Letter of Credit Forum

F) Transferable Credit

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F) Transferable Credit

TRANSFERABLE CREDIT

ARTICLE 48

Transferable Credit

A. A transferable Credit is a
Credit under which the Beneficiary (First Beneficiary) may request the bank
authorized to pay, incur a deferred payment undertaking, accept or negotiate
(the "Transferring Bank"), or in the case of a freely negotiable
Credit, the bank specifically authorized in the Credit as a Transferring Bank,
to make the Credit available in whole or in part to one or more other Beneficiary(ies) (Second
Beneficiary(ies)).

B. A Credit can be transferred
only if it is expressly designated as "transferable" by the Issuing
Bank. Terms such as "divisible", "fractionable",
"assignable", and "transmissible" do not render the Credit
transferable. If such terms are used they shall be disregarded.

C. The Transferring Bank shall
be under no obligation to effect such transfer except
to the extent and in the manner expressly consented to by such bank.

D. At the time of making a
request for transfer and prior to transfer of the Credit, the First Beneficiary
must irrevocably instruct the Transferring Bank whether or not he retains the
right to refuse to allow the Transferring Bank to advise amendments to the
Second Beneficiary(ies). If
the Transferring Bank consents to the transfer under these conditions, it must,
at the time of transfer, advise the Second Beneficiary(ies) of the First Beneficiary's instructions regarding
amendments.

E. If a Credit is transferred to
more than one Second Beneficiary(ies),
refusal of an amendment by one or more Second Beneficiary(ies)
does not invalidate the acceptance(s) by the other Second Beneficiary(ies) with respect to whom the Credit will be amended
accordingly. With respect to the Second Beneficiary(ies) who rejected the amendment, the Credit will remain unammended.

F. Transferring Bank charges in
respect of transfers including commissions, fees, costs or expenses are payable
by the First Beneficiary, unless otherwise agreed. If the Transferring Bank
agrees to transfer the Credit it shall be under no obligation to effect the transfer until such charges are paid.

G. Unless otherwise stated in
the Credit, a transferable Credit can be transferred once only. Consequently,
the Credit cannot be transferred at the request of the Second Beneficiary to any
subsequent Third Beneficiary. For the purpose of this Article, a retransfer to
the First Beneficiary does not constitute a prohibited transfer.

Fractions of a transferable
Credit (not exceeding in the aggregate the amount of the Credit) can be transferred
separately, provided partial shipment/drawings are not prohibited, and the
aggregate of such transfers will be considered as constituting only one
transfer of the Credit.

H. The
Credit can be transferred only on the terms and conditions specified in the
original Credit, with the exception of:

• the
amount of the Credit,

• any
unit price stated therein,

• the
expiry date,

• the
last date for presentation of documents in accordance with Article 43

• the
period for shipment, any or all of which may be reduced or curtailed.

The percentage for which
insurance cover must be effected may be increased in
such a way as to provide the amount of cover stipulated in the original Credit,
or these Articles.

In addition, the name of the
First Beneficiary can be substituted for that of the Applicant, but if the name
of the Applicant is specifically required by the original Credit to appear in
any document(s) other than the invoice, such requirement must be fulfilled.

I. The First Beneficiary has the
right to substitute his own invoice(s) (and Draft(s)) for those of the Second
Beneficiary(ies), for amounts not in excess of the
original amount stipulated in the Credit and for the original unit prices if
stipulated in the Credit, and upon such substitution of invoice(s) (and
Draft(s)) the First Beneficiary can draw under the Credit for the difference,
if any, between his invoice(s) and the Second Beneficiaries(ies')
invoice(s).

When a Credit has been
transferred and the First Beneficiary is to supply his own invoice(s) (and
Draft(s)) in exchange for the Second Beneficiary's(ies')
invoices(s) (and Draft(s)) but fails to do so on first demand, the Transferring
Bank has the right to deliver to the Issuing Bank the documents received under
the transferred Credit, including the Second Beneficiary's(ies')
invoice(s) (and Draft(s)) without further responsibility to the First
Beneficiary.

J. The First Beneficiary may
request that payment or negotiation be effected to the Second Beneficiary(ies) at the place to
which the Credit has been transferred up to and including the expiry date of
the Credit, unless the original Credit expressly states that it may not be made
available for payment or negotiation at a place other than that stipulated in
the Credit. This is without prejudice to the First Beneficiary's right to
substitute subsequently his own invoice(s) (and Draft(s)) for those of the
Second Beneficiary(ies) and
to claim any difference due to him.

Introduction: Differentiation between Transfer of Credit
(Article 48 UCP 500) and Assignment of Proceeds (Article 49 UCP 500):

The transfer of a Credit constitutes a change in creditors,
where the right to present documents and claim the Credit is being transferred
from the original beneficiary to a secondary beneficiary. This transfer results
in the Credit being called by a party unknown to the Applicant and is only
admissible if the Issuing Bank expressly designates the Credit as
“transferable” (Article 48 b UCP 500). The assignment of proceeds, a claim that
is conditioned upon presentation of compliant documents, leaves the legal
position of the beneficiary untouched, in particular his right to call the
Credit. An Assignment of proceeds is admissible even if the Credit is not
designated as transferable (Article 49 UCP 500).

Legal nature of transfer: Due to the mandatory
participation of the Transferring Bank when transferring a Credit, the legal
qualification of a transfer is disputed and considered a “rather complicated”
(footnote1). In distinction to an assignment of proceeds as provided for in
Article 49 UCP 500, the transfer of a Credit which is effectuated by the
transfer statement of an authorized bank creates an abstract obligation of the
Issuing bank towards the secondary beneficiary (footnote2).

Article 48 a UCP 500 – Bank authorized to transfer:

A transferable Credit can be transferred in whole or in part
to one or several second beneficiaries. Transferring Bank is the bank, which
is authorized to pay, incur a deferred payment undertaking, accept or
negotiate, i.e. the Nominated Bank as this term is defined in Article 10 b (i) UCP 500. A freely negotiable Credit has to specifically
designate the Transferring Bank in the Credit. The Issuing Bank also can be
the Transferring Bank if it si considered the
nominated Bank. This alternative, even though rarely used in real life, has
been accepted by the ICC Banking Commission:

“If a
transferable credit is available with the issuing bank itself, be it by
payment, by acceptance, or by negotiation, unless otherwise instructed by the
issuing bank, the (first) beneficiary is to address his credit transfer
request(s) to the issuing bank.” (footnote3)

Article 48 b UCP 500 – Necessary designation as
“transferable”: Condition for the transferability of a Credit is, that the Issuing Bank expressly designates the Credit as
“transferable”. Terms such as “divisible”, “fractionable”,
and “transmissible” are not sufficient. The rigid and formalistic requirements
are the consequence of the risk associated with transferability: transferability
is to be indicated unambiguously and with the same wording. A credit can be
transferred in whole or in part to one or several secondary beneficiaries,
absent restrictions in the Credit.

Article 48 c UCP 500 –
Acceptance and refusal of mandates to transfer: According to the wording of
the provision, the transferring bank, regardless of the general transferability
of a credit, is not obligated to transfer a credit “except to the extent and
manner expressly consented”. (so-called double
consent, general consent regarding transferability of the credit, and specific
consent regarding individual cases). Article 48 c however has to be interpreted
narrowly. It might be doubtful whether the beneficiary has an unfettered claim
for transferability; in no event is the acceptance or refusal of the mandate to
transfer in the sole discretion of the transferring bank; due to the issuance
of a transferable credit the beneficiary obtains a interest worthy of
protection that his mandate to transfer will be executed (footnote4).
Consequently, the transferring bank can refuse the transfer only for important
reasons; e.g. if the beneficiary is well known for his shady business practices
(footnote5). If the secondary bank without important reason refuses to
transfer, the beneficiary has to claim his right of transfer against the
Issuing or Confirming Bank (footnote6).

Notification of Issuing Bank: The
UCP 500 do not oblige the transferring bank to notify
the Issuing Bank of a transfer. A homogenous practice does not exist in this
regard. Some authors consider it necessary that the transferring bank notifies
without undue delay the issuing bank of the transfer without disclosing who the
secondary beneficiary is, so that the original beneficiary can no longer
present the documents to the Issuing bank (footnote7). Others believe that this
precautionary measure is superfluous and point to the fact that the Issuing
Bank should under no circumstances get to know the name of the secondary
beneficiary (footnote8). Nevertheless, the transferring bank should notify the
Issuing Bank simply of the fact that a transfer has occurred.

Article 48 d UCP 500 – Since
the 1993 revision the first beneficiary must irrevocably instruct the
transferring bank whether or not he retains the right to refuse to allow the
transferring bank to advise amendments to the Second Beneficiary. When the
transferring bank transfers the Credit to the second beneficiary it has to
notify the second beneficiary of the first beneficiary’s prohibition to advise amendments (footnote9). This notification has the
goal to warn the second beneficiary, since the secondary beneficiary needs
to find out, what the first beneficiary tries to achieve with this reservation
and why the first beneficiary wants to cling to the original version of the
Credit. The ICC Banking Commission believes that the right of refusal gives the
first beneficiary the right to accept or reject amendments and consequently
make it impossible for the second beneficiary to present compliant documents
under the Credit (footnote10).

The secondary beneficiary runs a
considerable risk, when he accepts the transfer, knowing that he will not
automatically be notified of subsequent amendments. Only if the transferring
bank is allowed or not prohibited from forwarding amendments, the secondary
beneficiary is in a position, to decide about acceptance or refusal of
amendments regarding the portion of a Credit transferred to him.

Article 48 e
UCP 500 – Transfer to several second beneficiaries.

Up to the 1993 revision it was disputed whether the
acceptance of a Credit amendment required the consent of all second
beneficiaries. Article 48 e UCP 500 clarifies that the second beneficiaries can
decide independent of each other; i.e. the acceptance of an amendment by one
second beneficiary does not bind another second beneficiary. In other words:
one second beneficiary can claim the Credit in its original version, an other beneficiary can claim the Credit in its amended
version.

Article 48 f UCP 500 – Payment of Expenses: The transferring
bank can refuse to transfer the Credit until its expenses (i.e. commissions,
fees, costs etc.) are paid; absent specific instructions, the first beneficiary
is responsible for payment of these expenses.

Article 48 g UCP 500 – Transfer only allowed once:

Generally a transferable Credit can only be transferred
once. A re-transfer from the second beneficiary to the first beneficiary
however is not considered a second transfer, as long as the second beneficiary
has not utilised the Credit. As the Icc Banking Commission clarified,
the transferring bank has to have the secondary beneficiary confirm that he
did not utilize the Credit:

“The
transferring bank, however, should obtain explicit confirmation from the
original second beneficiary that he has not utilized, or will not utilize, the available balance under the transferred credit
and request that the original advice of the transferred credit be returned.
Alternatively, if the transferred credit was advised to the original second
beneficiary through another designated advising bank, the transferring bank may
request the advising bank to notify the transferring bank that the transferred
credit expired without utilization (or that it expired wit a residual balance)”
(footnote11)

Article 48 h UCP 500 – Transfer on the terms and
conditions of the original Credit:

The core of a transfer is that the original terms and
conditions of the Credit are maintained. Exceptions to this principle can
result from the interplay between first and second beneficiary and a possible
resurrection of the legal position of the first beneficiary if the second
beneficiary does not utilize the Credit. The following is a list of allowed
modifications to the Credit which cannot have negative consequences for the
second beneficiary (footnote12):

• The
  amount of the Credit or any unit price stated in the Credit can be reduced
  (profit margin of the first beneficiary)
• Last
  date for presentation of documents in accordance with Article 43, period
  for shipment, expiry date. Reason: the first beneficiary should remain
  able to utilize the Credit.
• Insurance
  Cover may be increased as to provide the amount of cover stipulated in the
  original Credit or in Article 48 UCP 500.

Example: A credit amounting to
$100,000 providing for insurance cover of 110 %, when being transferred in an
amount of $80,000 can require that the insurance cover amount to $ 110,000.

• The
  first beneficiary can be named in documents instead of the applicant,
  unless the credit specifically requires otherwise.

Article 48 (i) UCP 500 –
Substitution of invoices and drafts:

The right to substitute invoices and drafts enable the first
beneficiary to claim his profit, i.e. the difference between the original
amount of the Credit and the transfer amount.

If the first beneficiary fails to supply his invoice and
draft the transferring bank is authorized to deliver the documents received
under the Credit from the second beneficiary to the Issuing Bank. By this
means, the UCP prevent that the first beneficiary inhibits the second beneficiary
to utilize the credit. Thus the first beneficiary looses his chance to protect
his sources, however, until the credit expires he
retains the right so supply his invoice in exchange for the second
beneficiary’s invoice.

Article 48 j UCP 500 – Right to transfer the nominated
bank:

Absent specific provisions in the Credit, the first
beneficiary can still demand, that payment to the secondary beneficiary be
effectuated at the place, where the Credit has been transferred. Such a
transfer of the nominated bank is not without risks for the Applicant, since
the first beneficiary retains the right to supply his invoices/drafts. The
consequence of this provision is that the first beneficiary is permitted to
considerably exceed the expiry date of the credit (footnote16). This applies
particularly in the case where the second beneficiary is allowed to present the
documents on the last day before expiration of the credit to a local bank
(footnote17).

Transfer to another country: The UCP 500 no longer
mention, since self-understood, that the first beneficiary has the right to
transfer the credit to a secondary beneficiary domiciled in a foreign country
(cf. Article 54 g UCP 400). This is the objective of a transfer and need not
specifically mentioned; however, it might be expedient, to exclude transfer to
exotic countries.

Example: An applicant, attempting to import Danish
fish, should stipulate when issuing a transferable credit, that transfer can
only be effectuated to a European beneficiary, better even to a beneficiary
domiciled in the European community. Thus he avoids that the credit is being
transferred to a second beneficiary residing in the fireland
islands.