In order to avoid confirmation cost / charges, an un-confirmed LC being transmitted to an advising bank which is the nominated bank too, LC available by Negotiation by beneficiary's drafts at sight on nominated bank.

Under reimbursement clause, it demonstrates to claim reimbursement from XYZ bank (the Reimbursing bank) upon receipts / presentation of complaint documents.

The LC issuing bank has arranged and the nominated bank has received the Reimbursement undertaking confirmation from reimbursing bank subject to URR 525 accordingly.

1. Do You feel that a Reimbursement Undertaking from a third bank i.e. Reimbursing bank can be an alternative of Confirmation?

2. Are such arrangements enough to provide comfort / satisfaction to a beneficiary?

Please advice.

Regards

Aziz Balouch

The beneficiary of a Reimbursement Undertaking is a 'bank' (usually the nominated bank) whereas the beneficiary of a LC confirmation is the party named in the LC as the Beneficiary. The bank that issues a reimbursement undertaking does not thereby become obligated to the LC beneficiary. Although Reimbursement Undertaking may help persuade a nominated bank to negotiate without recourse or offer to silently confirm a LC, the fact remains that it is not equivalent to LC confirmation as far as LC beneficiary is concerned. If for example, the nominated bank that has not confirmed the LC, refuses to negotiate the documents, the beneficiary cannot go to the bank that issued the reimbursement undertaking and ask them to negotiate. The only option open to beneficiary under such a situation is to go to the issuing bank itself. Under confirmation on the other hand, the beneficiary can demand that the confirming bank negotiate (i.e. honour its confirmation). This right of the beneficiary is additional to the right it has on the issuing bank. In other words, while under the confirmed LC the beneficiary ends up getting two bank’s (issuing as well as confirming bank’s) undertaking, under a LC backed by a reimbursement undertaking the beneficiary has just one bank’s (issuing bank’s) undertaking only.

1. Do you feel that a Reimbursement Undertaking from a third bank ie. Reimbursing bank can be a alternate of Confirmation?

No. A Confirmation of a credit benefits the beneficiary. A Reimbursement Undertaking benefits the nominated bank.

2. Are such arrangements enough to provide comfort / satisfaction to a beneficiary?

The only comfort a beneficiary should take from knowing a Reimbursement Undertaking exists is the fact that a 2nd bank believes the LC issuing bank is creditworthy - it does not assure the beneficiary that their complying documents will be honoured, i.e. it is NOT the same as a confirmation of the credit.

Therefore, though not enough, a Beneficiary, in a way, sees a benefit from such arrangement otherwise there is no use for such undertaking and there would not be a need to add cost to the transaction whether or not a Beneficiary pays the associated charges. Following are some of the benefits:

1) If the LC is available by negotiation, Beneficiary can, in most cases, easily negotiated, without recourse, documents with a favourable pricing.

2) Can discount, without recourse, payments due under the LC, again with a favourable pricing.

3) May easily get confirmation from the Nominated Bank, if so required by the Beneficiary.

In many cases, Nominated Banks use reimbursement undertaking from a third bank to add their confirmation to LCs issued by:

1) Banks that the Nominated Banks have no exposure or where their exposure to such banks reached its limit.

2) Banks in countries where the Nominated Banks have no exposure or where their exposure to such countries reached its limits.