ISP98 Form 7 - Model Standby Requiring Confirmation

Nomination to advise.  A standby that nominates a person to confirm typically also nominates that person to advise the standby.  As to the limited significance of advising a standby, see ISP98 Rules 2.05 (Advice of Standby or Amendment) and 2.07 (Routing of Amendments).. ↩

Nomination to confirm.  Under ISP98 Rule 1.09(a) (Definitions) a “confirmer” must be nominated by the standby issuer, and under Rule 1.11(c) (Interpretation of these Rules) a confirmation is generally treated as a separate standby issued by the confirmer for the account of the standby issuer.. ↩

Confirmation required.  This ISP98 Form 7 is based on an underlying agreement between the applicant and the beneficiary that the applicant will arrange for a standby to be either issued or confirmed by a beneficiary-approved bank.  Where the applicant applies for a standby to be confirmed by a beneficiary-approved bank, the focus is on the beneficiary’s satisfaction with the confirmation and on the confirmer’s satisfaction with the standby.  In this context, a standby that nominates a beneficiary-approved confirmer but is not confirmed fails to satisfy the underlying agreement and likely requires a substantial change in the underlying agreement or standby terms or both.

If, however, the standby is to be useable even though no confirmation is issued, then the text of the standby should be redrafted.  In particular, the issuer’s undertaking should be redrafted to substitute, e.g.: “If the person nominated to confirm does not issue its confirmation, then Issuer undertakes to Beneficiary to pay against presentation to Issuer on or before the expiration date at the following place for presentation: [address of place of presentation to Issuer] of Beneficiary’s demand that (i) identifies this Standby (by the name and address of the Issuer and of the Applicant and reference number for this Standby, as shown above), (ii) is dated and signed by Beneficiary, (iii) states that Applicant is obligated to pay to Beneficiary the amount demanded under the agreement between Beneficiary and Applicant titled [agreement title] and dated [date], and (iv) states that no confirmation of this Standby was issued[ despite Beneficiary’s tender of payment of confirmation fees and charges].”. ↩

Timely confirmation.  Confirmation may require time-consuming internal credit and country risk approvals and sanction clearance checks.  Accordingly, unless confirmation has been pre-arranged, this period might be appropriately set at 30 calendar days.  As a practical matter, the person nominated to confirm will require that the standby be issued before it is confirmed, and the issuer will charge fees for its exposure before as well as after the standby is confirmed.

The fact that a confirmation is or is not timely issued is an effective standby condition, whether or not the issuer receives a written notice thereof.  It is not a non-documentary condition under ISP98 Rule 4.11(c)(ii) (Non-Documentary Terms or Conditions).  In this regard, other ISP98 rules permit or require an issuer to treat a confirmer’s operations affecting the standby as within the issuer’s operations.  See endnote 6 on ISP98 Rule 2.01(d)(iii) (Undertaking to Honour by Issuer and Any Confirmer to Beneficiary), which provides for an issuer’s obligation for wrongful dishonor of a presentation made to the confirmer.. ↩

Automatic cancellation.  This model form states that the standby is issued and, if  not timely confirmed, then it is automatically cancelled.  For the reasons indicated in the preceding endnote, it would not be practical to condition standby issuance on confirmation issuance.  See ISP98 Rules 2.03 (Conditions to Issuance) and 2.06(a) (When an Amendment is Authorised and Binding).. ↩

Presentations to confirmer.  ISP98 Rule 2.01(a) (Undertaking to Honour by Issuer and Any Confirmer to Beneficiary) obligates an issuer to honour a complying presentation made to the issuer.  ISP98 Rule 3.04 (Where and to Whom Complying Presentation Made) provides for presentation to the issuer of a standby, whether or not confirmed.  These rules are intended to maximize a beneficiary’s rights against the issuer.  However, these rules also maximize the burdens and risks of the issuer of a confirmed standby.  In this regard, because most standbys require presentation of beneficiary prepared documents that have no intrinsic value and are easily duplicated, there are risks of duplicate presentation under standbys that permit presentation at more than one place.  Accordingly, the effects of these rules are frequently and appropriately limited in the text of the standby.  This form of standby expressly requires that all presentations be made to the confirmer.

An ISP98 standby that permits presentation to a confirmer thereby obligates the issuer to perform the confirmer’s obligations if the confirmer wrongfully dishonours.  This standby form, which permits presentation to the confirmer, expressly disclaims that obligation.  See note 15.. ↩

]]: No presentation to issuer.  This form of standby expressly disclaims issuer responsibility for any attempted presentation by the beneficiary to the issuer, even if the standby is not confirmed.  This disclaimer is consistent with treating the standby as cancelled if not confirmed and is included for the avoidance of doubt. 

Notes 3 and 15 address the possibility of obligating the issuer directly to the beneficiary, where the standby is not confirmed and also in certain circumstances where the standby is confirmed.. ↩

Undertaking to honour/reimburse.  The issuer’s undertaking in this standby form includes rightful honour of the confirmation as an optional condition to payment under the standby.  The wording in this clause is based on ISP98 Rules 8.01(a)(ii) (Right to Reimbursement) and 1.11(c)(1) (Interpretation of these Rules).  Under those rules an issuer’s obligation to reimburse a confirmer is treated like an applicant’s obligation to reimburse an issuer.  The issuer’s undertaking in this standby form also includes conditions to payment under the standby based on the confirmer’s forwarding the documents specified in the standby for examination under the ISP98 rules that apply to a presentation to an issuer, i.e., ISP98 Rules 4 (Examination) and 5 (Notice, Preclusion, and Disposition of Documents).

Although largely theoretical, there are differences between reimbursing a confirmer and honouring a confirmer’s presentation.  E.g., the letter of credit independence principle may be somewhat differently applied.  A confirmer claiming reimbursement may be treated for some limited purposes as an agent of the issuer or as an agent of the beneficiary.  Whether a confirmer rightfully honoured its confirmation may depend on the law where the confirmer acted and not on the law governing the standby issuer.  Accordingly, the concerned parties may wish to include both or to exclude or disclaim one or another of these combined undertakings of the issuer to reimburse and to honour.. ↩

Confirmer’s rightful honour.  If a standby provides for paying a confirmer that rightfully honours its confirmation, without further conditions, then the standby issuer may wish to clarify with the applicant that the issuer is entitled to rely on the confirmer’s claim of rightful honour.  A standby may so provide simply by failing to disclaim a confirmer’s ISP98 undertaking in ISP98 Rule 8.01(a)(ii) (Right to Reimbursement), which provides that rightful honour of a confirmation obligates the issuer to reimburse.  (This ISP98 Form 7 standby includes additional conditions that limit the issuer’s obligations to reimburse/honour, e.g., the forwarding of specified documents to the issuer.). ↩

Expiration with automatic extension.  If the standby is to provide for automatic extension of the expiration date or the like, then ISP98 Rule 2.07 (Routing of Amendments) and ISP98 Form 2 should be consulted (and the form of confirmation to be issued should be drafted to give the confirmer time to act in parallel with the issuer, e.g., to send an effective notice of non-extension of the confirmation.). ↩

Prompt forwarding.  A confirmer may receive a presentation on the expiration date, thereafter examine the presentation and decide to honour, and thereafter forward the documents to the issuer.  This form of standby and ISP98 leave to applicable standard practice determinations as to whether a particular forwarding is “prompt” or how long after the expiration date an issuer may expect a claim for reimbursement or actual receipt of forwarded documents.  The applicable standard practice mentioned in ISP98 Rule 1.11(a) (Interpretation of these Rules) includes the practice of issuers and nominated banks under commercial letters of credit that provide that they are available at or expire at the counters of a nominated bank.

A standby may instead require that the documents be forwarded to, or received by, the issuer within a fixed time period.  If so, the parties should consider the effect of automatic extension under ISP98 Rules 3.13 or 3.14 (CLOSURE ON EXPIRY DATE).  In this regard, the beneficiary under this form of standby is expected to rely on the place of presentation and the expiration date stated in the confirmation, leaving the confirmer with any risks resulting from differences in those terms as between the confirmation and the standby.. ↩

Issuer examination of documents.  This optional text clarifies that reimbursement is subject to the issuer’s examination of the forwarded documents under ISP98 Rules 4 (Examination) and 5 (Notice, Preclusion, and Disposition of Documents) to determine whether the confirmer is entitled to reimbursement under the terms and conditions of the standby, including ISP Rule 8 (Reimbursement Obligations).  It is intended to avoid possible arguments over the application of ISP98 rules to claims from a confirmer for honour or reimbursement.

To simplify an issuer’s response to a confirmer’s claim for payment, the standby may add that the forwarded documents must be accompanied by the confirmer’s statement that they were timely received and rightfully honoured by the confirmer under a confirmation issued by the confirmer as provided in the standby.  See ISP98 Form 6 model counter standby, endnote 8 and related text.. ↩

Form of demand and statement.  The requirements in a standby for demanding payment from the issuer should be repeated in the confirmation and supplemented by specific information as to the manner, time, and place of presentation to the confirmer.  For additional and alternative model texts and forms of beneficiary payment demands and statements, see ISP98 Forms 1-4 and their endnotes.. ↩

Interest; advance payment. Because ISP98 does not provide for interest on late honour or reimbursement, any desired provision on issuer liability to pay interest, collection costs, or the like, should be added (or left to applicable law).

If the standby adds an undertaking to pay the confirmer in advance of the issuer’s examination of forwarded documents, then it should restate the issuer’s refund right under ISP98 Rule 8.03 (Refund of Reimbursement).  If payment to the confirmer is to be made by the confirmer’s claiming on another bank, then ISP98 Rule 8.04 (Bank-to-Bank Reimbursement) and the standard ICC rules to which it refers should be consulted.. ↩

Confirmer’s wrongful dishonour.  ISP98 Rule 2.01(d)(iii) (Undertaking to Honour by Issuer and Any Confirmer to Beneficiary) provides that “If the standby permits presentation to the confirmer, then the issuer undertakes also to honour upon the confirmer’s wrongful dishonour by performing as if the presentation had been made to the issuer.”  This rule (like the similar rule obligating confirmers in case of wrongful dishonour by the issuer) is intended to maximize a beneficiary’s rights against an issuer and any confirmer.  However, these rules also maximize the burdens and risks of the issuer and confirmer by making both responsible for what the other does under their respective obligations to act with independence, promptness, and finality.  This form of standby does not restate that type of undertaking and instead expressly disclaims that undertaking to the beneficiary, consistent with the other clauses in ISP98 Form 7 that limit the issuer’s obligations to reimbursing the confirmer.  This disclaimer covers confirmer dishonour, whether or not wrongful, so as to avoid argument over the scope of the term “wrongful dishonour” in ISP98 Rule 2.01(d)(iii).  This disclaimer is consistent with the assumptions in this model form that the beneficiary relies on the confirmer’s confirmation and not on the issuer’s standby.

If, however, this disclaimer is not wanted, then the standby should restate the undertaking described in ISP98 Rule 2.01(d)(iii), e.g.: “If Confirmer wrongfully dishonours a presentation made under its Confirmation, then Issuer undertakes to Beneficiary to honour this Standby by paying to Beneficiary the wrongfully dishonoured amount [against a presentation made to Confirmer on or before the expiration date that includes the above stated document(s)].”  The bracketed text is intended to avoid argument based on the confirmer’s peculiar handling of the presentation to it, notably where the beneficiary’s claim of wrongful dishonour by the confirmer is based on confirmer preclusion rather than beneficiary compliance.

This model form and these endnotes to not include alternative wording for a standby that provides for the beneficiary, at its option, to make presentation on either the issuer or the confirmer or for a standby that provides for action against the confirmer only if the standby is wrongfully dishonoured by the issuer.  As indicated in prior endnotes, a standby that provides the  beneficiary with unlimited rights to present to either the issuer or the confirmer and then to enforce its claims against either or both is problematic for both.  It may make both responsible based on facts and law known to, or peculiar to, one but not the other, e.g., closure of a place for presentation.  These risks may be mitigated where the issuer and confirmer are affiliated or otherwise familiar with each other’s operations.  One risk avoidance step may be to include in the standby (and a similar provision in any confirmation) that the issuer and confirmer may exchange information about the confirmed standby without further consent of or notice to the applicant or beneficiary, as well as that any payment made under either immediately reduces the amount available under both.  In this regard, ISP98 Rule 4.11(c)(ii) (Non-Documentary Terms or Conditions) facilitates issuer reliance on communications about the standby sent or received by a confirmer.. ↩

Responsibility for confirmer charges.  ISP98 Rule 8.02 (Charges for Fees and Costs) generally obligates an issuer to a nominated person (and the applicant to the issuer), to pay the customary charges of a confirmer or other nominated person that acts on the nomination, including those that the beneficiary fails to pay.  This optional sentence in the standby allocates responsibility to the beneficiary and expressly disclaims any residual responsibility.. ↩

Communications.  This optional clause (which was adapted from a similar optional clause in ISP98 Form 1) or a variation of it is particularly apt for a standby that provides for confirmation.  For further clarification this clause may be expanded to state that the issuer and the person nominated to confirm should promptly advise each other of all communications affecting the standby (or confirmation) that are made between the beneficiary and either the issuer or the person nominated to confirm.  See ISP98 Rules 2.05 (Advice of Standby or Amendment), 2.07 (Routing of Amendments, and 4.11 (Non-Documentary Terms and Conditions).. ↩