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What is a standby letter of credit?

A standby letter of credit is essentially a bank guarantee issued in the form of a letter of credit stipulating obligation of the bank to pay the guaranteed amount to the beneficiary under the letter of credit in case of a guarantee event (i.e. failure of the standby letter of credit applicant to fulfil obligations to the beneficiary). If, in the opinion of the beneficiary, its partner is in breach of the obligations, the beneficiary may use the standby letter of credit. Normally, to this end it is sufficient to provide the bank with a written statement that the partner has failed to fulfil the specified obligations (often the statement is provided in conjunction with other documents during validity period of the letter of credit and on the agreed terms). In case the partner being the applicant under the letter of credit has fulfilled the obligations, the letter of credit shall expire at the end of its validity period.