PROCEDURE FOR AN IRREVOCABLE CONFIRMED CREDIT

A. THE SALE CONTRACT

The sale contract should clearly specify that payment will be by confirmed irrevocable letter of credit
if the exporter wishes to insist on this highly secure form of payment. The sale contract is sometimes
referred to as the underlying contract in relation to the documentary credit operations. It is fundamental
principle that the documentary credit is independent/autonomous of the contract of sale, meaning that
disputes under that contract cannot normally prevent payment under the credit. However, the importer must
request in credit application that the credit be opened in accordance with the conditions specified in the
contract of sale.
The sale contract may or may not provide additional details or conditions with respect to the credit
(as, e.g., the time of payment, the documents to be presented, etc.). The exporter will normally insist on a
confirmed credit when it is less than fully confident in the credit risk of the issuing bank, or when it fears that
there may be political or foreign exchange risks associated with the buyer’s country.

B. THE CREDIT APPLICATION

Assuming that the parties have agreed to the terms of the documentary credit in the sale contract,
the importer will apply to its bank for the credit to be issued, thus becoming the applicant. The credit
application, when accepted, constitutes a contract between the importer – applicant and its bank
(the issuing bank). The bank agrees to issue the documentary credit, and the importer agrees
to reimburse the bank for payments made under the credit. Since the bank will open a credit that follows the
instructions given by the importer, it is up to the importer to make sure that these instructions do not
contradict the contract of sale (if there is a contradiction, the importer will be in breach of the contract of
sale). Great care should be taken that the credit does not contain any non – documentary conditions
(conditions that cannot be established by a specific document), as such conditions cannot be enforced.
The importer makes the credit application by filling in a standard form provided by the bank.
The application form has been designed to correspond with the model form for the credit itself, thereby
greatly facilitating the transfer of information from the application to the credit.

C. ISSUANCE OF THE CREDIT

The issuing bank will decide whether or not to issue the credit after considering the importer’s
creditworthiness. From the bank’s point of view, the documentary credit amounts to a borrowing request by
the importer for the time period dating from the opening of the credit until its expiry date
or maturity date for payment.
The bank issues a documentary credit in favour of the exporter – beneficiary under which the bank agrees
to pay the beneficiary, provided the it presents documents that comply with the terms and conditions of the
credit. It is said that this irrevocable undertaking constitutes the third “contract” of the documentary credit
mechanism. The first contract is the contract of sale between the exporter and the importer, and the second
is the one formed by the credit application, whereby the bank agrees to issue the credit for a fee and the
applicant agrees to reimburse the bank for payments made under the credit.
D. CONFIRMATION
When the credit application specifies a confirmed credit, the issuing bank will request that another bank,
usually in the beneficiary’s country, confirm the credit. By confirming the credit, the confirming bank adds its
irrevocable obligation to that of the issuing bank. The exporter is thus assured of
a second reliable paymaster, this one in its own country.
The confirming bank’s decision to confirm will involve a credit analysis of the issuing bank’s credit risk as
well as the relevant political and foreign exchange risks. Having confirmed the credit, the confirming bank
must honour or negotiate upon presentation of complying documents by the beneficiary, regardless of the
issuing bank’s ability to reimburse the confirming bank. The confirming bank advises the confirmed credit to
the beneficiary. The confirming bank’s undertaking to pay now constitutes the fourth contract in the chain.

E. RECEIPT AND REVIEW OF CREDIT

When the exporter receives the letter of credit, it is strongly recommended that it immediately review it,
carefully checking it against the terms of the contract in the light of the anticipated circumstances
of the shipment.
A disturbingly high percentage of documentary credit transactions encounter difficulties upon first
presentation of documents (as many as 50-90%, depending on the country). One of the reasons is that
sellers often neglect to review the credit when they receive it. An immediate review allows sellers to detect
in due time any inconsistencies with the contract of sale, or with their intended means of preparing or
shipping the goods.
If the exporter, on reviewing the credit, realizes that it would be impractical or impossible to comply with its
terms, it should immediately notify the importer and request that the credit be amended.
The exporter should verify that the credit is actually amended and that it is notified of the amendment.

F. SHIPMENT OF GOODS AND PRESENTATION OF DOCUMENTS

In order to be paid under the credit, the exporter must prepare the goods for shipment in due time,
and must assemble all the necessary documents. The exporter is well advised to check
the documents against the documentary credit specifications before presenting them to the bank.
It is highly recommended that the beneficiary present the documents as early as possible. This is because
the bank will take a certain amount of time to examine the documents (a period which cannot exceed five
banking days following the day of presentation under UCP 600) and, in the event the bank detects a
discrepancy which can be corrected, the beneficiary will want to have enough time to correct the
discrepancy and re-present the documents before the expiry of the credit or the latest presentation date.
After shipment, the beneficiary presents the documents (and the draft in those common cases where the
credit calls for a draft) to the confirming bank.

G. EXAMINATION OF DOCUMENTS BY CONFIRMING BANK

The confirming bank will carefully examine the documents presented by the beneficiary against
the terms and conditions specified in the letter of credit. The bank will note any discrepancies (differences
between the documents presented and the terms and conditions of the credit), or will observe that the
documents are complying.
If the documents are found to be complying, the bank will honour (pay, accept or incur a deferred payment
undertaking) or negotiate under the credit, according to its terms. A confirming bank’s settlement to the
beneficiary is without recourse, which means that the confirming bank cannot recover the funds from the
beneficiary, regardless of the issuing bank’s subsequent decision not to reimburse the confirming bank.
If the documents are discrepant, the exporter may be able correct them if there is still time remaining before
the expiry date of the credit or the last day for presentation, and provided that the discrepancies are of a
nature that permits correction. Obviously, some discrepancies cannot be corrected (transport document
shows late shipment, credit overdrawn, etc.), regardless of the time frame.
Should the beneficiary for whatever reason be unable to correct the documents, it may still approach the
applicant for a waiver of the discrepancy. An applicant may be willing to grant a waiver, especially if the
discrepancy appears to be an insignificant one and there are strong commercial reasons for going through
with the deal. Unfortunately, it sometimes happens that applicants use discrepancies as an opportunity to
bargain for discounts from exporters, which is all the more reason for beneficiaries to prepare the
presentation of documents with great care.

H. ISSUING BANK REVIEW; RELEASE OF THE DOCUMENTS TO THE BUYER

The issuing bank will also review the documents it has received from the confirming bank. If,
in the judgement of the issuing bank, documents are discrepant and the confirming bank has made an error
in paying under the credit, the issuing bank can recover the funds for which it has been debited by the
confirming bank.
If the issuing bank’s review indicates that the documents were, in fact, complying, then it will debit
the account of the applicant (or advise the applicant of the due date on which its account will be debit) and
release the documents to it. The documents (particularly the document entitling control of
the goods, such as the marine bill of lading), will allow the importer to collect the goods from
the carrier. Although not addressed in the rules, the importer should also immediately conduct its own
review of the documents. It is possible that the importer may discover a discrepancy that has been missed
or ignored by the banks. In such a case, and depending on applicant law and the language of their credit
application, the buyer can refuse to reimburse the issuing bank and can itself reject
the documents. This is why banks conduct such painstaking examinations of the documents.

Source: Guillermo C. Jimenez, ICC Guide to Export/Import. Global Standards for International Trade, ICC,
New York 2012