Standby letter of credit
A standby letter of credit is an irrevocable, independent, documentary bank undertaking that supports an applicant's payment or performance obligation and is drawn only when the stated documents are presented, typically after an alleged default. The International Standby Practices (ISP98, ICC Publication No. 590) are written for standby letters of credit, including performance, financial and direct-pay standbys, and apply when expressly incorporated.
Standby letter of credit use on bank export finance desks
On EF desks a standby letter of credit is used where the beneficiary needs bank credit support rather than a commercial payment LC for each shipment. Common purposes include bid security, performance support, advance-payment repayment, warranty obligations and financial backstops. The instrument sits alongside a commercial letter of credit book and the bank's demand-guarantee book. Many markets treat a standby and a demand guarantee as functionally similar independent undertakings, with the governing rule set, ISP98, UCP 600 or URDG 758, chosen in the text.
ISP98 Rule 1.01 states that the rules are intended for standby letters of credit, including performance, financial and direct-pay forms, and may be applied to a similar undertaking by express reference. Rule 1.06 characterises a standby as irrevocable, independent, documentary and binding when issued, even if the instrument does not say so.
Mechanics under ISP98 and rule choice
Because a standby is independent, the issuer's obligation does not depend on performance or breach of the underlying transaction, or on the issuer's knowledge of that performance or breach. Because it is documentary, the issuer examines required documents on their face. Non-documentary conditions must be disregarded where the standby does not require a document evidencing them and fulfilment cannot be determined from the issuer's own records or normal operations.
UCP 600 can also govern a standby when the credit text so indicates, to the extent the UCP provisions are applicable. Commercial LC examination practice, including the five banking-day examination window under UCP Article 14, then frames presentation handling. Where the instrument is styled as a demand guarantee rather than a standby LC, parties often incorporate URDG 758, the ICC Uniform Rules for Demand Guarantees in force since 1 July 2010.
Standby letter of credit versus demand guarantees and bonds
A standby letter of credit and a URDG demand guarantee both create independent bank payment obligations against documents. Naming conventions and local regulatory treatment differ by jurisdiction. Contract security packages in works and plant procurement often call for a performance bond or bank demand guarantee; those forms may be issued as standbys under ISP98 or as guarantees under URDG 758. Desk practice turns on beneficiary form requirements, governing law and which ICC rule set the bank's operations team is mandated to process.