Standby Letter of Credit to be issued by an Issuer for a Beneficiary on request by an Applicant. It works as a guarantee to ensure that payment for a deal is made.
The most common scenario for the Standby Letter of Credit to be issued is where two parties enter into an agreement or a deal, and they do not know each other’s credibility well enough.
The Bank would then issue this Standby Letter of Credit to act as an assurance for the parties to trust each other. In other words, the Issuing Bank acts as a guarantor for the Applicant in order to obtain a contract by assuring the Applicant’s obligation to the Beneficiary would be fulfilled, through this Standby Letter of Credit.
This Letter, in the worst-case, where the Applicant escapes liability, would avail the Beneficiary to claim payment from the Bank. And as the Bank is only obliged to pay only in the worst-case scenario, it is, therefore, a “Standby” Letter.
This Standby Letter of Credit is particularly important in international trading, where it would be even more difficult for companies to know each other’s credibility well, and the different laws and regulations that they are bound to.
This Standby Letter of Credit could firstly, help both parties gain trust, with the Issuing Bank involved as a guarantor; and secondly, set the responsible jurisdiction and governing laws, so as to prevent any disputes regarding the relevant laws.
This document should be carefully read by the Individual Bank and the Recipient of the Letter (likely the Seller).
This Standby Letter of Credit may be used as a guarantee to ensure that payment for a deal is made.
The party names shall be clearly stated in the Letter, as well as the maximum amount with the corresponding currency and the payment date. The effective period shall also be specified in the Letter, with both the starting and expiry date entered in the Letter.
Both the Bank and the Recipient should sign and return a copy, and once signed, both parties should get a copy. To avoid any future disputes, both parties may wish to have their signatures witnessed.
If either party wishes to amend the agreement in the future, both parties should agree to do so, and the original agreement and amendments should be recorded in writing and signed by both parties.
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