Confirmation is normally requested by a beneficiary at the time of agreeing the sale of goods, or agreeing to provide services or performance, and is usually a pre-condition inserted in the proforma invoice or sale contract.
A beneficiary will usually request confirmation when it has concerns with (a) the risk of the issuing bank (e.g., the ability of the bank to honour its undertaking), (b) country risk (e.g., the payment risk of the country where the issuing bank is domiciled), and/or (c) documentary risk (e.g., they require another bank to take the risk of non-payment due to the issuing bank determining that documents do not comply).
Some beneficiaries also have a company policy that every documentary credit, or documentary credits from certain countries or regions, must be confirmed.
Depending on the location of the beneficiary's customer, this may or may not be a sound policy given the range of fees charged by banks for adding confirmation and that the underlying issuing bank, country and/or documentary risk may not be as significant in every documentary credit.
In order for a bank to consider a request or authorisation from an issuing bank to add confirmation, there must be a credit facility established for that issuing bank with the confirming bank. As a minimum, this facility will determine the maximum period for which confirmation may be added (e.g., up to 6 months); the maximum amount that may be outstanding at any one time; and the maximum payment terms that may be applied (e.g., 180 days after sight).
In simple terms, when a bank adds its confirmation to a documentary credit, it effectively ‘undertakes' to the beneficiary that it will honour or negotiate a complying presentation, notwithstanding the financial position of the issuing bank and the financial or political status of the country in which the issuing bank is located.
Having confirmed a documentary credit, the confirming bank also accepts the documentary risk in the examination of documents. If the confirming bank determines that the documents comply it must honour or negotiate, notwithstanding any subsequent view of the issuing bank that the documents do not represent a complying presentation.
A confirming bank need not be a nominated bank, but it is highly advisable that it is.
If it is not a nominated bank, the bank must understand what form its undertaking is to take i.e., is it to be a reimbursement undertaking or is it to act as a security for non-payment by the issuing bank. Its confirmation should be worded accordingly.
More comprehensive information on the roles and responsibilities of a confirming bank can be found in the Documentary Credits 'Advising, Confirmation and Amendments' module at www.tradefinance.training