ICC Digital Library Forum

Hi all,
i need your suggestions concerning effectiveness of an assignment of proceeds under L/C's for the following scenario:
An assigment of proceeds has been agreed between beneficiary and the confirming bank for future claims out of the L/C. Documents are presented with discrepancies under the letter of credit, therefore they were sent on approval basis to the L/C issuing bank.
Now the question: Is it possible to assign proceeds effectively under a L/C, whether discrepant documents have been presented.
In other words, is it a condition for the effectiveness of an assigment to present L/C conform documents ?
Thanks in advance for your suggestions.
Greetings
GerhardH

Gerhard,

The assignment itself is all right (at least in Switzerland) but the typical risk for the assignee (and he should be aware of it) is that he may not have any control over the documents. So if the documents are rejected due to discrepancies, he may no be paid.
So a bank issuing/notifying an assignement will specify that the funds will be paid to the assignee as long as documents conform (confirmed L/C), funds are received (unconfirmed L/C) or that there is no legal hindrance. Daniel

Dear Gerhard,

Same picture in Denmark as Daniel describes; there will only be paid under the assignment when/if funds are received under the LC.

Best regards
Kim

A payment made by an issuing or nominated bank after applicant/issuer waiver of discrepancies should qualify as LC proceeds (and not just as proceeds of a non-LC collection from the applicant), but a particular assignment or payment or a particular country's law might produce a different result.

US letter of credit and secured transactions law (UCC Articles 5 and 9) both address assignments of LC proceeds (as does the recently drafted UNCITRAL secured transactions guideline). Thankfully, and with considerable effort when these laws were revised in the 1990s, the two mesh.

Our LC law distinguishes transfer of drawing rights from assignments of LC proceeds and then focuses on the rights and obligations of an LC bank vis a vis an assignee--chiefly to protect the LC bank against having to pay an assignee unless the LC bank consents.

Secured transactions law focuses on the assignee's rights vis a vis other creditors and generally respects the rights of LC banks but not the finality of an LC bank's payment to an assignee.

Under the current UCC (and prior case law on UCP LC practice, notably the Alaska Textile case), a payment made by an issuing or nominated bank after applicant/issuer waiver of discrepancies normally qualifies as a payment made under the LC.

Also, as a practical matter, the assignee of LC proceeds is typically also a secured creditor with respect to the underlying account receivable, so the two principal contestants for the LC bank's payment are the same. Finally, once the payment is made to an overseas assignee, the applicant's other creditors (or bankruptcy representative) may have little practical ability to reverse the payment.

All that said, the technical issues raised by your question are not easily answered under most countries' laws.

Regards, Jim Barnes

My opinion is - it does not matter whether the documents are in order or presented with discrepancy. Whenever negotiating bank get the fund from the issuing bank/reimbursing bank, they can pay.

Shahed Aziz
Toronto, Canada