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A Standby Letter of Credit (SBLC) is an irrevocable, independent undertaking by the issuer, on behalf of their client, in favour of a beneficiary, stating that an agreed-upon amount will be paid to the beneficiary if the issuer’s client fails to fulfil their obligations to the beneficiary under a separate underlying contract upon presentation of a valid claim by the beneficiary to the issuer as per the terms of the SBLC.¹⁾

SBLCs are passive instruments as they tend to “standby” in the background and are only claimed upon when things go wrong in the separate underlying contract between the beneficiary and their counterparty i.e. when the beneficiary’s counterparty defaults in their obligations.²⁾

In practice, most SBLCs are never claimed on and simply expire on the specified expiry date, as there was no default in the underlying contract between the beneficiary and their counterparty.³⁾

The applicant can mitigate any concerns about potential improper drawing by agreeing with their counterparty to incorporate a requirement for the beneficiary to provide advance notice of any intended claims to the applicant. Documentary evidence of such notice (e.g. copy of email) would need to be included with any claim presented to the issuer.⁴⁾

Ensure there are no clauses within the SBLC that require their claim to be dependent on approval from/be countersigned by the applicant or their representative. This would be detrimental to the beneficiary should there be a dispute and the applicant refuses to provide the required approval.⁵⁾

Applicants need to be mindful of the implications of requesting SBLCs with either open-ended expiries or just “expiry events”. Such SBLCs essentially have no fixed expiry date, which can create challenges should there be a need to cancel the SBLC and the beneficiary is unable to be reached to provide the required consent.⁶⁾

The applicant can avoid any potential challenges with an open-ended Standby Letter of Credit by agreeing with their beneficiary to have an “Evergreen/automatic extension” clause in the SBLC. This means there is an initial fixed expiry which is automatically extended for specific periods without the need for amendments.⁷⁾

It will continue to be extended until such a time as a non-renewal notice is sent to the beneficiary in accordance with the notice period stated in the SBLC terms or until any stated final expiry date (where applicable).⁸⁾

As long as the issuer notifies the beneficiary of their intention to cancel the SBLC within the stated agreed notice period, the SBLC can be cancelled on that expiry without any need to receive consent from the beneficiary.⁹⁾

With “expiry events”, the best practice is to also include a fixed expiry date and state that the Standby Letter of Credit terminates upon the earliest occurrence of either the expiry event or the specified expiry date.¹⁰⁾

It is common to see Standby Letters of Credit issued subject to UCP600, even though this rule is more applicable to Commercial Letters of Credit. Most often, this is because the parties are used to mentioning UCP600. However, it is worth noting that there are elements of an SBLC that are not covered by UCP600, and aspects of the UCP600 that are simply not applicable to SBLCs and may create avoidable challenges.¹¹⁾

It is recommended that applicants and beneficiaries have their SBLCs issued subject to ISP98 which has rules that are more precise and specifically tailored to SBLCs.¹²⁾

bid, performance and advance payment bonds

When structured either as demand guarantees or stand-by letters of credit, no shipping documents are needed and only a demand is presented.

Unlike a deal guaranteed by the LC, the documents would normally be presented directly to the buyer rather than to the bank in order to generate payment. Only if for some reason payment is not made will copies of the documents go to the bank together with a statement saying that the invoice has been pre- sented, but payment not made. The bank will then make the payment to the seller.

However, it is generally only used when the amount of money involved in the transaction is small, or the companies involved are very large and therefore likely to be more credit worthy. As a standby LC is not usually drawn, the fees charged by banks are slightly lower.

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