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Distinguish between Guarantee Letter of Credit and a Standby Letter of Credit

Standby Letter of Credit. Article 2 of UCP states that credit includes standby credits but does not define the term. The US Controller of Currency defines a standby letter of credit thus: “A standby letter of credit is any letter of credit, or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the issuer:

(i) to repay money borrowed by or advanced to for the account of the party; or

(ii) to make payment on account of any indebtedness undertaken by the account party; or

(iii) to make payment on account of any default by the account party in performance of an obligation.”

Under a standby credit, also known as guarantee credit, the issuing bank assures the beneficiary that in the event of non-performance or non-payment of an obligation by the applicant, the beneficiary may get the payment from the issuing bank. The claim should be a draft accompanied by the requisite documentary evidence  of non-performance as stipulated in the credit.

Standby credit is a substitute for bank guarantee and is used in countries where issuing of bank guarantee is not allowed, e.g., Japan and the USA.

The fact that an UC is not a transferable one does not affect the rights of the beneficiary  to assign the proceeds of the credit to any third party.

Assignment of L/C. Article 49 states: “The fact that a credit is not stated to be transferable shall not affect the beneficiary’s right to assign any proceeds¬† to which he may be, or may become, entitled under such credit, in accordance with the provisions of the applicable law.”

As a way of clarification it is further stated that this Article relates only to the assignment of proceeds and not to the assignment of the right to perform under the credit itself.

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