As a rule, documentary letters of credit are untransferable.
Transferability of a letter of credit is contractually defined and it must be unequivocally emphasised in the letter of credit terms and conditions, by using the word transferable.
Transferrable letters of credit are such letters of credit whose beneficiary may require from the bank authorised to transfer the L/C to transfer it partially or fully to one or more beneficiaries.
In practice, it is typically one and the same letter of credit, but there will be two agreements. The first agreement is signed between the exporter and the importer, while the second agreement will be signed between the exporter and the party that will actually deliver the goods.
The original beneficiary of the letter of credit, or the instructing party for the transferred letter of credit, may change certain terms and conditions in its instructions. Such terms and conditions are changed in accordance with the Uniform Customs and Practice for Documentary Credits (UCP 600), Article 38.
What elements may the instructing party change in its instructions?
Unit price may be reduced
Term of validity may be shorter
Period for the presentation of documents may be shorter
Latest shipment date may be sooner
Percentage of insurance may be higher
The original beneficiary, or the instructing party for the transferred letter of credit, has the right to replace with its own invoices the invoices of the other beneficiary and thus collect the difference (Article 38 paragraph h) of the UCP 600).
The other beneficiary must present documents to the bank which will carry out the transfer, thus protecting the original beneficiary’s rights and preventing that documents are sent directly to the L/G bank (Article 38 paragraph k) of the UCP 600).