Transferable LC with an Invoice Required in the Applicant’s Name

Introduction

A question was raised about a transferable LC in which the original credit specifically requires the Commercial Invoice to be issued in the name of the Applicant.

At first glance, this may appear to create a problem for the First Beneficiary’s right to substitute its own invoice under UCP 600 Article 38(h). However, Article 38(g) provides an important mechanism that needs to be considered first: in the transferred credit, the name of the First Beneficiary may be substituted for that of the Applicant.

So, does the original invoice requirement really prevent the normal invoice substitution mechanism from working?

Let’s have a look.

Question

The Case:

The original LC (MT700) is issued as transferable, but it contains a specific requirement stating that the Commercial Invoice must be issued directly in the name of the Applicant.

My Assessment:

I advised against proceeding with the transfer under these conditions based on the following:

In a standard transfer under UCP 600 Article 38, the Second Beneficiary should issue the invoice to the First Beneficiary. The First Beneficiary then exercises their right to substitute it with their own invoice addressed to the Applicant, in order to secure their profit margin and maintain commercial confidentiality.

If the LC explicitly mandates that the Second Beneficiary draw the invoice directly in the Applicant’s name, the First Beneficiary loses the legal and operational ground to intercept or substitute that invoice.

Passing this condition as-is creates a major structural impediment, as any attempt to substitute a document not addressed to the First Beneficiary would contradict the LC terms and standard transfer mechanics, leading to discrepancies.

My Question:

Is my technical interpretation correct that this specific invoicing condition effectively invalidates the standard invoice substitution mechanism under Article 38, making the LC practically non-transferable from a commercial and operational standpoint without an amendment?

Looking forward to your insights.

Best regards,

Firas

_______

Answer

Dear Firas,

I do not think your assessment is correct.

The key point is that UCP 600 Article 38(g) specifically permits the name of the First Beneficiary to be substituted for that of the Applicant in the transferred credit.

Therefore, although the original LC requires the Commercial Invoice to be issued in the name of the Applicant, the transferred credit may be structured so that the name of the First Beneficiary is substituted for that of the Applicant.

Consequently, the transferred credit can require the Second Beneficiary to issue the Commercial Invoice in the name of the First Beneficiary.

The Second Beneficiary therefore presents an invoice showing the First Beneficiary, in compliance with the transferred credit.

The First Beneficiary can then exercise the right provided under Article 38(h) to substitute its own invoice for that of the Second Beneficiary. The substituted invoice can show the Applicant, as required by the original credit.

The sequence is therefore:

Original credit:
Applicant → First Beneficiary

Transferred credit:
First Beneficiary → Second Beneficiary

Second Beneficiary’s invoice:
issued in the name of the First Beneficiary

First Beneficiary’s substituted invoice:
issued in the name of the Applicant

So, the fact that the original LC specifically requires the invoice to be issued in the Applicant’s name does not, by itself, invalidate the invoice substitution mechanism or make the credit non-transferable.

The important point is that Article 38(g) provides the mechanism for dealing with the Applicant’s name in the transferred credit, while Article 38(h) provides the First Beneficiary with the right to substitute its own invoice.

No amendment to the original LC should therefore be necessary merely because the original LC requires the Commercial Invoice to be issued in the Applicant’s name.

Best regards,

Mr. Old Man