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What is a Reimbursement Undertaking?
A reimbursement undertaking is issued by a reimbursing bank at the request of an issuing bank, in favor of a claiming bank—typically the confirming bank—to honor that bank's reimbursement claim. It's important to note that this undertaking is not issued in favor of the beneficiary of the letter of credit (L/C). From the beneficiary's perspective, such an undertaking is generally not essential for his own bank to process or handle the credit.
However, in trade finance practices, banks that are reluctant to confirm an L/C due to country risk or the creditworthiness of the issuing bank may request a reimbursement undertaking. This instrument helps mitigate risk and provides assurance that reimbursement will be honored, thereby securing the confirming bank’s exposure.
Often, exporters or beneficiaries require the credit to be confirmed—particularly when the issuing bank is located in a high-risk country or has a low credit rating. But suppose the nominated bank (usually the exporter’s bank) lacks a credit limit or country exposure limit to take on the risk of such an issuing bank or jurisdiction. In that case, it may request the risk to be shifted to the reimbursing bank, often based in a more stable financial environment.
In such cases, the nominated or confirming bank may request an Irrevocable Reimbursement Undertaking (IRU) from the reimbursing bank, located in a safer jurisdiction where it has available limits. It’s crucial to understand that the reimbursing bank, when issuing such an IRU, is not concerned with the documentary compliance of the beneficiary’s presentation, but only with the validity of the claiming bank’s demand.
According to Article 1 of URR 725 (Uniform Rules for Bank-to-Bank Reimbursements), in a bank-to-bank reimbursement, the reimbursing bank acts solely on the instructions and under the authority of the issuing bank.
Further, Article 2 defines a Reimbursement Undertaking as a separate, irrevocable undertaking issued by the reimbursing bank upon the authorization or request of the issuing bank, addressed to the claiming bank. This obligates the reimbursing bank to honor the claim as long as the terms and conditions of the reimbursement undertaking are complied with.
Therefore, a reimbursing bank cannot issue an IRU without the explicit instruction from the issuing bank. This reinforces that an IRU is not an independent instrument like a standby letter of credit, but rather part of the structured reimbursement arrangement tied directly to the issuing bank's authority.
A Reimbursement Undertaking is a commitment by a reimbursing bank—often instructed by the issuing bank—to honor claims made by a nominated or confirming bank under a letter of credit (LC). It is not issued in favor of the beneficiary, and from the beneficiary’s point of view, it is generally not necessary for handling the LC.
Why Reimbursement Undertakings Are Used
In trade finance, some confirming banks are hesitant to confirm LCs due to:
- Country risk
- Issuing bank creditworthiness
Key Benefits
- Shifts risk from confirming bank to reimbursing bank
- Enables exporters to receive payment promptly
- Improves confidence in LCs involving high-risk issuing banks
How It Works
- The issuing bank instructs a reimbursing bank to issue a reimbursement undertaking.
- The confirming/nominated bank pays the beneficiary.
- The confirming bank submits a claim to the reimbursing bank.
- The reimbursing bank honors the claim if terms are met.
Legal Foundation: UCP 600 & URR 725
- URR 725 Article 1: Reimbursing bank acts solely under issuing bank’s instructions.
- URR 725 Article 2: Reimbursement undertaking is a separate, irrevocable instrument in favor of the claiming bank (not the beneficiary).
- It is not concerned with document compliance by the beneficiary, only the validity of the claim by the claiming bank.
2025 Update
- No changes to UCP 600 (still the 2007 version).
- eUCP updated to v2.1 in 2023 for electronic LCs (not affecting reimbursement undertakings).
- Incoterms® 2020 still in effect; no 2025 version released.
- Digital LC platforms (e.g., Contour, Marco Polo) gaining traction—but traditional rules still apply unless otherwise agreed.
Summary
The Reimbursement Undertaking is a crucial risk-mitigation tool in letter of credit transactions, especially for confirming banks handling LCs issued from higher-risk jurisdictions. Although digital trends are emerging, as of 2025, the core rules under UCP 600 and URR 725 remain unchanged.
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