Assignability of Documentary Credits

Present-day necessity suggests that the rule that a letter of credit "can only be transferred on the express authority of the principal"' has stood much too long as a barrier to a source of financial accommodation for a great number of small businessmen engaged in the export trade and many others in domestic business endeavor.The meaning of the rule becomes clearer if we look upon it as an admonition that a letter of credit "issued in favor of a named beneficiary cannot be assigned with safety unless the party who has caused the credit to be issued expressly authorizes or consents to its assignment.' 2 Strangely enough, although the admonition, or rule, has been generally honored for a great many years by bankers and others engaged in letter-of-credit finance, the reason for it is not nearly so manifest as one might suppose.Since any attempt to evaluate the rule in terms of rationale must be based upon an understanding of what a letter of credit is, we first must concern ourselves with the nature of the irrevocable documentary letter of credit, which is the type of letter of credit most generally used in commerce.In brief, it is an irrevocable promise which a bank makes to a seller at the instance of a buyer, in which the bank engages itself to pay 3 the seller a specified sum upon delivery to the bank within a specified time of shipping documents evidencing shipment of goods purchased by the buyer.By this means the seller is relieved of any risk of non-payment by the buyer.