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At a December 2023 meeting, bankers considered the situation where a “high-valued” client requests your bank to issue a standby LC with the following governing laws clause: “This Standby Letter of Credit is subject to the ISP98 and for matters not covered by the ISP98, the laws of the Country X shall apply.”
Bankers then discussed the questions: Would your bank be willing to issue this standby if the laws of Country X were unfamiliar to you? If so, on what grounds? If not, how would you limit your risk in order to close this deal for your high-valued customer? Alternatively, would it be acceptable if the above-mentioned clause was amended to: “This Standby Letter of Credit is subject to the ISP98”?
Among those LC specialists commenting, most were reluctant to include the clause due to their unfamiliarity with Country X’s laws which posed added risk to the issuer in case of any legal dispute. Some specialists if at a bank with presence in Country X would have comfort including such clause outright, or would seek the support of their branch for local issuance. Another idea expressed was to induce a correspondent bank in Country X to take their bank’s standby as a counter instrument for the correspondent bank to issue a local undertaking. Due to the applicant’s pressing need, and subject to the issuer ’s legal department opinion, another banker suggested obtaining from the applicant an addendum to the credit application (i.e., an indemnity) where the applicant would absorb legal expenses in Country X should they arise.
After the meeting, Francisco Rodriguez, CDCS, GLS, chose to share his thoughts with DCW readers. He reminded that the various possible responses would fit within the internal guidance of some banks, but not all and pointed out that ISP98 Rule 1.08 (Limits to Responsibilities) provides, in part: “An issuer is not responsible for ... observance of law or practice other than that chosen in the standby or applicable law at the place of issuance.”
As for the alternative, “This Standby Letter of Credit is subject to the ISP98”, bankers said this would certainly make a difference. For Rodriguez, it reads like a standard clause, devoid of the “X” factor as regards to applicable law.