Standby Letters of Credit: A Comprehensive Guide (Finance and Capital Markets)

251 Pages·2008·0.72 MB·English

by  Jacob E. Sifri

STANDBY LETTERS OF CREDIT
Palgrave Macmillan Finance and Capital Markets Series
For information about other titles in this series please visit the website:
http://www.palgrave.com/business/financeandcapitalmarkets.asp
Standby Letters of
Credit

A COMPREHENSIVE

GUIDE

JACOB E. SIFRI
© Jacob E.Sifri 2008
Foreword © Theodora Issa 2008
All rights reserved.No reproduction,copy or transmission of this
publication may be made without written permission.
No paragraph of this publication may be reproduced,copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright,Designs and Patents Act 1988,or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,90
Tottenham Court Road,London W1T 4LP.

Any person who does any unauthorised act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The author has asserted his right to be identified as

the author of this work in accordance with the Copyright,
Designs and Patents Act 1988.
First published in 2008 by
PALGRAVE MACMILLAN
Houndmills,Basingstoke,Hampshire RG21 6XS and
175 Fifth Avenue,New York,N.Y.10010
Companies and representatives throughout the world.

PALGRAVE MACMILLAN is the global academic imprint of the Palgrave
Macmillan division of St.Martin’s Press,LLC and of Palgrave Macmillan Ltd.

Macmillan® is a registered trademark in the United States,United Kingdom

and other countries.Palgrave is a registered trademark in the European

Union and other countries.
ISBN-13:978–0–230–21218–3 hardback
ISBN-10:0–230–21218–2 hardback

This book is printed on paper suitable for recycling and made from fully

managed and sustained forest sources.Logging,pulping and manufacturing
processes are expected to conform to the environmental regulations of
the country of origin.
A catalogue record for this book is available from the British Library.

A catalog record for this book is available from the Library of Congress.
10 9 8 7 6 5 4 3 2 1

17 16 15 14 13 12 11 10 09 08
Printed and bound in Great Britain by

CPI Antony Rowe,Chippenham and Eastbourne
To My Father Elia Sifri
Contents

Foreword x

Preface xiii

Acknowledgement xv

1 An Overview 1
1.1 Introduction 1

1.2 Limitations on usage 2

1.3 General 3
2 Scope and Application of the ISP98 6
2.1 Standby letters of credit 6
2.2 Letters of credit authorities 8

3 Obligations 26
3.1 The undertaking to honour by the issuers
and any confirmers 26
3.2 Obligation of different branches 30

3.3 Conditions to issuance 30
3.4 Nomination 31
3.5 Advice of standby or amendment 32
3.6 When an amendment is authorized and binding 33
3.7 Routing of amendments 35
4 Presentation 37
4.1 Introduction 37
4.2 What constitutes a presentation 38
4.3 Identification of the standby 39
vi
CONTENTS vii
4.4 Where and to whom complying presentation is made 40
4.5 When timely presentation is made 42
4.6 Complying medium of presentation 43
4.7 Separateness of each presentation 44
4.8 Partial drawings and multiple presentations;
amount of drawings 45
4.9 Extend or pay 47

4.10 No notice of receipt of presentation 49
4.11 Issuer waiver and applicant consent to waiver
of presentation rules 49

4.12 Original standby is lost,stolen,mutilated or destroyed 51

4.13 Expiration date on a non-business day 52
4.14 Closure on a business day 53

5 Examination of Documents 59

5.1 Examination for compliance 59
5.2 Extraneous documents 60

5.3 Inconsistencies 61
5.4 Language of documents 62
5.5 Issuer of documents 62
5.6 Date of documents 63

5.7 Required signature on a document 63

5.8 Demand document implied 65
5.9 Identical wording and quotation marks 66
5.10 Applicant approval 68

5.11 Non-documentary conditions 69
5.12 Formality of statement in documents 70

5.13 No responsibility to identify the beneficiary 71

5.14 Name of acquired or merged issuer or confirmer 72
5.15 Name of acquired or merged issuer or confirmer 73

5.16 Standby document types – demand for payment 75
5.17 Statement of default or other drawing event 76

5.18 Negotiable documents 77

5.19 Legal or judicial documents 77
5.20 Other documents 78
5.21 Request to issue separate undertaking 79
6 Notice,Preclusion and Disposition of Documents 84
6.1 Timely notice of dishonour 84
6.2 Statement of grounds for dishonour 88
6.3 Failure to give timely notice of dishonour 89
6.4 Notice of expiry 92
6.5 Seeking applicant’s waiver without request by presenter 93
viii CONTENTS
6.6 Seeking applicant’s waiver upon presenter’s request 94
6.7 Disposition of documents 96
6.8 Cover instruction / transmittal letter 97
6.9 Applicant notice of objection 98
7 Transfer,Assignment and Transfer by Operation of Law 100
7.1 Requests to transfer drawing rights 100

7.2 Transferability of drawing rights 100
7.3 Conditions to transfer 102
7.4 Effect of transfer on required documents 103

7.5 Reimbursement for payment based on a transfer 104

7.6 Assignment of proceeds 104
7.7 Request for acknowledgement 105
7.8 Conditions to acknowledgement of assignment
of proceeds 106

7.9 Conflicting claims to proceeds 107
7.10 Reimbursement for payment based on an assignment 107

7.11 Transfer by operation of law 108
7.12 Additional document for drawing in successor’s name 108
7.13 Suspension of obligations upon presentation by successor 109
7.14 Reimbursement for payment based on a transfer

by operation of law 110

8 Cancellation 112
8.1 Cancellation or termination of an irrevocable standby 112
8.2 Issuer’s discretion regarding a decision to cancel 113

9 Reimbursement Obligation 115
9.1 Right to reimbursement 115
9.2 Charges for fees and costs 117
9.3 Refund of reimbursement 117
9.4 Bank-to-bank reimbursement 118

10 Timing 119
10.1 Duration of the standby 119
10.2 Effect of expiration on nominated person 120
10.3 Calculation of time 120
10.4 Time of day of expiration 120
10.5 Retention of standby 121
11 Syndication/Participation 122
11.1 An overview 122
11.2 Issuing syndicated LCs and managing operations 122
CONTENTS ix
12 Types and Uses of Standby LCs 125
12.1 The types of standby LCs 125
12.2 Performance standby LC Vs. performance bonds 128
12.3 Evergreen and annually renewable credits 130
12.4 Performance standby LCs for construction projects 131
12.5 Inoperative standby LCs 137
13 Roles and Responsibilities 138
13.1 The mechanisms of the standby letter of credit 138
13.2 Bonds correlating the parties 141

13.3 Roles and responsibilities – applicant’s side 145

13.4 Issuing bank and advising bank/nominated bank 158
13.5 Background 164
13.6 Roles and responsibilities – beneficiary’s side 166
13.7 Roles and responsibilities in bank-to-bank reimbursement 173

13.8 Relevant discussions 174

14 Risk Management 184

14.1 Introduction 184
14.2 Operational risk issues in banking 185
14.3 Relevant discussion 189

14.4 Conclusion 193

15 Fraud Detection and Prevention 195
15.1 Introduction 195

15.2 Background 195
15.3 Fraud and ISP98 196

15.4 The independence principle 197

15.5 The exception – fraud in the transaction 199

15.6 The proper structuring of an LC 200
15.7 The case of Emirates Banks 204
15.8 Procedures for fraud prevention 206

16 Presentation and Settlement 209
16.1 Introduction 209
16.2 Standard for examination of documents – overview 209
16.3 The general procedure for documents examination 216
16.4 Processing of discrepant documents by the issuer 218
16.5 Processing discrepant documents by a nominated
bank or confirmer 220
16.6 Remitting the standby proceeds 223
Index 225
About J. Sifri Consulting Services 233