Standby Letter of Credit
Standby Letter of Credit - is an obligation of bank of the Importer (issuing bank) to the Exporter (beneficiary) to make payment for Importer (applicant) in case of default of the treaty obligations by the last and presentation by the Exporter (beneficiary) the written requirement to payment.
Standby Letter of Credit is used in cases if one of the parties under the transaction wishes to receive the maximal guarantee of execution of contract obligations from other party.
Standby Letter of Credit is issued for a period (usually, this period corresponds to the period of the contract or the date of delivery of the goods, services or works) and may be terminated early (extended) at the request of the Importer (applicant) and with the consent of the Exporter (beneficiary). Payments under the contract by Importer (applicant) makes irrespective of issue Standby Letters of Credit.
In international practice legal for Standby Letters of Credit are regulated in accordance with the International Standby Practices (ISP98), International Chamber of Commerce (ICC), Publication No. 590, latest revision or Uniform Customs and Practices for Documentary Credits (UCP), International Chamber of Commerce (ICC), Publication No. 600, latest revision and also according banking practice.
Unlike Guarantee the Standby Letters of Credit can be subject to the Uniform Customs and Practices for Documentary Credits (UCP 600), which stipulate certain standards for inspection of documents that are not applicable to the Guarantee.
Thus, if the requirement of the Exporter (beneficiary) for Guarantee is accompanied by the documents to confirming execution by him of the obligations and bank verify only presence of these documents and, probably, their conformity to the requirements containing in the Guarantee.
In case for Standby Letter of Credit subordinated UCP 600, documents should to correspond the standards specified at UCP 600, and also each other, that considerably increases a degree of protection. For Standby Letters of Credit subordinated UCP 600 also eliminates the problems connected by it as Guarantees usually submit to the legislation of the country of issuing bank.
Advantages of the Standby Letter of Credit:
- Opportunity of reception by the Importer (applicant) the goods, rendering of services or executions of works without an advance payment and/or with a delay of payment.
- The maximal guarantee of payment for the Exporter (beneficiary) for the delivered goods, rendered services or performed works.
- Opportunity of the prescheduled termination of validity of the Standby Letter of Credit in case of performed obligations by the Importer (applicant) before the Exporter (beneficiary).
- Speed of reception of funds under the Standby Letter of Credit in case of default by the Importer (applicant) the contract obligations.
The world practice shows steady growth of popularity of Standby Letters of Credit for payments by International trade transactions. Simplicity of use, the transparency and availability of the given kind of international payments deduce attitudes between the parties on qualitatively new level.
Draft of Standby Letter of Credit