Standby letter of credit

The standby letter of credit comes from the banking legislation of the United States, which forbids US credit institutions from assuming guarantee obligations vis-à-vis third parties. To circumvent this rule, the US banks created the standby letter of credit, which is based on the "Uniform Customs and Practice for Documentary Credits (UCP 600)".

Similarities with the guarantee
Like the guarantee, the standby letter of credit is of an abstract nature, i.e. legally separated from the underlying transaction. In the case of a standby letter of credit, the documents stipulated in the claim must be submitted within the specified period. These documents should show that the client (exporter) has not met or insufficiently fulfilled his or her performance obligations or the debtor has not met a payment on time.

The standby basically fulfils the same purpose as a guarantee: it is payable upon first demand and without objections or defences on the basis of the underlying transaction. It is up to the beneficiary to decide whether a standby may be given.

Principles

  • On 1 January 1999, the ICC introduced the «ISP 98» (International Standby Practices), new guidelines which were drawn up especially for «standby letters of credit» business.

  • In practice, however, standbys are generally still subject to the «Uniform Customs and Practice for Documentary Credits», publication no. 600 (UCP 600).

Forms

Area of application
In import-export business, primarily with the Americas and frequently in the Far East as well, or wherever the contracting parties decide to use this legal form as a security instrument.

Purpose

To secure any claims by the obligee on the obligor due to non-contractual delivery or performance by the agreed date or credit repayment on the due date.

Guarantee amount

Depends on purpose of security.

Term

Depends on purpose of security.

Special features
In contrast to the guarantee, a standby can be confirmed immediately (i.e. deferment of the country and credit risk), provided the standby conditions permit.