Question

1. “A confirming bank will only pay under a letter of credit if the documents presented to it conform strictly with the terms of the credit”.

Discuss the role of a confirming bank under a letter of credit.

1. “In dealing with a letter of credit, a bank has no interest in goods being bought or sold. The credit is separate from and independent of the underlying contract of sale or other transaction”.

Discuss why the bank has no interest in the underlying contract of sale or other transaction.

Answer 1

Role of a conforming bank in LOC:

The confirming bank must pay against a complying presentation even if the issuing or nominated bank doesn’t.

The confirming bank must:

• It is the duty of the confirming bank to honor if the credit is available by sight payment, deferred payment or acceptance with the confirming bank.
• The confirming bank must honor the credit even if the credit is available with another nominated bank & the bank doesn’t make the payment.
• honor, if the credit is available by deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
• It is also the duty of the confirming bank to honor if in case the credit is available with another nominated bank & that bank doesn’t negotiate.
• In case of availability of credit on acceptance with another nominated bank & if that bank doesn’t accept the draft or having accepted doesn’t make the payment then the confirming bank must honor it.

Why banks are not concerned of underlying contract:

The contracts constituting the credit are independent of the underlying transaction i.e. the contract of sale. This is because in performing their duties the banks are not concerned with either their transactions would put the buyer or seller in breach of the sale contract of whose terms they may be any case unaware of. For example if the terms of credit require a bank to reject documents which the buyer would be required to accept under the sale then the remedy of the seller would be to sue on the contract. The obligations of the bank are defined by terms of credit alone & the contract of sale is not at all relevant for them. Indeed it may also be governed by law of different jurisdiction to that governing the credit & the UCP 600 adopts the same principle:

“A credit by its nature is a separate transaction from the sale or other contract on which it may be based & the banks are in no way concerned or bound by such contract even if any reference whatsoever to it is included in the credit”.