1.1. Similarities
The standby letter of credit is in many ways similar to LCs. The SLCs, more importantly, are in principle similar to LCs. In other words, the doctrine of autonomy and the principle of strict compliance are also applied to SLCs.^° As to the required documents, types and their roles, there is a distinction between SLCs and LCs. They are more important in the latter form of credit.
There is a tendency in respect of the autonomous nature of SLCs (both in the USA and in the UK) to question whether the rule of independence should be broken or not. For instance, it is suggested that as the risk under SLCs is very high for the bank's customer, because there is no documentation as in the case of traditional LCs, Article 5 of the UCC should be amended to facilitate attacks on the problem by breaking the rule of independence and to permit suing the beneficiaries for breach of the underlying co ntra ct.In a case^^ Eveleigh, L.J., accepted the view that if the underlying agreement is lawfully avoided or there is a total failure of consideration on the part of the buyer, he would be prepared to grant an injunction and to restrain the bank from payment of the credit to the beneficiary.
Although such suggestions try to mitigate the risks imposed upon the bank's customer, some disadvantages may emerge, firstly, when in the wake of breaking the principle of independence the creditors are forced back to elaborate contracts like a guarantee contract; secondly, no intention may exist on the part of
Schmitthoff, supra (f.n. 1), p. 364.
"F raud in the transaction: Enjoining letters o f credit during the Iranian Revolution'*, 93 Harvard Law Review, 992 (1980), pp. 1013-15.
Potton Homes L td. v. Coleman Contractors Toverseas) L td .. The Times, 28th Feb. 1984; Int.B.L., supra (f.n. 16), pp. 272-3, and look at particularly for cases referred to in fn . 32, at p. 273.
the parties when negotiating SLCs, since for such a type of credit the beneficiaries' position is of great importance.
1.2. Differences
A standby letter of credit and LCs are different from each other as to the function of the credit, its beneficiary, and the required documents. A traditional letter of credit is a device for payment in a sale contract, so there should be some positive performance to entitle the beneficiary to demand the credit;^'^ but in the case of SLCs, in contrast to LCs, failure of the applicant for the credit in carrying on his contractual obligation entitles the beneficiary to draw a draft or demand for the amount of the credit.^^
As to the beneficiary of the credit in SLCs, mostly but not always the buyer customer is the beneficiary of the credit and the seller (in case of sale contracts) or contractor (in case of construction agreements) are applicants for the credit. Of
Becker, J.D., "Standby letters of credit and the Iranian cases: W ilt the independence o f the credit survive?". Uniform commercial Code Journal, Vol. 13, No. 4, 1981, pp. 335-47 [hereinafter referred to as Becker]; Penn, supra (f.n. 22), pp. 133-34.
"The value o f the documentary credit, appreciated especially in sales transactions involving carriage o f goods by sea, lies in its twin objectives, namely to raise credit and to secure payment o f the purchase price. The credit meets the common interest o f both parties not to tie up funds during the transport o f goods. Even more importantly, it safeguards the different interests o f buyer and seller. The buyer is assured that payment is made only against document that confer title o f the goods to him or at least provide evidence o f their shipment and o f certain qualities (e.g. by certificate o f inspection, examination or origin). The seller when parting possession o f the goods is assured o f payment, or honour o f a b ill o f exchange he may wish to discount, by a financially strong and reliable third paity, often a confirming bank in his own country. He is thus protected against the risk o f the foreign buyer's inability or unwillingness to pay." [UNCITRAL Y.B.,
1988, supra (f.n. 1), p. 49, para. 19]
Banks, supra (f.n. 3), pp. 74-5; G. Weisz and J.I. Blackman, "Standby letters o f credit after Iran; Remedies of the account p a rty ". University o f Illinoise law Rev., V o l.l, 1982, pp. 355-84, pp. 358-60 [hereinafter referred to as Weisz]; "W hile the traditional documentaiy credit provides the seller (or similar performing party) with a secure mechanism for payment by the buyer, the stand-by letter o f credit is a default instrument in that it covers the risk o f non-performance or defective perfomiance by a contractor, supplier or other obligor." [UNCITRAL Y.B., 1988, supra (f.n. 1), p. 47, para. 3]; It is also stated: "In contrast to the documentaiy credit, which secures payment due to the beneficiary for his regular performance o f a commercial obligation, the stand-by letter o f credit is designed to provide security or indemnity to the beneficiary for the unlikly contingency, and the need to protect against it, may arise in respect o f a great variety o f commercial or financial obligations. Stand-by letters o f credit may thus be used to underwrite undertakings in various contexts, as are bank guarantees and bonds." [UNCITRAL Y.B., 1988, supra (f.n. 1), p. 50, para. 26]
course, there are some types of SLCs where the buyer/employer is the applicant for the credit; these include the bid credit, or advanced payment bonds.
Lastly, there is an important difference between the documents. In SLCs there is no need that a required document(s) has any link with the underlying agreement. As a contrast, tendered documents in the traditional form are directly related to the underlying contract, e.g. sale contract, carriage contract and so
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