The court in Greenhill International Pty Ltd v Commonwealth Bank of Australia confirmed that silent confirmations of letters of credit fall outside the Uniform Customs and Practice for Documentary Credits 600 (UCP 600) and are governed purely by the express and implied terms agreed to by the paying bank and the beneficiary. However, the court in Fortis Bank SA/NV v Indian Overseas Bank confirmed that, despite silent confirmation, a nominated bank retains its rights against the issuing bank under UCP 600.
The most recent version of UCP 600, which codifies best practice in relation to letters of credit, allows a nominated bank with whom the credit is made available by the issuing bank to add its confirmation upon the issuing bank’s request or authorisation. A confirmation means “a definite undertaking of the confirming bank… to honour or negotiate a complying presentation”. In terms of the UCP600 only a confirming bank, and not a nominated bank, is obliged to honour a complying presentation. Beneficiaries therefore prefer that a credit is confirmed to ensure that the bank has no discretion regarding the honouring of letter credit when presented with a complying presentation.
In circumstances where the issuing bank has not authorised or requested a bank to add its confirmation to a credit, nominated banks, on request by beneficiaries, often add their silent confirmation to these credits. Silent confirmation is a purely contractual arrangement between the nominated bank and the beneficiary, which excludes the issuing bank and is not governed by UCP 600. It often includes rights of recourse, not otherwise permitted by the UCP 600, and obliges the beneficiary to assign or cede to the nominated bank its rights against the issuing bank under the credit.
These additional express or implied terms may render otherwise clear and well regulated letters of credit opaque and ambiguous. For instance, in Greenhill International Pty Ltd v Commonwealth Bank of Australia the assignment of rights under the letters of credit to, and right of recourse retained by, the nominated bank was interpreted by the court as placing an additional implied obligation on the nominated bank to take all reasonable steps to compel the issuing bank to honour the credit.
It is important that when banks add their silent confirmation to letters of credit the terms governing this arrangement must be clearly crafted to avoid any such implied obligations. More importantly, as confirmed in Fortis Bank SA/NV v Indian Overseas Bank, the nominated bank should, despite such silent confirmation, continue to rely on its clearly defined UCP rights which oblige an issuing bank to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded such documents to the issuing bank.