Assignment of Proceeds of a Letter of Credit
An Assignment of the Proceeds of a Letter of Credit is a mechanism by which the beneficiary of a Letter of Credit may pledge the proceeds of future drawings to a third party. Assigning proceeds involves presenting the L/C to a bank which will hold the L/C until drawn upon, along with irrevocable instructions to the bank to disburse proceeds, when generated, in a specified way, e.g., "pay 75% of each drawing to XYZ Company."
The bank will acknowledge the assignment to the assignee but has no obligation actually to pay any funds to the assignee unless the L/C is drawn upon by the beneficiary and payment is received from the issuing or confirming bank. An assignment of proceeds is not an assignment or transfer of the letter of credit and the assignee acquires no rights to perform under the L/C in order to generate funds.
Third party beneficiary: A contract such as a Letter of Credit can sometimes specify that the benefits accruing to one party will be conferred on a third party. The effect is to provide the third party beneficiary, which is to say a party who has not assented to the contract, a legal right to enforce the contract.
Edited by Michael Dennis