(c) ISP98: Standby practices
Standby Letter of Credit (`Standby`): an undertaking by one party, usually a bank, to pay a beneficiary or to accept bills of exchange drawn on it. This payment is made once the beneficiary has demanded it and has satisfied the conditions stated in the standby (e.g. presents certain documents).
Standby v. L/C: A standby differs from the ordinary L/C: the L/C is a payment instrument, which normally obliges the beneficiary to provide transport documents; the standby is intended to protect the beneficiary in the event of non-performance by its counterparty in the underlying contract. The standby obligation may be triggered by a document of any description (such as a mere statement that the counterparty is in default), not necessarily the presentation of any ‘official’ documents referred to in the previous section.) Standby practice originated in the United States to circumvent rules that prevent a bank from giving guarantees.
Practical use. Standbys are commonly named descriptively. For example:
- a performance standby supports an obligation to perform other than to pay money, including for the purpose of covering losses arising from partial or non-performance of the applicant in the underlying contract;
- an advance payment standby supports an obligation to make an advance payment;
- a bid bond or tender bond standby supports an obligation to negotiate and enter into a contract if the applicant is awarded a bid;
- a financial standby supports an obligation to pay money (or repay under a loan);
- a counter standby supports the issuance of a separate standby by the beneficiary of the countered standby;
- a direct pay standby supports payment when due of an underlying payment obligation;
- an insurance standby supports an insurance or reinsurance obligation of the applicant;
- a commercial standby supports the obligations of an applicant to pay for goods or services in the event of non-payment by ordinary payment methods.
Regulatory framework: ISP98. Standby practice triggers many questions. ISP 98 (International Standby Practices)[1] provides a clear and authoritative framework for addressing them. ISP 98 has become the industry standard for the use of standbys in international transactions. For it to apply, however, the contract must express that the standby is subject to the ICC’s International Standby Practices (or, in short, ISP98).
ISP98 vs. UCP600. UCP600 reinforced the independence and documentary character of the standby. It provides standards for examination and ‘notice of dishonour’ and an authoritative basis to resist pressures to issue a standby without expiration date. In many cases, however, UCP600 is not appropriate for standbys. Even simple standbys may pose problems not addressed by UCP600. More complex standbys – those involving longer terms or automatic extensions, transfer on demand, requests that the beneficiary issue its own undertaking to another, and the like – require more specialized rules of practice. ISP98 fills these needs.
ISP98 receives acceptance not only from bankers and merchants (as does UCP600), but also from a broader range of businesses (e.g. project managers, corporate treasurers, rating agencies, government agencies). Because standbys are often intended to be available in the event of disputes or applicant insolvency, their texts are subject to a degree of scrutiny not encountered in the context of (the typical UCP600-governed) L/C’s. There are basic similarities between ISP98 and UCP600 because standby and commercial practices are fundamentally the same. Nevertheless, ISP98 is more precise, expressly stating the intent implied in the UCP600 rule. Like UCP600 (and demand guarantees), ISP98 will apply to any independent undertaking issued subject to it.
U.N. Convention. ISP98 has been developed as a complement to the United Nations Convention on Independent Guarantees and Standby Letters of Credit[2] The Convention facilitates the use of independent guarantees and standby letters of credit and reflects their basic principles.
[1] Initially developed by the Institute of International Banking Law and Practice and adopted by the ICC (ICC Publication No. 590, 1998 Edition). ISP 98 came into effect on 1 January 1999.
[2] General Assembly 11 December 1995, entered into force on 1 January 2000. Eight countries have ratified the Convention: Belarus, Ecuador, El Salvador, Gabon, Kuwait, Liberia, Panama and Tunisia. The text of the Convention is available at: http://www.uncitral.org/uncitral/en/uncitral_texts/payments/1995Convention_guarantees_credit.html.