Transfer, assignment and fraud exception in documentary credits

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In international trade, the documentary credit is a powerful tool for securing payments. Its strength lies in its independence from the underlying commercial contract. But what happens when the exporter wishes to mobilise this claim before it has even been realised? The circulation of documentary credits is governed by strict rules that must be mastered to avoid legal pitfalls.

Direct transfer of the documentary credit

Direct transfer allows the first beneficiary to assign its rights to a third party, often its own supplier.

Prerequisite: an expressly transferable credit

In accordance with article 48b of the Uniform Customs and Practice (UCP 600) of the International Chamber of Commerce, "A loan can only be transferred if it is expressly designated as transferable by the issuing bank.. A Court of Cassation ruling of 15 December 1975 confirms this rule, stating that the banker does not have to assess the merits of the changes made at the time of the transfer, within the limits set out in the UCP.

Be careful with the terms used in the letter of credit: "divisible", "fractionnable" and "assignable" are not equivalent to "transferable".

Transfer limits

Credit may only be transferred once (Article 48g UCP). Partial transfers are permitted if partial shipments are not prohibited.

The transfer takes place under the conditions specified in the original credit, but some modifications are permitted:

• Reduction in unit prices and L/C amounts
• Limitation of shipping time
• Substitution of the name of the first beneficiary for that of the principal

In practice, the transfer requires the creation of a new L/C in favour of the second beneficiary.

Indirect circulation mechanisms

When direct transfer is not possible, other mechanisms can be used to mobilise the claim.

Transfer of credit proceeds

Article 49 of the UCP distinguishes the transfer of credit from the simple assignment of the proceeds. This assignment is made in accordance with the ordinary law governing the assignment of receivables and exposes the assignee to the defences available to the assignor.

In a ruling handed down on 13 January 1987, the Paris Court of Appeal described this transaction as a discount that was not enforceable under insolvency law.

Back-to-back credit

This mechanism consists of backing two separate documentary credits. The bank issues a second credit to the supplier of the first beneficiary, based on the existence of the main credit.

As the Paris Court of Appeal pointed out on 13 November 1987, this delicate arrangement makes the bank liable under its duty to advise. The bank must ensure that the terms and conditions of the two loans match.

The collection mandate

Without assigning his claim, the beneficiary may authorise his bank to recover the amount of credit. This mandate does not create any rights of its own for the bank, which acts merely as an agent.

The fraud exception: limiting the autonomy of the documentary credit

There is a fundamental limit to the principle of the autonomy of the documentary credit: fraud, which requires a clear understanding of the legal relations between the parties.

Conditions of application of the exception

For the fraud defence to be successful, it must :

1. Affect the documents themselves, not the performance of the commercial contract
2. Be certain, not merely alleged

The judgment of the Commercial Chamber of 29 April 1997 states that "fraud cannot be invoked if it does not affect the credit itself, in particular through the documents presentedbut only the performance of the commercial contract"..

Time of discovery and consequences

The time at which the fraud is discovered is decisive. In the case of a credit that can be realised by negotiation, the Court of Cassation (23 October 1990) ruled that the fraud exception is belated if invoked after the discounting of the bill.

In the event of manifest fraud, the banker is not only authorised but obliged to refuse payment, at the risk of incurring liability towards the principal (CA Colmar, 14 June 1985).

Seizure and blocking of documentary credits

The seizure of a documentary credit is governed by special rules.

Possibility of seizure by the beneficiary's creditors

The beneficiary's creditors may seize the claim arising from the documentary credit, even if it is conditional (Cass. com., 5 July 1983).

Impossible for the client to enter the data

On the other hand, the principal may not seize the amount of the credit, as this would contradict the irrevocable undertaking he has given (Cass. com., 14 October 1981). The Court of Cassation has confirmed this prohibition even when the principal invokes a claim unrelated to the basic contract (Cass. com., 18 March 1986).

Only the judicial freezing of credit, ordered by the interim relief judge in the event of manifest fraud, remains possible before the credit is granted (CA Paris, 28 March 1985).

To navigate these complex mechanismsWhen it comes to international trade, the support of a specialist lawyer is essential. Our firm masters these legal subtleties and can guide you in your international trade operations. Don't hesitate to contact us to help you secure your transactions and avoid the pitfalls of these financial arrangements.

Sources

• Uniform Customs and Practice for Documentary Credits, ICC Publication No. 600
• Cass. com. 15 December 1975, Gavalda and Stoufflet chronicle
• Cass. com. 29 April 1997, Bull. civ. IV, n°213
• Cass. com. 23 October 1990, JCP G 1991, II, 21687
• CA Colmar, 14 June 1985, D. 1985, inf. rap. p. 219
• Cass. com. 5 July 1983, Bull. civ. IV, n°202
• Cass. com. 14 October 1981, JCP G 1982, II, 19815
• Cass. com. 18 March 1986, JCP G 1986, II, 20624
• CA Paris, 13 November 1987, D. 1989, summ. p. 195
• CA Paris, 28 March 1985, D. 1986, p. 155
• Stoufflet J., Le crédit documentaire, Paris, 1957
• Caprioli E., Le crédit documentaire : Évolution et perspectives, Litec, 1992

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