The letter of credit transaction usually involves two banks: the
buyer's bank issuing the letter of credit and a bank in the seller's
country, which advised the letter of credit to the beneficiary. The
advising bank may also assume the role of confirming bank.
Whether advising and/or confirming, the seller's bank assumes
certain responsibilities.


An advising bank acts as the agent of the issuing bank. The
function of the advising bank is to take reasonable care to verify the
authenticity of credits received and then accurately transmit them to
their beneficiaries. When advising a letter of credit, the bank
assumes no other liability. On receipt of the documents for
examination and payment, the advising bank will pay the seller only
if it has received good funds from the issuing bank, even if it was
specifically named as paying bank in the letter of credit.


By confirming a letter of credit, the advising or another bank
assumes the same responsibilities as the issuing bank, including
the obligation to pay against presented documents if they are in
order and all of the letter of credit terms are met. In effect, the
beneficiary has the individual promise of two banks to pay against
conforming documents; the issuing bank and the confirming bank.

How is a Letter of Credit Confirmed?

When negotiating the terms of sale, the seller would require a letter
of credit requesting the advising bank to add its confirmation. The
buyer includes this request when submitting the application for L/C
issuance to his bank. In most instances the issued credit states:
"Please advise beneficiary adding your confirmation" or words to
similar effect. Note: This is a request, not a requirement. The
advising bank for various reasons may decline to add its
confirmation and simply advise the L/C without engagement on
its part. When adding confirmation, typical language included in the
cover letter would be, "We hereby confirm this credit and thereby
undertake that all drafts drawn under, and in strict compliance with
the terms stated therein (and any further terms stated herein) will
be duly honored on presentation and delivery of documents as
specified, if presented, at this office on or before the expiry date."

Why Request Confirmation?

The beneficiary may have concerns about the political or economic
stability of the buyer's country, or the strength and reputation of the
issuing bank. Confirmation by a bank known and convenient to the
seller promotes the commercial utility of letters of credit. Also in the
event of a dispute, jurisdiction will be determined by the confirming
bank's location.

Letter of Credit