Standby Letters of Credit and the Problem of Bad Faith Calls

Abstract

The documentary letter of credit traditionally employed for transactions involving the sale of goods has been joined since World War II by an apparently similar instrument called the "standby" letter of credit. The "standby" letter of credit differs fundamentally from the conventional or "sales" letter, because it resembles in function more a guarantee than a sales letter of credit. For example, while payment under the sales letter of credit is virtually certain and is in fact intended, the standby letter theoretically provides for payment only if the customer defaults in his contractual obligations.