Assignment of Proceeds Under Documentary Credit

The legal framework for assigning proceeds under a documentary credit is primarily governed by national law. This allows a beneficiary (the "assignor") to instruct the nominated or issuing bank to pay a portion of the credit proceeds directly to a third party (the "assignee").

Procedure:

Irrevocable Instruction: The assignor provides the bank with irrevocable instructions on how to make the payment to the assignee.
Acknowledgment: The bank acknowledges the instruction by issuing a letter to the assignee. This "acknowledgment of an assignment of proceeds" informs the assignee about the arrangement.
Disclaimer of Liability: The bank explicitly disclaims any payment or guarantee obligations towards the assignee. The bank acts solely as an agent for the assignor, facilitating the payment of the received funds.

Key Considerations:

The Bank Having Unrestricted Access to the Proceeds:
- Limited Security for the Assignee: Unlike being the direct beneficiary of a documentary credit, the assignee's claim to the proceeds is not directly tied to the credit itself. Their right to payment hinges on two conditions:
  1. Successful Presentation by the Assignor: The original beneficiary (assignor) must present the required documents under documentary credit to receive the funds.
  2. Bank's Unfettered Access to the Proceeds: This is where the key risk lies. The bank must have full and unrestricted control over the received proceeds.
- Potential Threats to Unrestricted Access:
  - Creditor Claims: If the assignor (beneficiary) has outstanding debts, creditors may attempt to seize the credit proceeds before they can be paid to the assignee.
  - Legal Seizures: Legal actions, such as court orders or legal attachments, could prevent the bank from freely disbursing the funds as instructed.
- Impact on the Assignee: If the bank cannot freely access or use the proceeds due to creditor claims or legal seizures, the assignee's right to receive payment may be jeopardized.
No Right to Perform: The assignment does not grant the assignee the right to present documents under the credit. This right remains solely with the assignor.
UCP 600 Guidance: Article 39 of UCP 600 addresses the assignment of proceeds. It permits the beneficiary to assign their right to receive proceeds to a third party, including a bank. This may be necessary for purposes like pre-financing or issuing back-to-back credits.

In summary:

Assigning proceeds under a documentary credit provides a mechanism for beneficiaries to direct the flow of funds. However, it's crucial to understand that the assignee's payment security is limited. The bank's role is to facilitate the payment as instructed by the assignor while disclaiming any liability towards the assignee.

Disclaimer: This article provides general information and should not be considered legal advice.

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