Assignment of Proceeds

[Anneli Olsson]

We have discussed financing a shipment that was delivered CIF that will take about 60 days to reach the buyer.

To do this we need to sign a "Assignment of Proceeds" document - whatshould we think about doing this?

[Chandansharma]

Assignment of proceeds is a method used wherein you can assign a part or full of your proceeds to the non-party (referred as Assignee). The real issue of assignment of proceeds is the assignee will be paid when you (as a beneficiary) receive the payment under the LC and they (the assignee) would have no RIGHTS to influence the transaction.

If your LC is confirmed, the confirming bank in their AOP form will inform you that the payment will be made to assignee once the docs are complying. On the flip side, if the LC is unconfirmed, the assignee will be advised that the payment will be made to the them upon receipt of funds from Issuing bank.

[Mr. Smith]

Anneli, I notice that you do not mention what your company's role is in the transaction (bank, ‘middle-man’, end-supplier etc) nor for that matter documentary credits. Therefore it is difficult to respond to your query with any specificity.


What I can say is that –as a general rule- in order for an assignment of the right to receive proceeds of a sales contract to take place, the seller (the ‘creditor’) usually has to transfer (in the everyday meaning of the word) to a third party their right against the buyer (the ‘debtor’) to receive the proceeds of the contract by executing a legally effective / enforceable document. (I shall call this sales contract the ‘first contact’; see later.) This might be the "Assignment of Proceeds" document to which you refer. In my own organisation we tend to refer to a ‘deed of assignment’.

Of course, the creditor mentioned above is the ‘assignor’ and the third party that acquires the right to receive the proceeds is the ‘assignee’. Evidently, there is also likely to be a contract between the assignor and assignee (such as a sales or financial contract) where the assignor is the debtor and the assignee is the creditor (I shall call the contract between the assignor and the assignee the ‘second contact’). The purpose of the assignment is usually to ‘secure’ (I use the word most advisedly) a debt owed by the assignor to the assignee.

I understand that in many systems of law the assignment is only effective if notice of the assignment is given to the debtor (of the first contract) and, of course, the debtor (under the first contract) can only act on it if notified.

The dangers to the assignee of relying on an assignment of the right to receive proceeds are that (A) the payment will not be made under the first contract (B) the assignor will subsequently purport to revoke the assignment (whether or not legally possible) and instruct the debtor (of the first contract) not to pay funds to the assignee or (C) there is a prior claim to the proceeds that takes legal precedence over the assignment.

In the posting immediately above the matter of an assignment of the right to receive the proceeds of a documentary credit is mentioned. A common misconception is that it is a bank (whether issuing bank, confirming bank, non-confirming nominated bank or advising bank) that assigns the right to receive the proceeds of the credit. However, this is not correct; it is the party that is owed the debt under the credit, i.e. the beneficiary, that must assign the right to receive proceeds of the credit to the party that it (the beneficiary) owes or will owe money i.e. the assignee (such as a supplier or financier). Once the assignment by the beneficiary (assignor) has taken place, the assignor or assignee must notify the relevant bank of the assignment and ideally the assignor will also instruct separately the relevant bank to pay the assignee.

The bank that receives the notice and –if any- payment instruction is under no obligation to give any form of commitment, or even expression of intent, to the assignor or assignee regarding any payment that might be made under the credit. However, in the case of my own organisation, if our requirements are met, we are willing to give the assignee an ‘intent letter’ where we say that we have received instructions from the beneficiary stated to be irrevocable to remit to the assignee such sum or sums -not exceeding in aggregate the amount specified in the notice- as shall be payable or received by us unencumbered under the credit and that it is our intention to comply with the request of the beneficiary provided their instructions have not (despite being expressed to be irrevocable) been revoked whether expressly or by implication or by operation of law or otherwise and also provided that we are not aware of any other circumstances which may affect the beneficiary’s ability to deal with the proceeds and that this information is given without prior engagement or responsibility and on the strict understanding that it creates no liability or obligation whatsoever and that we offer no advice nor opinion as to the effectiveness of the beneficiary’s purported assignment to the assignee.

Whether or not the credit is confirmed by us does not affect the wording of our ‘intent letter’.