However, even non-transferable letters of credit may be transferred by using an alternative method. Article 39 of the UCP allows the transfer of rights and funds deriving from a certain letter of credit, even when a document is not issued as 'transferable'. This way, the rights and funds arising out of a given letter of credit may be transferred instead of the document itself when the party to the document changes.
This is an alternative resolution as the new actor in this case does not become a party to the original transaction but rather receives the right to collect either the goods or the funds. Parties, however, should always keep in mind that these provisions are not imperative before they base their actions on UCP provisions.
Thus the alternative way Article 39 provides would not be possible unless parties agree otherwise in an agreement. Therefore one should initially examine the letter of credit contract. According to the leading opinion on the subject, unless otherwise agreed upon in the main contract and if the paying bank is a Turkish bank, the transaction will be subject to Turkish Law.
Pursuant to Article of the Turkish Law of Obligations which contains the local law pertaining to contracts a written transfer of rights arising out of the letter of credit will be deemed valid by courts. Additionally, it is important that one of the parties notifies the paying bank and the issuing bank of the transfer. Furthermore, for the transfer of rights arising out of a letter to be possible, one should determine whether the credit is due or not.
If the bank decides that submission is proper when the letter of credit is submitted, the beneficiary's credit will be regarded as due.
However, if the first beneficiary does not submit the necessary documents, only a mere possibility of transfer claim may arise. In the latter scenario, the risk would be higher comparatively, because unless the transferor beneficiary submits the documents in due time, the transferee second beneficiary might have difficulties in claiming the payment. To conclude, when a letter of credit is not issued as transferable, parties may resort to this alternative procedure to transfer the rights arising from the letter of credit in order to achieve the result.
If a party chooses this alternative way, the first beneficiary should submit the documents before the transfer and the credit should be due. In addition, both banks should be notified and the agreement for the transfer of rights should be in writing. This procedure is crucial to minimize the risks that might arise in the case of transfer of rights claim. It should be reiterated that when a party resorts to this alternative procedure, merely the right of claim arising from the letter of credit is being transferred, not the letter of credit itself.
It is not possible to directly transfer a letter of credit unless the document prepared by the issuing bank specifically states it is "transferable". Even though there exists an alternative resolution discussed in this article for transferring letters of credit, if the possibility of transfer is present from the beginning or is considered by one of the parties, it will always be preferable to have the letter of credit be issued as "transferable" by the bank itself.
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We need this to enable us to match you with other users from the same organisation. It is also part of the information that we share to our content providers "Contributors" who contribute Content for free for your use. It cannot be transferred, so it does not give the option to the first beneficiary to transfer the funds to anyone else. A lot of organizations might prefer to work with non-transferable Letter of Credit because of the fact that they want to make sure that their letter of credit is not transferred without their discretion.
Hence, in this case, it can be seen that there is a need to have clear discretion about the letter of credit being transferable, and only being specific to one party, the single beneficiary that the buyer has decided. Definition A transferrable letter of credit can be described as a financial guarantee, that one of the parties, is going to transfer all, or a part of the credit that they have to the other party. Related article What is Outsourced Accounting?
Search for:. What is a Shares Certificate? Explanation What are A-Shares? The beneficiary knows that their supplier wants some type of assurance that they will be paid, but the beneficiary wants to maintain a maximum amount of control over the transaction.
An Assignment of Proceeds might just be the answer. Once the letter of credit is received, the beneficiary would approach their bank with the original letter of credit in hand and ask that a specific value of the original letter of credit be assigned to the supplier. The bank will require the original letter of credit be presented along with the written request for the assignment. The bank needs the original LC so it can endorse the backside of the LC indicating that an assignment has been made to the named party and the value of the assignment.
Remember, most letters of credit are freely negotiable, meaning that the beneficiary could present documents to any bank. By endorsing the LC, any bank that might receive documents will know that an assignment has been made. Once the endorsement is taken care of, the bank will issue a document or letter titled Assignment of Proceeds addressed, in this case, to the supplier. The content of this document will indicate that an assignment of proceeds has been made in their favor with a stated value.
It will also indicate that if and when payment is made under the letter of credit, payment will automatically be made under the assignment. If all goes according to plan, the beneficiary arranges shipment, obtains the documents necessary to draw against the LC, presents these documents to the bank, and the bank makes payment to both the beneficiary and to the holder of the assignment of proceeds.
Unfortunately, yes. Worst case scenario would be that the supplier goes ahead and ships the merchandise to the buyer but also contacts them proposing that they not use the LC as the method of payment.
A Transferable LC is letter of credit where the Beneficiary Transferor or 1st Beneficiary may request the Transferring Bank to make the credit available in whole or in part to one or more other beneficiaries called Transferee s or 2nd beneficiary ies. You can do business on a larger scale, since the security provided by the Import Documentary Credit may be transferred to the actual supplier s or other parties to the transaction that will receive payment.
Retain control over the entire transaction as all parties follow the same terms and conditions with only a few changes allowed.
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