In international trade finance the a letter of credit transaction is still the most prevalent, particularly if the parties do not know each other well. The following explains how a seller or provider of services might be able to pay his subcontractors out of the letter of credit.
Difference between assignment and transfer of a letter of credit.
The UCP 600, which govern the processing of letters of credit, explains in its Article 38 b that a transferable credit may be made available in whole or in part to another beneficiary (“second beneficiaryâ€) at the request of the beneficiary (“first beneficiaryâ€). This means that the second beneficiary steps into the shoes of the first beneficiary including his obligation to present proper documents in order to get paid.
Contrast this with the assignment of proceeds where the beneficiary only assigns the proceeds due him/her to an assignee. The assignee thus does not have to provide any documents to trigger the bank’s payment obligation. Rather an existing payment obligation is being transferred.
Consent required ?
Article 38 UCP provides that “a bank is under no obligation to transfer a credit except to the extent and in the manner expressly consented to by that bankâ€. Some interpret this language literally, meaning that a bank can refuse its consent for any or no reason. Others rather interpret this clause to mean that a letter of credit cannot be transferred only by agreement of first and second beneficiary. The first beneficiary has a claim against the bank not refuse willfully its consent. Only for grave reasons, e.g. if the second beneficiary is obviously not serious, a bank may refuse its consent. The author believes the secondview to be correct, however, this Opinion is not undisputed among scholars.
Miscellaneous
Only if the original letter of credit explicitly states that it is transferable, the beneficiary might transfer it. All costs such as commissions, fees, costs, or expenses incurred in respect to a transfer must be paid by the first beneficiary. A transferable letter of credit might be transferred to more than one second beneficiary.
Any request for transfer must indicate if and under what conditions amendments may be advised to the second beneficiary. The transferred credit must unmistakably indicate those conditions. This proviso is intended to alert the second beneficiary. According to the ICC Banking Commission the first beneficiary who decides not to have the second beneficiary be advised of amendments to the credit, preserves his right to accept these amendments himself. This right might make it unworkable for the second beneficiary to fulfill the obligations under the credit, e.g. if shipping dates are set too short.
The second beneficiary runs a considerable risk in cases where the first beneficiary retains the right not to inform of amendments to the Credit.
The second beneficiary receives the credit in its original format, however, the following conditions might be reduced or curtailed:
-the amount of the credit
- unit price stated in the credit
-the expiry date
-the period for presentation, or
- the latest shipment date or given period for shipment.
Place of honor or negotiation
The first beneficiary may in its request for transfer indicate that the honor or negotiation of the credit is to be effected to a second beneficiary at the place to which the credit has been transferred. This of course can be a foreign country. The applicant might want to limit the transfer-locations so that he does not receive goods or services from an undesired corner of the world.
Substitute invoices
The first beneficiary may as indicated above transfer not the full amount of the credit . Thus the first beneficiary retains the right to submit his invoice for the difference between the original credit amount and the transferred credit amount.
Author Resource:
Click here if you want to find our more about international law , or letters of credit .
![[Valid RSS feed]](http://www.look4articles.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites
![[Valid RSS feed]](http://www.look4articles.com/images/rss.jpg "XML Feed For RSS")