Standby letter of credit (SBLC)

A French contractor signs a 40 million dollar contract with a Texas operator. The operator asks for 10% performance security and turns down the URDG 758 demand guarantee the bank offers: it wants a standby letter of credit subject to ISP98, payable in New York. It gets one from the same bank's New York branch. The form comes from American banking law. National banks had no power to guarantee another party's debt; they could, however, issue letters of credit. The standby therefore borrowed the mechanics of the documentary credit to do the work of a guarantee. What sets it apart from a documentary credit is the document that triggers payment. A documentary credit pays against documents evidencing performance, invoice and bill of lading. A standby pays against the beneficiary's statement that the applicant has failed to perform, and the bank examines only whether that statement complies with the terms of the credit. The undertaking is independent of the underlying contract, like a demand guarantee. UCP 600 applies to standbys to the extent it can, which leaves gaps. ISP98 (ICC publication No. 590, effective January 1, 1999) was written for them: an examination period deemed reasonable up to three business days and unreasonable beyond seven, and, if the place for presentation is closed on the last day, an automatic extension to thirty calendar days after it reopens, where UCP 600 extends nothing after force majeure. The letter of credit used as reinsurance collateral in the United States is a standby. The 'leased SBLCs' offered online are a fraud regulators know well.