IS ASSIGNMENT OF PROCEEDS UNDER A DOCUMENTARY CREDIT SUBJECT TO THE EXPIRY DATE?

QUESTION

Dear My Friend,

We hope my email finds you well.

I need your opinion regarding the assignment of proceeds under a documentary credit. Is it subject to the expiry date?

Thanks for your support.

Firas Jawad

________

ANSWER

Hi Firas,

Thank you for your interesting question.

Article 39 of the UCP 600 deals with the assignment of proceeds. It allows the beneficiary of a documentary credit to instruct that all or part of the proceeds be paid to a third party. Once made, such an assignment is generally considered irrevocable.

It is important to distinguish an assignment of proceeds from a transfer of credit.

An assignment of proceeds does not give the assignee the right to present documents or otherwise use the credit. It merely entitles the assignee to receive funds that become payable to the beneficiary under the LC.

In practice, assignments of proceeds may occur:

• Between the beneficiary and the negotiating bank
• Between the negotiating bank and another bank or forfaiter
• Between the beneficiary and a supplier or subcontractor
• Or in favor of any other third party

In my view, an assignment of proceeds is generally not subject to the expiry date of the credit itself, because it concerns the right to receive payment rather than the right to present documents.

The expiry date governs the presentation of documents under the LC. Once complying documents have been presented and the issuing bank’s payment obligation has arisen, the proceeds may still be assigned even if the credit has technically expired.

For example:

• A beneficiary presents complying documents before the expiry date.
• The issuing bank incurs a deferred payment obligation payable 90 days later.
• The beneficiary assigns those proceeds to a financing bank after the LC expiry date.

In such a case, the assignment may still be effective because the payment obligation already exists.

However, if no complying presentation has been made before expiry, then there are no proceeds to assign, since no payment obligation has arisen under the credit.

Therefore, the key issue is not the expiry date itself, but whether the bank’s obligation to pay has already been established under the LC.

Best regard

Mr. Old Man