary is seeking an undertaking from its bank, it may ask for a “silent confirmation”. It is silent to the issuing bank which did not specifically request a bank to add its confirmation. It represents a bank’s agreement to “honour” or “negotiate” (both terms defined in UCP600 Article 2) a beneficiary’s complying presentation under an LC.

In Commonwealth Bank of Australia v. Greenhill International Pty Ltd,1 the Full Court of the Supreme Court of South Australia determined that silent confirmations fall outside UCP600 and are governed purely by the express and implied terms agreed to by the silent confirming bank and the beneficiary. This may or may not be correct. Let’s explore.

Based on my knowledge of the industry, silent confirmations, or commitments to either pay, purchase, honour or negotiate, were widely common but not discussed in the UCP rules, in any manner. However, beginning with UCP500 while the term silent confirmation was not discussed, Article 10(c) afforded protections to a nominated bank:

Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Bank’s receipt of and/ or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. [emphasis added]

Under UCP500, a nominated bank which provided its undertaking to a beneficiary and then, depending on an LC’s terms, either: paid, incurred a deferred payment undertaking, accepted drafts; or negotiated, is afforded many of the same protections that are provided to a confirming bank. While the term “Silent Confirmation” came about via marketing efforts to convey what service a bank was providing to a beneficiary under prior UCP versions (400 and earlier), UCP500 brought the practice to light and gave nominated banks protections for providing the service so long as the issuing bank nominated it. When aligned with UCP, a silent confirmation is a commitment for a nominated bank to “honour” or “negotiate” (terms defined in UCP600 Article 2). When not following UCP mandates, it remains separate and apart; a side agreement between only the beneficiary and the bank providing its silent confirmation.

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