Standby Letter Of Credit Law Research

The Standby Letter of Credit was created by American bankers for purpose of evading the prohibitive law that banks should not provide guaranties for others. Therefore, in its origin, Standby was a substitution of bank guaranties. Developed from the traditional commercial credit, Standby was born of Autonomy, or say Independence, which was a basic principle of credit system. As a kind of guaranty, the principle of autonomy was in conformity with the requirement of economy and the need of parties concerned, which resulted in its quick development in both domestic and international market and wide use in almost all kind of transactions, in spite of the fact it was original created to support domestic financial debts. Currently, Standby has been widely used with its transaction amount far exceeding that of the traditional commercial credits. This Article is therefore purposed on legal issues about the nature of Standby and arising from its operation.There have been disputes on nature of Standby. These disputes arise because people doubt whether a guarantee can be independent. Traditional accessory suretyship is characterized by principle of co-extensiveness, which complies with the purpose of suretyship, and is therefore confining the scope of the surety's liability to that of the principal debtor. On the contrary, guarantor/opening bank under Standbys will totally set aside the performance of the underlying agreement according to the Principle of Autonomy, and will solely depend on the documents presented when making its decision on whether to make payment. However different from the traditional suretyship, Standby, or say guarantee with character of independence, is still within the scope of guarantee system. Guarantee is an agreement, although it is sui generis because of its specific function. When agreeing to use and issuing a Standby, all parties are intended to provide a guarantee for the principal debt. Adoption of the Autonomy is an allocation of risks agreed by all parties after fully assessment of their own interests. This allocation of risks is based on all parties' wiliness and shall be legally respected. In this term, Standby is a new kind of guarantee operated under Principle of Autonomy.Because of the Principle of Autonomy, Standby is independent of eitherthe underlying agreement or the agreement between the account party and the opening bank on opening of a standby, although they are in fact interactive. Therefore, strictly, from a legal perspective, only the opening bank and the beneficiary, and, in case other intermediate banks are involved, are involved under a Standby. All rights and obligations of the opening bank and the beneficiary are decided by the terms and conditions of the Standby, among which, the documents required are of essential importance. Different documents result in different payment mechanisms. Addition of non-documentary conditions will destroy the Principle of Autonomy, and therefore make Standby identical to the traditional suretyship. However, there are disputes as to what are non-documentary conditions. One holds the Standby is independent of the underlying agreement as long as the bank's obligation is restricted to examining the documents and making the payment. In operation, the other insists that payment under the Standby is relying on the underlying agreement if performance of the underlying agreement has to be considered before the beneficiary obtains the documents required. ISP98 adopted the former from a banker's point of view, in which case, the value of Standby will be reduced on the side of the beneficiary since the payment is no longer quick and definite.There are other problems arising from operation of Standbys, i.e. presentation and examination of documents, transfer of drawing rights and assignment of proceeds, and fraud and abuse. These problems are similar to some extent to those exist under commercial credits. Presentation must be made strictly in accordance with that specified, and examination must be...