The 2-in-1 Standby – a Sound Option or Specious Shortcut?

On occasion we have come across a type of Standby LC that, for lack of a better expression, we would call the “2-in-1 Standby”. Usually driven by beneficiary request, it consists of a Bid Standby that converts into a longer- term Performance Standby if certain conditions are met. In other words, instead of issuing a Tender/Bid Standby under ISP98 (or URDG LG) for a BID, and THEN issuing a performance IF the applicant wins the bid, the bid standby “becomes” a performance standby (or incorporates performance default drawdown wording) if the applicant is awarded the bid. Generally speaking, UCP600 would be less suited for such an instrument. More traditional or cautious standby LC practice might reject such an approach outright to avoid unnecessary complexity. However, practices and needs vary, and the mere existence of such a peculiar instrument merits exploring it in greater detail. As samples are quite rare, we will discuss some examples of clauses encountered and discuss potential advantages and disadvantages to such an approach. Finally, we would invite further comments from the DCW community.

To begin, like most standbys, the instrument’s text generally refers to the contract or Request for Proposals/Tender guidelines, pursuant to which the standby is issued. In the discussion of the purpose of the standby the wording includes a description of the initial type of standby, e.g. as a bid standby or to secure an advance, but adds further wording to the effect that the standby “may serve” as performance security or “will continue as” a performance standby should certain conditions arise or after a certain date. Such conditions may be expressed generally, but the text should include clear, documentary conditions to attest that such conditions have been met. The expiration date will generally cover the whole period of the obligations, i.e. the bid process and the performance obligations of the winning bidder (Applicant). In some instances, like many performance standbys, the standby would also include an annual automatic extension clause.

The key part would then be the statement of default and demand for payment wording to be provided by the Beneficiary should it choose to claim. The first statement covers the common events where the Applicant withdraws its bid prematurely or fails to sign the contract should it be selected as the winning bidder. However, it might also include a statement that the Beneficiary did not receive proof or “confirmation”, i.e. notification that the Bid Standby has been “converted” into a Performance Standby or is otherwise effective for a determined period of time covering performance obligations.