Q&As

What is the difference between a standby letter of credit and a letter of credit?

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Published on LexisPSL on 03/07/2018

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • What is the difference between a standby letter of credit and a letter of credit?
  • Summary
  • Primary and secondary obligations
  • Documents presented under CLCs and SBLCs to obtain payment
  • Standard rules and practices

What is the difference between a standby letter of credit and a letter of credit?

This Q&A considers the differences between a standby letter of credit (SBLC) and an ordinary letter of credit (CLC), sometimes also referred to as a commercial, documentary or trade letter of credit.

For the nature of a CLC or SBLC, see Practice Notes:

  1. Characteristics of commercial letters of credit,

  2. Commercial letters of credit—structure and parties

  3. Characteristics of standby letters of credit

  4. Standby letters of credit—standard rules and practices

Summary

The principal difference between a SBLC and a CLC is the type of event that will trigger a payment under the letter of credit.

A CLC payment is normally triggered where the seller of goods or services in an international sale or supply agreement has performed its obligations and the buyer pays through a CLC opened at the inception of the agreement as an agreed method of making payment of the price. There is no nexus between payment under the CLC and any default under the contract.

A SBLC payment is normally triggered where a

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