International Standby Practices ISP98 – 25 Years

This year represents a remarkable milestone in the lifetime of the international rules for standby letters of credit: ISP98. Although I come from Eastern Europe, a region where use of standby LCs is limited, I deal with relevant issues related to standby rules and practices very often as an international trade finance trainer and consultant. I see expanding use of standbys nowadays and also increasing reliance on ISP98 as the set of governing rules for standbys issued outside its main domain, the United States.

Use of Standby Letters of Credit

It is well known fact that the standby letter of credit instrument originated in the US where it is used very widely in situations where we Europeans would utilize a demand guarantee. There is also a unique type of standby, called “direct pay” (i.e., payable when the underlying payment obligation is due without regard to a default) which does not have an equivalent in demand guarantee practice. In general, in the US, users have a choice to make standbys governed by ISP98 or UCP 600. Demand guarantees are rarely used in US; if they are, it is mostly in the context of international transactions.

In my region, we may choose between a demand guarantee and a standby LC. Understandably, the first choice would be a demand guarantee, often subject to URDG 758, or silent as to governing rules and subject to applicable law alone. A standby LC could be used if so requested by the client. Standbys are often used to secure the payment obligation of a buyer in relation to its overseas open account trade or similar payment obligations. Such relatively simple standbys are frequently made subject to UCP 600. Banks in Central and Eastern Europe also issue and receive other, more complicated standbys, both direct standbys and counter-standbys. This is usually the case when the underlying transaction relates to the Americas. Most of these standbys would be subject to ISP98.

As an international trainer active in many regions of Europe, Asia, and Africa, I see increasing interest in ISP98, above all in the Middle East over the past five years. Users want to know about the differences among the available rules and what practical impact the chosen rules have (or might have) on the relevant instrument and how it is processed. Consequently, many of my courses focus on differences among URDG 758, UCP 600, and ISP98 and provide detailed practical analysis and comparison. In this article, I only intend to discuss the main aspects to consider when choosing governing rules and some observations about ISP98.