By Rupnarayan Bose
Once upon a time I was so confident, so sure about its basic principles. So I discussed it in the books that I wrote. I taught the rules with total confidence to my students, delivered lectures to the seminar participants on what I believed was “The Rule”. I expounded on the implications of UCP 600 article 10, focusing on the true meaning of terms such as “parties to a credit” and “irrevocable”. I explained to anyone who cared to listen why a letter of credit could neither be amended nor cancelled without the agreement of all the “parties to the credit”, namely, the issuing bank, the confirming bank (if any), and the beneficiary; the options that a beneficiary had, and how the options could be exercised after receiving the amendment advice. It was fun discussing threadbare the provisions of this article.
Well, those were also the days of my blissful ignorance, until recently, when I chanced upon a series of posts on a reputed forum discussing the very same article of the UCP – and arriving at a conclusion that was completely at variance with our conventional wisdom. Since then I have been as confused as a hungry baby in a topless bar.
The background, of course, is familiar to most of us. The issuing bank issues an L/C. The confirming bank adds its confirmation and advises the same to the beneficiary. An amendment follows. The confirming bank has the option to extend its confirmation to cover the amendment. Where it does so, the amended L/C bearing the confirmation of the confirming bank is advised to the beneficiary.
At this point in the timeline:
- Under UCP 600 sub-article 10(b), “[a]n issuing bank is irrevocably bound by an amendment as of the time it issues the amendment“.
- Under the same sub-article, “A confirming bank … will be irrevocably bound as of the time it advises the amendment.”
It is for the beneficiary, being the last in line, to indicate its acceptance to the amendment (or to reject the same). The beneficiary still retains the option to utilise the original, un-amended L/C, or accept the amendment. UCP 600 sub-article 10(c) lays down the rules for the same. If all the three parties to the L/C act on expected lines, the amendment sails through without a hitch. The L/C stands amended.
Things become somewhat confusing where the confirming bank opts to advise the amendment, but without extending its earlier confirmation to cover the amendment. It happens, so no surprises there. The advising bank still complies with UCP 600 sub-article 10(b) which states, “….A confirming bank may, however, choose to advise an amendment without extending its confirmation and, if so, it must inform the issuing bank without delay and inform the beneficiary in its advice.”
Where the amendment is only for an increase in the face value of the L/C, conventional wisdom tells us that the earlier confirmation by the confirmer would still remain valid, but only up to the amount of the original L/C. Any presentation for an amount in excess of the face value of the original L/C will not be covered by the confirmation. For long, this has been our understanding and interpretation of UCP 600 article 10.
On the face of it, this interpretation offers a simplistic but acceptable solution. The confusion begins where the amendment is not only about the amount of the L/C (increase or decrease), but also about other terms in the L/C such as date or mode of shipment, departure or arrival point, documentation or shipping marks. Paragraph ‘B’ of the section quoted later in this article cites the instance of “the addition of a document” and its implications. In such instances, where does one draw the line between the un-amended and amended sections within the same L/C? Conventional wisdom is likely to stumble at this point.
Simply put, the nature of the amendment should not be the issue. What should be a matter of debate and discussion is the status of the L/C subsequent to where the confirming bank advises the amendment to the L/C without extending its confirmation to the amendment. In which case, is there an amended L/C? Is the beneficiary still permitted by the UCP 600 to accept the “amendment” or to present documents complying with the terms of the “amended” L/C, and be entitled to payment (by honour or negotiation)?
I have in front of me extracts from the book, “UCP600: Analytical Commentary”. Section 14 (pages 458-459) of its analysis under chapter-reference “UCP600 Article 10 (Amendments)” states as follows:
“Confirmers and Amendments. While it is common to state simply that the consent of the confirmer is required for an amendment to be effective, the reality is far more complex. Strictly speaking, the consent of the confirmer is needed in order to bind the confirmer, but what that consent consists of and the consequences where it is not given considerable thought (sic).
- The Options Available to a Confirming Bank. A confirming bank is not obliged to agree to an amendment. It can either advise the amendment indicating its agreement to it or indicating that it does not extend its confirmation to the amendment.
- Confirmer Elects Not to be Bound. Where the confirmer elects not to be bound the beneficiary must elect between performing under the unamended credit or performing under the amended credit. Depending on the nature of the amendment, the choice may not be stark where the amendment increases the quantity of the goods under a credit that permits partial shipment. Partial shipments up to the unamended amount would fall within both the amended and unamended credit. Even the addition of a document may not discharge the beneficiary since that document would be extraneous under UCP600 Article 14(g) (Standard for Examination of Documents) although the presentation of the requested document may be deemed to constitute consent to the amendment in a manner that discharges the confirmer.”
The options and privileges available to a confirming bank as explained in the foregoing are logical and perfectly understandable – being fully in conformity with UCP 600 article 10. It goes without saying that “the consent of the confirmer is needed in order to bind the confirmer”. However, the “consequences where it is not given” is of considerable interest, if not rather confusing, to this writer.
UCP 600 sub-article 10(a) states, “….a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.” Accordingly, where the confirming bank – a party to the L/C – declines to add its confirmation to an amendment, the L/C is supposed to remain un-amended. The original, un-amended L/C, or an L/C the last amendment for which was confirmed by the confirming bank, should continue to be the sole operative instrument.
In such a situation, there cannot exist any option for the beneficiary to “…elect between performing under the unamended credit or performing under the amended credit” (to quote Professor Byrne et al). Remember that the amendment never came into effect, thanks to the refusal of the confirming bank. The “amended credit” never happened, never came into being! Consequently, UCP 600 sub-article 10(b) cannot stand. A confirming bank cannot elect to “advise an amendment without extending its confirmation” because the “amended” L/C cannot be a valid, operative instrument. In my opinion, UCP 600 sub-article 10(b) seems to be in direct conflict with sub-article 10(a). If the latter prevails, (where the confirmer refuses to extend) the former cannot come into play.
By that very same argument, UCP 600 sub-article 10(c) cannot be a stand-alone item either. The beneficiary, as a party to the L/C, may exercise its option – to accept an amendment or reject the same – only if it received a valid credit instrument. The options available with the beneficiary under UCP 600 sub-article 10(c) would be available if, and only if, the confirming bank extended its confirmation to the original L/C.
An expert participating in the aforementioned debate on the forum put it succinctly when he opined that,
“[i]f a CB elects not to add confirmation to an amendment (whether it be to do with an increase, decrease, extension, curtailment thereof or relating to any other material changes) and which if the beneficiary subsequently accepts, either by express consent or by performance in compliance with LC amended terms, the confirmation (as a whole) is rendered null and void under the LC as amended. That is to say, if the beneficiary requires continuation of the confirmation, they must expressly reject the amendment, or at least continue to perform in compliance with the un-amended LC terms.”
To reiterate, where the confirming bank does not extend its earlier confirmation to a subsequent amendment:
- the amendment cannot take effect; the L/C remains un-amended;
- irrespective of UCP 600 sub-article 10(b), the confirming bank cannot “choose to advise an amendment without extending its confirmation” to the L/C, since the amendment is invalid (ask the confirming bank why, or refer to sub-article 10.a;
- since the so-called “amended” L/C cannot exist, UCP 600 sub-article 10(c) should be deemed inoperative.
- if the beneficiary accepts the amendment, “the confirmation (as a whole) is rendered null and void under the L/C as amended”.
I tried to wrap my head around the above, and failed miserably.
Article 7 of the UCP states, “An issuing bank is irrevocably bound to honour as of the time it issues the credit.” Further, in accordance with UCP 600 sub-article 10(b), “[a]n issuing bank is irrevocably bound by an amendment as of the time it issues the amendment“. If the beneficiary eventually makes a complying presentation under the amended L/C, the issuing bank cannot refuse to honour the presentation. This is irrespective of whether the amendment is finally advised to the beneficiary or not. It must be kept in mind that the commitment of the issuing bank to the beneficiary is independent of the obligations of that of the confirming bank to the beneficiary.
If the confirmer does not consent to the amendment, it is not bound by the same, because the amended L/C instrument is a different contract altogether vis-à-vis the original. As explained earlier, the issuing bank is bound by its own amendment. So we now have a situation where
- there ought not to be any amended L/C in existence under UCP 600 sub-article 10(a), because the confirmer did not extend its earlier confirmation to the amendment;
- if the beneficiary requires continuation of the confirmation, it must continue to perform in compliance with the un-amended LC terms;
- YET, the issuing bank being bound by its own commitment under UCP 600 is obliged to honour a complying presentation under its own amended L/C – an L/C that is not supposed to exist as a valid, operative instrument.
As the saying goes, we have a situation here.
Amendment to an L/C is a frequent, normal and routine business requirement. But it appears that by requesting for an amendment to a confirmed L/C, the beneficiary may find itself between a rock and a hard place. If a partly confirmed L/C cannot exist, confirmation may become a millstone around the neck of the beneficiary, if not of the applicant too.
If you are still not confused enough, here is one last question. If the confirming bank is allowed to walk away from an agreement to which it was initially a “party”, if its commitment to an L/C becomes null and void through its refusal (to extend), what happens to the concept of irrevocability of an L/C instrument?
Everything said and done, where the buyer and the seller
agree to an amendment, and the issuing bank agrees to modify the L/C
accordingly, technicalities should not stand in the way. Facilitating trade
should be the paramount objective. In my opinion, amendment(s) to an L/C should
be allowed to remain valid and operative irrespective of the refusal of a confirming
bank to extend its earlier confirmation to any subsequent amendment. It would
be similar to where there was no confirming bank. The beneficiary should be
allowed the option to accept or reject an amendment to the L/C even if refused
by the confirming bank, and perform under the amended L/C. The UCP 600 sub-articles
10(a), 10(b) and 10(c) should be modified accordingly. So should paragraph ‘B’
of the book “UCP600: Analytical Commentary”.
 First published: Trade Services Update, pp13, Volume 20, Issue 4, October- December 2018
 Authors: Professor James E. Byrne, Vincent M. Mauella, Chee Seng Soh, Alexander Zelenov