A standby letter of credit, also known as a guaranteed letter of credit, is a letter of credit that is not issued for the purpose of paying off the price of a commodity transaction, but for the purpose of loan financing or guaranteeing debt repayment.
A standby letter of credit is a special form of letter of credit, which is a certificate of the issuing bank’s obligation to the beneficiary. The issuing bank guarantees that if the applicant fails to perform its obligations, the beneficiary can obtain reimbursement from the issuing bank by issuing a bill of exchange to the issuing bank in accordance with the provisions of the standby letter of credit and attaching a statement or certificate that the applicant has not performed its obligations. Standby letters of credit are only subject to some of the provisions of UCP600. Standby letters of credit have the following properties.
(1) Irreversibility. Unless otherwise provided in the standby letter of credit or with the consent of the other party, the issuer shall not modify or revoke its obligations under the standby letter of credit.
(2) Independence. The performance of the issuer’s obligations under a standby letter of credit does not depend on: ① the issuer’s right and ability to obtain reimbursement from the applicant; ② the beneficiary’s right to obtain payment from the applicant; ③ the reference in the standby letter to any reimbursement agreement or underlying transaction; ④ the issuer’s knowledge of the performance or default of any reimbursement agreement or underlying transaction.
(3) Documentary nature. The issuer’s obligations depend on the presentation of documents and the superficial examination of the requested documents.
(4) Mandatory nature. A standby letter of credit is binding upon its issuance, and is mandatory for the issuing bank regardless of whether the applicant authorizes the issuance, whether the issuer collects fees, or whether the beneficiary receives or takes action in reliance on the standby letter of credit or amendments.
The differences between a standby letter of credit and a general letter of credit are: ① The issuing bank of a general commercial letter of credit will only pay the amount under the letter of credit when the beneficiary submits relevant documents to prove that it has fulfilled the obligations of the underlying transaction; the issuing bank of a standby letter of credit will only pay the amount under the letter of credit when the beneficiary provides documents to prove that the debtor has not fulfilled the obligations of the underlying transaction. ② The issuing bank of a general commercial letter of credit is willing to pay the bills and documents issued by the beneficiary in accordance with the provisions of the letter of credit, because this shows that the underlying transaction relationship between the buyer and the seller is proceeding normally; the issuing bank of a standby letter of credit does not want to pay the bills and documents issued by the beneficiary in accordance with the provisions of the letter of credit, because this shows that there is a problem in the transaction between the buyer and the seller. ③ A general commercial letter of credit always has the importer of the goods as the applicant and the exporter as the beneficiary, while the applicant and beneficiary of a standby letter of credit can be either the importer or the exporter.