GTRMS Blog
GTRMS Blog
What Is a “Silent Confirmation”?
I know what silent confirmation is, but would like to know your thoughts.
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There is no standard definition of what a "silent confirmation" is. When I talk to exporters about silent confirmation, what I mean is an engagement by the nominated bank to act in accordance with their nomination. The nomination may be to pay, to accept drafts, to issue a deferred payment undertaking, or to negotiate. Note that under the UCP600, all of these are forms of "honor" except negotiation. The important thing about honor is that, once you do it, it is without recourse. An engagement to honor gives the beneficiary the same protection as a normal confirmation. If the nomination is to negotiate, the equivalent is to engage to negotiate without recourse. By engaging to act in accordance with their nomination, the nominated bank provides the same protection to the beneficiary as if they had confirmed the L/C.
As you will often hear, a bank that issues a silent confirmation has not been authorized by the issuing bank to confirm the L/C. What no one has pointed out, however, is that the bank has probably been authorized to honor or negotiate. People say silent confirmation is not discussed in the UCP, but nomination to honor or negotiate certainly is, acting in accordance with one’s nomination is, and even negotiating without recourse is mentioned. The UCP says that a bank that adds its confirmation undertakes to honor or to negotiate without recourse. Nothing in the UCP says that the ONLY bank that can undertake to honor or negotiate is the bank asked to add its confirmation--any nominated bank can undertake to act in accordance with its nomination. I therefore say that silent confirmation is indeed dealt with in the UCP, it's just that that term is not used. Neither should a bank's silent confirmation agreement use the term "confirm." It's an engagement or a commitment to honor or to negotiate (without recourse) and that's what it should say.
If you read the UCP, you will find that a confirming bank has no right to reimbursement when they honor or negotiate--the issuing bank is obligated to reimburse a NOMINATED bank, not a confirming bank. When you confirm a letter of credit, you had better make sure you are nominated to honor or negotiate. It would be a weird situation, but a letter of credit could be issued such that it contains a request for a bank to add their confirmation and yet does not authorize them to honor or negotiate; a bank that confirms such an L/C becomes obligated to pay, but the issuing bank has no obligation to reimburse them for that payment.
What a confirming bank does have a right to, under the UCP, is to accept or reject amendments. A bank that is merely nominated to honor or negotiate has no such right. This is dealt with in an engagement to honor or negotiate by simply stating that the engagement terminates if the beneficiary accepts an amendment without permission from the nominated bank. A very useful characteristic of a silent confirmation is that the nominated bank might not be the advising bank; in other words, the beneficiary can get a silent confirmation from any bank under an L/C that states it is available with any bank. Of course, if you issue a silent confirmation under an L/C you didn't advise, there is a danger the beneficiary will accept an amendment without telling you. This is why it's a good idea to only issue silent confirmations for beneficiaries you have a relationship with. The same goes for accepting presentation of documents under any L/C you did not advise yourself.
March 24, 2011