Silent confirmation of credits

1 Credits and the UCP

A letter of credit is a unilateral promise by the issuing bank to pay the beneficiary upon a complying presentation of documents. For an Australian exporter, this amounts to replacing the counterparty with a bank as a reliable paymaster.

Letters of credit normally include by reference the terms of the Uniform Customs and Practices for Documentary Credits (the UCP). The UCP are rules that apply when the text of the credit indicates that it is subject to the rules, and they are binding on all parties to the credit unless expressly modified or excluded by the credit.1 The UCP are published by the International Chamber of Commerce. The current version is the 2007 Revision as published in ICC publication No 600. It is common to refer to the rules as the UCP 600.

The UCP 600 include rules which have become the defining characteristics of letters of credit:

  • the rules are binding on all parties unless expressly excluded by the credit;2
  • the autonomy principle: the credit is independent of the underlying transaction that gave rise to it;3
  • banks deal in documents, not in goods or services.4

A court will not interfere with a claim under a credit save in the most extraordinary circumstances. In Australia, this includes fraud by the beneficiary, unconscionability and 'negative terms' in the underlying contract.5

2 Confirmation

Although a letter of credit will replace the purchaser by a more reliable paymaster, it is probably a foreign paymaster. The exporter-beneficiary may find it difficult to negotiate with the foreign bank. Disputes with the bank are likely to be difficult and expensive to resolve.

One solution for this is to negotiate for a 'confirming bank'. The confirming bank undertakes obligations to the beneficiary that are similar in all respects to those of the issuing bank.6 In addition, the confirming bank must negotiate without recourse if the credit is available by negotiation with the confirming bank.

The UCP defines 'confirming bank' as:7

Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank's authorization or request.

Consequently, and importantly, a bank may not be a confirming bank unless so requested or authorised by the issuing bank.

3 Nominated bank

A nominated bank is one at which the credit is available. It is common for the issuing bank to name a class of banks as nominated banks. For example, when the beneficiary is an Australian exporter, the credit might be available at any Australian bank.

Article 12 of the UCP 600 defines the status of a nominated bank. Nomination does not impose any obligation on the nominated bank except where expressly agreed to by the bank and the agreement is communicated to the beneficiary. Mere receipt of documents or receipt together with examination does not make the nominated bank liable to the beneficiary.

The issuing bank is obliged to reimburse any nominated bank that has honoured or negotiated a complying presentation of documents.8

4 Negotiation of credits

A credit may be available by 'negotiation' if it so states. Although negotiation of credits has been common for many years, it was not until the 2007 revision that the term was defined in the UCP. Article 2 stipulates:

Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

5 Prepayment

Where a bank is nominated to accept a draft or to incur a deferred payment undertaking, it is also authorised by the issuing bank to prepay or purchase an accepted draft or a deferred payment undertaking.9 Reimbursement is due at maturity, whether or not the nominated bank has negotiated the credit before maturity.

Under the UCP 500, the previous version of the UCP, a bank that discounted the credit took the risk that the issuing bank would have some defence at maturity.10 Under the UCP 600, the effect of 7(b) and (c) is to shift the risk of fraud or other defences to the issuing bank.

6 Authorisaton but no request

In Fortis Bank SA/NV v Indian Overseas Bank [2011] EWCA Civ 58 the relevant letters of credit included 'THE LC MAY BE CONFIRMED AT THE REQUEST AND COST OF BENEFICIARY'. Upon request by the beneficiary, Fortis confirmed the letters of credit.

In a dispute between the nominated bank, Fortis, and the issuing bank, IOB, Hamblen J held that Fortis was a confirming bank as well as a nominated bank authorised to negotiate.

7 No authorisation or request

An issuing bank may be reluctant to authorise or request a bank to become a confirming bank. The issuing bank may be subject to local regulations restricting its relations with foreign banks or it may be subject to exchange controls which either prohibit or penalise its use of a foreign bank as a confirming bank. In some cases, it may be reluctant to enter into a relationship because of the reputation of the foreign bank.

This leaves the beneficiary in a difficult position. The local bank may be a nominated bank, but the beneficiary would like some comfort that the credit will be met. According to the UCP, the local nominated bank may do this by expressly agreeing to honour or negotiate and communicating that decision to the beneficiary.11

Instead of following this simple and effective procedure, nominated banks sometimes choose to make separate agreements with the beneficiary that purport to 'confirm' the credit subject to certain conditions. The conditions are always unfavourable to the beneficiary, The procedure is called 'silent confirmation'.

8 Greenhill v CBA

'Silent confirmation', although common, is an uncertain and dangerous device. This is illustrated by Greenhill International Pty Ltd v Commonwealth Bank of Australia [2013] SADC 7.

The plaintiff concluded a contract with SBM for the sale of a quantity of waste paper. SBM, located in India, applied to the Bank of India (BOI) to open an irrevocable letter of credit in favour of the plaintiff. The defendant bank was named as the advising bank and duly advised the plaintiff that the credit had been opened.

The credit was available by negotiation at any Australian bank, including the defendant bank. In other words, the defendant bank was a nominated bank authorised to negotiate the credit. The credit appears to have been a deferred payment credit, payment due 180 days after a complying presentation of documents.

Rather than simply notifying the beneficiary that it agreed to negotiate the credit, the CBA entered into an agreement called a 'silent confirmation'. The essential terms of the agreement were that:

  • The defendant undertook to 'silently confirm' the Credit;
  • The defendant undertook to 'honour the drawings' subject to the Provisions of the Uniform Customs and Practice for Documentary Credits, International Commerce Publication No 600 (UCP600”);
  • The plaintiff assigned and subrogated its rights under the credit against the BOI to the defendant;
  • The plaintiff agreed to assist the defendant to take all steps necessary to achieve payment including proceedings to enforce recovery from the BOI;
  • The defendant charged a fee for agreeing to 'silently confirm' the Credit; and
  • The defendant retained the right to 'effect recourse' to the plaintiff in the event of any delay, default or loss occurring as a result of a dispute in relation to the plaintiff’s contract of sale of the waste paper.

The plaintiff presented the required documents and received advanced, discounted, payment from the defendant. The BOI accepted the documents and, in May 2008, advised the defendant bank that reimbursement would be made in 180 days. Note that both banks accepted the documents as a complying presentation.

Following delivery of the waste paper in May, SMB raised concerns as to its quality. In August, SMB sought and obtained a 'temporary injunction' which restrained 'Valley View International' from 'encashing' the credit. Note that this intended to restrain the plaintiff, not the BOI. It was ineffective since it failed to name the plaintiff.

In January 2009, the defendant wrote to the plaintiff purporting to exercise the right of recourse. It debited the plaintiff's accounts with the amounts advanced together with interest. The plaintiff disputed this action on a number of grounds.

The defendant made several demands for payment from BOI, but took no other action. In December 2010, an Indian court made an order restraining the BOI from making payment to either the plaintiff or the defendant, but it was not until mid-March that BOI informed the defendant of the order.

9 The effect of the agreement

The defendant undertook to credit the account on presentation of complying documents, and this was subject to the provisions of the UCP. However, the agreement went on to give the defendant a right of recourse. This is inconsistent with the terms of the UCP for confirming banks.

In accordance with well established principles, when the express terms of a contract conflict with terms incorporated by reference, the express terms will prevail.12 Consequently, the defendant had a right of recourse.

10 Implied terms

Costello J went on to consider the plaintiff's submission that the defendant had breached implied terms of the agreement. He accepted that there were implied terms that the defendant would take all steps necessary to achieve payment in the event of a default by the BOI.13

One of the requirements for finding an implied term, and in many ways the most difficult to establish, is that 'it must be necessary to give business efficacy to the contract'. Costello J found this to be the case since the plaintiff, as a result of the assignment, had lost all rights against BOI while, without the implied term, the defendant had recourse without making any effort on the plaintiff's behalf.

The court found that the defendant had breached the obligation to assist the plaintiff since, prior to debiting the account, the defendant did not:14

  • bring to the attention of the BOI that it had already negotiated the credit;
  • state to the BOI that it was bound to honour the credit;
  • forward any letter of demand to the BOI regarding payment;
  • take any other steps to persuade the BOI to make payment;
  • threaten the institution of proceedings against the BOI;
  • institute proceedings seeking the recovery of the monies; and/or
  • communicate with the Indian Court or seek to participate in that Court’s proceedings.

Costello J concluded that the defendant, far from taking all reasonable steps to require BOI to honour the credit, effectively took no steps at all.15

11 Some observations

The assignment: The agreement between the defendant and the plaintiff required the plaintiff to assign all rights to the bank. In the event, the assignment, which deprived the plaintiff of its rights against BOI, was a major factor in finding the implied term that defeated the bank.

The assignment was unnecessary since it added nothing to the practical rights of the defendant against the BOI. The defendant was a nominated bank that negotiated the credit, and that gave it a direct and enforceable right against the issuing bank.16

Further, the direct rights against the BOI are subject to fewer defences than the rights acquired through the assignment. The assigned rights are subject to all the defences that BOI might have against the beneficiary,17 but the defendant, as a nominated bank authorised to negotiate, is entitled to be reimbursed by issuing bank when it has negotiated a complying presentation and advanced funds.18

If the bank was not a nominated bank, then the form of the agreement would be appropriate. The assigned rights would be the only enforceable rights of the bank against the issuing bank and, indeed, the only source of a right to present the documents to the issuing bank.

Reimbursement by BOI: As a nominated bank that negotiated a complying presentation, the defendant was entitled to be reimbursed by the BOI at maturity of the credit. Importantly, this obligation of BOI is independent of BOI's undertaking to the beneficiary.19

This means that even if BOI had a defence against the plaintiff's claim, it had no defence against a claim by the defendant.20

Action against BOI: A letter of credit, like any other contract, may specify its governing law. In the absence of a specific choice of governing law, the 'proper law of the contract' governs.

The 'proper law of the contract' when the contract is a letter of credit is the place where the documents are to be presented and the credit honoured.21 That place was clearly contemplated as being in Australia and, since the defendant was named as the advising and nominated bank, probably South Australia.

Assuming that the credit did not specify a choice of law, then the defendant bank could easily have brought an action against the BOI in Australia, probably obtaining a default judgment.

The UK courts have held that a restraining order against payment of a credit will be ignored unless it is issued under the proper law of the contract.22

Implied terms: Implied terms found by the court provide a fair outcome for the Greenhill case, but the solution is not satisfactory. Implied terms are notoriously 'unstable' in the sense that two different courts may come to quite different conclusions.

An implied term solution is also unsatisfactory since the defendant's solicitors are, no doubt, already busy re-drafting the standard agreement to exclude the implied terms. The implied term solution is a likely to be a one-off solution.

The defendant in the Greenhill case would undoubtedly object to the term 'solution' in the preceding paragraph. However, it seems obvious that the letter of credit structure presumes that the negotiating bank will take steps to obtain reimbursement.

Recourse: Obtaining a right of recourse against a beneficiary who makes a complying presentation is clearly against the spirit and purpose of documentary credits. Given the rules concerning terms incorporated by reference, it seems impossible to prevent banks from engaging in the procedure. Even if the ICC rules were amended to prevent unfair recourse, an express term allowing it would be given priority.

One possibility of preventing the practice is the unconscionability provisions of the Competition and Consumer Act. In one performance bond case, Skodaexport,23 Batt J noted that acting within one's strict legal rights might be `unconscionable' for the purposes of Act. Drawing on a standby credit was also found to be unconscionable in Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) [2003] NSWSC 713.

In both Skodaexport and Boral Formwork the purpose of the bonds could be fulfilled while still granting a partial injunction. Similarly, it might be found that it would be unconscionable for a bank to seek recourse against the beneficiary without first pursuing its rights against the issuing bank.

This is particularly so since the bank has suffered no loss: it still has the right to be reimbursed by BOI.

The Greenhill case is under appeal.



Art 1 UCP 600, but this also follows from the rules concerning conflict between express terms and terms incorporated by reference.


Art 1 UCP 600; the autonomy principle was well established before the UCP; see, for example, Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318. The principle also applies to performance bonds and standby letters of credit: see Edward Owen Engineering Ltd v Barclays Bank International Ltd and Umma Bank [1978] QB 159; Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443.


Art 4 UCP 600. The UCP does not mention the fraud exception to the autonomy principle. Other exceptions exist: see Weaver et al, The law relating to banker and customer in Australia, (3rd ed, Thomson Lawbook Co 2003)


Art 5 UCP 600.


Weaver et al, The law relating to banker and customer in Australia, (Third ed, Thomson Lawbook Co 2003) for a discussion of the autonomy principle and its exceptions.


Art 8 UCP 600.


Art 2 UCP 600.


Art 7(c) UCP 600.


Art 12(b) UCP 600.


See, for example, Banco Santander S A v Banque Paribas [2000] EWCA Civ 57 where fraud by the beneficiary was discovered; see also Alan L Tyree, Deferred payment letters of credit, (2013) 24 JBFLP 66.


Art 12(a) UCP 600.


See, for example, Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd [2002] FCA 1156 and Modern Buildings Wales Ltd v Limmer and Trinidad Co Ltd [1975] 1 WLR 1281. Of course, the UCP itself permits a credit to exclude or modify terms: Art 1 UCP 600.


Based on the conditions explained by the High Court in BP Refinery (Westernport) Pty Ltd v Hastings [1977] HCA 40 and Codelfa Construction Pty Ltd v State of New South Wales [1982] HCA 24.


At para 55.


At para 57.


Art 7(b) and (c) UCP 600.


See Banco Santander S A v Banque Paribas [2000] EWCA Civ 57.


Art 7(c) UCP 600.


Art 7(c) UCP 600.


Essentially overturning the decision in Banco Santander S A v Banque Paribas [2000] EWCA Civ 57. See also Fortis Bank SA/NV v Indian Overseas Bank [2011] EWCA Civ 58.


Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233


Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 where the credit was payable in North Carolina. The issuing bank was in Kuwait and a Kuwaiti court has issued a 'provisional attachment'.


Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380.

Author: Alan L Tyree

Created: 2013-11-12 Tue 09:39

Emacs 24.3.1 (Org mode 8.0.2)