Legal Perspective: Obligations under standby letters of credit

An issuer of a standby letter of credit (LC) undertakes to the beneficiary to honour a presentation that appears to comply with the terms and conditions of the international standby practices (ISP).

An issuer honours by paying the amount demanded of the issuer at sight by acceptance of a draft drawn by the beneficiary on the issuer; by deferred payment of a demand made by the beneficiary on the issuer; and by negotiation.

An issuer acts in a timely manner if it pays at sight, accepts a draft, or undertakes a deferred payment obligation within the time permitted for examining the presentation and giving notice of dishonour.

A confirmer undertakes to honour a complying presentation made to the confirmer by paying the amount demanded of the confirmer at sight or, if the standby so provides, by another method of honour consistent with the issuer's undertaking.

If the confirmation permits presentation to the issuer, then the confirmer undertakes to honour upon the issuer's wrongful dishonour by performing as if the presentation had been made to the confirmer.

If the standby permits presentation to a confirmer, then the issuer undertakes to honour upon the confirmer's wrongful dishonour by performing as if the presentation had been made to the issuer.

An issuer honours by paying immediately available funds in the currency designated in the standby unless the standby states it is payable by a monetary unit of account or delivery of other items of value.

For the purpose of ISP rules, an issuer's branch undertaking to act under a standby in a capacity other than as issuer is obligated in that capacity only and shall be treated as a different person. A standby is issued when it leaves the issuer's control unless it clearly specifies that it is not then "issued" or "enforceable".

Statements that a standby is not "available", "operative", "effective", or the like do not affect its irrevocable and binding nature at the time it leaves the issuer's control.

A standby may nominate a person to advise, receive a presentation, effect a transfer, confirm, pay, negotiate, incur a deferred payment obligation, or accept a draft.

Nomination does not obligate the person to act except to the extent that he undertakes to act. The nominated person is not authorised to represent the person making the nomination.

The writer is a legal consultant on banking and stock market laws.