Transferable LCs – Who Really Gets Paid, and When?

Transferable LCs often look straightforward—but once you get into the details, they rarely are.

When money is involved, two questions always come up: who gets paid, and when?
And are we really dealing with two independent sets of documents?

Let’s keep it simple.

QUESTION

Dear Mr. Old Man,

I have two questions regarding transferable letters of credit:

1. When the second beneficiary presents a complying set of documents to the transferring bank, is the transferring bank required to pay the second beneficiary immediately? Or must it wait until the documents are forwarded to the issuing bank, the issuing bank pays, and then the transferring bank pays the second beneficiary?
2. Are the document sets presented to the transferring bank and to the issuing bank independent from each other? If one set is discrepant, does it affect the payment of the other set?

Thank you.
V.

____

ANSWER

Hi,

Good questions. Transferable LCs look simple on paper, but in practice, they often cause confusion. Let’s keep it straightforward.

1. Does the transferring bank have to pay the second beneficiary immediately?

No.

A transferring bank does not automatically undertake to pay the second beneficiary upon presentation, even if the documents are complying.

Unless it has added its confirmation, the transferring bank normally pays the second beneficiary only after it receives the proceeds from the issuing bank under the original credit.

In other words, the transferring bank mainly acts as an intermediary. It checks the documents, handles the substitution (if required), and passes the documents on. Payment to the second beneficiary is usually dependent on actual receipt of funds.

(Yes, in some cases a bank may choose to advance funds, but that is a commercial decision, not an obligation under the credit.)

2. Are the two sets of documents independent?

Not entirely.

The two presentations are closely linked through the substitution process. The key connection lies in the invoice and draft (if any).

When the second beneficiary presents documents, the transferring bank will invite the first beneficiary to replace the invoice and draft with its own. The rest of the documents normally remain unchanged.

Under UCP 600 Article 38(i), if the first beneficiary:

• fails to substitute upon first request, or
• submits a substitute invoice/draft that still contains discrepancies and does not correct them promptly,

then the transferring bank may forward the original set of documents received from the second beneficiary to the issuing bank, without further responsibility to the first beneficiary.

So what happens if one set is discrepant?

Here is the practical point:

If the presentation under the transferred credit is discrepant (for example, late shipment), then even after substitution, the presentation under the original credit will also be discrepant.

And once documents are discrepant, payment is no longer automatic. It depends on whether the issuing bank (and ultimately the applicant) accepts the discrepancies.

So while there are “two sets” in form, in substance they are connected. A problem in one will almost always carry over to the other.

In short:

• The transferring bank is not obliged to pay upfront. It would only be obliged to do so if it has added its confirmation and the presentation is complying.
• The two presentations are not independent in practice.
• A discrepancy in one set will usually affect the other as well.

Best regards,
Mr. Old Man