Transferable Letter of Credit: Is It Really “Transferable”?

Letter of credit can be qualified in a number of ways and it is well recognized that a transferable credit is no different from any other apart from the fact that it enables the beneficiary of the credit to “transfer” the benefit to a third party. Where the credit itself is not stated to be transferable, no transfer of the credit is permitted because to do so would defeat the purpose of the credit.

 

The transferable credits are commonly used where the beneficiary contracts with a third party in order to obtain goods which are necessary to fulfill his obligations to the issuing bank’s customer. In such a case, the beneficiary will often be required to transfer the benefit of the credit to the third party in order to fulfill his obligations to that party.

 

Article 54 of UCP 400, Article 48 of UCP 500 and Article 38 of UCP 600, incorporated the relevant provisions relating to the transfer of a letter of credit. However, its interpretation has long troubled bankers, particularly with regard to the obligations placed upon the issuing or confirming banks.

 

A decision of the Privy Council considered this thorny issue, and held that, although a beneficiary had the right to instruct the bank, which issued a transferable letter of credit, to make the credit available to one or more third parties, by Article 54(c) of UCP 400, no bank asked to transfer the credit was obliged to do so except to the extend and in the manner to which the bank expressly agreed. Furthermore, the designation of a letter of credit by the issuing bank as transferable was insufficient to constitute consent to a subsequent transfer request by the beneficiary.

 

The brief facts of the case were that Lariza (Singapore) Pte Ltd had agreed to sell crude palm oil to Bakrie Brothers (Singapore) Pte Ltd. It was a term of the contract that payment for the oil was to be made by means of a transferable irrevocable sight letter of credit to be opened in favour of Lariza, the opening of which was to be advised through the Bank of Canton Limited. In order to fulfill its agreement with Bakrie, Lariza entered into an agreement with Ban Lee oil Mill Co for the purchase of a corresponding quantity of crude palm oil  which would be passed on to Bakrie. Payment of the Ban Lee contract was also to be made by an irrevocable sight letter of credit opened in their favour.

 

On 27 February 1980 (UCP 400 was in forced), a transferable irrevocable sight letter of credit was opened by Bank Negara Indonesia in favour of Lariza for the account of Bakrie and in due course Lariza requested Bank Negara Indonesia to transfer part of the letter of credit to Ban Lee, but the bank persistently refused to effect the transfer. As a result Lariza failed to perform its obligations under its agreement with Ban Lee and were sued by Ban Lee for damages for breach of contract.

 

Lariza subsequently brought an action against Bank Negara Indonesia claiming damages for breach of contract arising from the issuing and opening by the bank of the letter of credit. That claim was resisted by the bank, which contended that it was not under any obligation to effect the transfer of the letter of credit as requested by Lariza.      

 

The case eventually reached the Privy Council , which held that under Article 54 of UCP 400, a bank which issued a transferable letter of credit could not, without more, be taken to have consented in advance to any request by the original beneficiary to transfer the credit to a third party. The consent contemplated by paragraph (c) of Article 54 was held to be a consent to effect the transfer to the particular extend in issue, and in that particular manner. Such a consent cannot be given in blanket form in advance, so as to apply to any request for transfer which may subsequently be made, whatever its extend or manner may be. Any consent given by the issuing bank must be an express consent which is made after the request by the beneficiary and it has to cover both the extent and the manner of the transfer requested.

 

It is submitted that if the view of the Privy Council is correct the whole purpose of the transferable letter of credit is effectively destroyed. A transferable credit should be transferable at the instance of the beneficiary and neither the issuing nor confirming bank should be able to refuse to transfer the credit, for otherwise the commercial purpose of such instruments would be defeated. Such restriction clause which appeared in UCP 400 and UCP 500 is still maintained in UCP 600 today.

Comments are closed.

%d bloggers like this: