Assignment Of Letter Of Credit

In the case of letters of credit, Article 39 of UCP 600 allows for proceeds to be assigned to a Third Party Bank.Such an assignment is, of course, indispensable when a Third Party Bank buys the right to receive payment from either a Nominated Bank or a beneficiary.

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Apart from ensuring that there has been an assignment of proceeds under Article 39 of UCP 600, the assigning Nominated Bank or beneficiary must ensure that the assignment is valid and has been created before the SWIFT advising such assignment is sent to the Issuing Bank.

Whilst a notice of assignment and acceptance should be obtained in all cases where proceeds due under a Credit are assigned to a Third Party Bank, an endorsement of a draft can in many legal systems provide similar protection under national legislation e.g.

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party beneficiaries according to instructions of beneficiaries under L/C.

under the English Bills of Exchange Act 1882 where an endorsee can benefit from the protection afforded to holders in due course.

It is understood by all parties that Issuing Banks can only pay Third Party Banks subject to the satisfaction of their KYC procedures.Whilst this treatment of deferred payment credits addresses the main issue raised in Santander, the question as to whether Third Party Banks or forfaiters which further discount such Credits get the same protection as the Nominated Bank has not been resolved or dealt with by the changes made in UCP600.What is the position, for example, of the Third Party Bank/forfaiter which gets an assignment of proceeds from a Nominated Bank or directly from the beneficiary?Furthermore, if an Issuing Bank gives an undertaking of payment at maturity to a Third Party Bank, and such Third Party Bank then assigns proceeds to another Bank, does this give the same rights to the Third Party Bank as those of the Nominated Bank?What can a Nominated/presenting Bank do if the Issuing Bank refuses to amend reimbursement instructions and insists that its obligations are limited to those set out in UCP600?Such an assignment does not, in and of itself however, cure or resolve the issues relating to defects or adverse claims affecting the assignor’s rights explained above but these can be overcome with a suitably worded acceptance of the notice of assignment by the Issuing Bank.Obtaining an acceptance of assignment of proceeds is, and has been for some time, standard forfaiting practice but care needs to be taken as whilst UCP 600 makes it clear that a beneficiary may assign proceeds, the Issuing Bank is under no obligation to either accept such requests or to acknowledge them.In such circumstances, it would be unfair for the debtor to lose its rights simply because there had been a change of creditor.It is perfectly possible for a debtor, say an Issuing Bank, to agree that it will pay an assignee regardless of any defects in the rights which have been acquired from the assignor.The stipulations in Articles 7, 8 and 12 of UCP600 have established the independent rights given to a Nominated Bank to incur a deferred payment undertaking which includes the authorization to a Nominated Bank to prepay.The right to get reimbursed is not affected by the action of such Nominated Bank to actually prepay or discount such letter of credit.

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