PAYMENT OBLIGATION OF THE TRANSFERRING BANK

QUESTION

Dear Mr. Old Man,

I have two questions regarding transferable LCs:

1. When the second beneficiary presents complying documents to the transferring bank, is that bank obligated to pay the second beneficiary immediately? Or must it wait until the documents are forwarded to the issuing bank and payment is received before settling with the second beneficiary?
2. Are the sets of documents presented to the transferring bank and the issuing bank considered independent of each other? If one set is discrepant, does it affect payment on the other set?

Thank you.

V.

ANSWER

Hi,

1. No. Unless the transferring bank is also the confirming bank (which is rare), it is not obligated to pay the second beneficiary immediately upon receipt of complying documents. The transferring bank typically undertakes to pay the second beneficiary only after it receives payment under the original LC on behalf of the first beneficiary.

It’s worth noting that unless the transferring bank has added its confirmation, it does not assume an independent payment obligation. Its role is primarily administrative—facilitating the transfer and document handling—not guaranteeing payment to the second beneficiary.

2. No, except for the invoice and draft. When the second beneficiary presents documents, the transferring bank will notify the first beneficiary to substitute the invoice and draft (if any).

The transferring bank is entitled to forward the second beneficiary’s documents to the issuing bank as-is—without liability to the first beneficiary—if:

• The first beneficiary fails to provide the substituted invoice/draft upon first request, or
• The substituted invoice contains discrepancies not found in the second beneficiary’s invoice and is not corrected promptly.

According to UCP 600 Article 38(i), if the first beneficiary presents its own invoice and draft but fails to do so upon first request—or if its invoice contains discrepancies that did not exist in the second beneficiary’s invoice and are not corrected—the transferring bank may present the second beneficiary’s documents directly to the issuing bank without further responsibility to the first beneficiary.

As mentioned in point 1, the transferring bank only commits to pay the second beneficiary once payment has been received under the original LC. Therefore, if the documents presented under the transferred LC are discrepant (e.g., late shipment), the substituted documents (draft and invoice) presented by the first beneficiary under the original LC will likely also be discrepant. Once discrepancies exist, payment depends on the issuing bank and applicant’s acceptance.

Practically speaking, banks often include a clause in the LC transfer advice to the second beneficiary stating that payment is “subject to receipt of funds under the original LC.” This helps avoid misunderstandings and makes the conditions of payment explicit.

Best regards,

Mr. Old Man