Standby letters of credit were initially developed because banks in the USA had limited legal authority to issue guarantees. Today, except under limited circumstances, the restriction on the issuance of guarantees no longer exists.Standby letters of credit are not legally distinct from demand guarantees, which also require the presentation of stipulated documents and compliance with the terms and conditions of the guarantee. The distinction lies in practice and terminology.Standby letters of credit are used to underwrite a wide variety of commercial and financial operations. A standby letter of credit acts as a guarantee if there is a failure to perform a contractual undertaking, such as the obligation of a buyer to pay or that of a seller to deliver. It has the same basic form as a commercial documentary credit. However, the intention is often that the beneficiary in whose favour a standby letter of credit is issued draws only in case of default on the transaction to which the standby letter of credit relates.
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