Characteristics of standby letters of credit
Characteristics of standby letters of credit

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Characteristics of standby letters of credit
  • Purpose and uses of standby letters of credit
  • Standby letters of credit distinguished from guarantees
  • Structure of and parties to a standby letter of credit transaction
  • An independent obligation (the autonomy principle)
  • Dealing in documents only
  • Standard rules and practices for standby letters of credit: UCP or ISP

Standby letters of credit are a type of letter of credit.

The common feature of all letters of credit is an undertaking by a bank to pay the beneficiary of the letter of credit a specific sum within a specified time limit against the presentation of specific documents in accordance with the terms of the letter of credit.

Letters of credit can be either:

  1. commercial letters of credit (also known as traditional letters of credit), or

  2. standby letters of credit (also known as standby credits)

The purpose of a letter of credit determines which category it falls into.

  Standby letters of credit Commercial letters of credit
Use Used in similar circumstances to on demand guarantees or performance bonds Used in relation to the movement of goods in the context of international or domestic trade
Purpose Purpose is to secure the obligations (monetary or non-monetary) of a party to a contract A method of payment under a contract of sale
Reason for payment under the letter of credit The beneficiary's counterparty under the