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This year represents a remarkable milestone in the lifetime of the international rules for standby letters of credit: ISP98. Although I come from Eastern Europe, a region where use of standby LCs is limited, I deal with relevant issues related to standby rules and practices very often as an international trade finance trainer and consultant. I see expanding use of standbys nowadays and also increasing reliance on ISP98 as the set of governing rules for standbys issued outside its main domain, the United States.
Use of Standby Letters of Credit
It is well known fact that the standby letter of credit instrument originated in the US where it is used very widely in situations where we Europeans would utilize a demand guarantee. There is also a unique type of standby, called “direct pay” (i.e., payable when the underlying payment obligation is due without regard to a default) which does not have an equivalent in demand guarantee practice. In general, in the US, users have a choice to make standbys governed by ISP98 or UCP 600. Demand guarantees are rarely used in US; if they are, it is mostly in the context of international transactions.
In my region, we may choose between a demand guarantee and a standby LC. Understandably, the first choice would be a demand guarantee, often subject to URDG 758, or silent as to governing rules and subject to applicable law alone. A standby LC could be used if so requested by the client. Standbys are often used to secure the payment obligation of a buyer in relation to its overseas open account trade or similar payment obligations. Such relatively simple standbys are frequently made subject to UCP 600. Banks in Central and Eastern Europe also issue and receive other, more complicated standbys, both direct standbys and counter-standbys. This is usually the case when the underlying transaction relates to the Americas. Most of these standbys would be subject to ISP98.
As an international trainer active in many regions of Europe, Asia, and Africa, I see increasing interest in ISP98, above all in the Middle East over the past five years. Users want to know about the differences among the available rules and what practical impact the chosen rules have (or might have) on the relevant instrument and how it is processed. Consequently, many of my courses focus on differences among URDG 758, UCP 600, and ISP98 and provide detailed practical analysis and comparison. In this article, I only intend to discuss the main aspects to consider when choosing governing rules and some observations about ISP98.
The Choice of Governing Rules
UCP 600 is certainly the least suitable set of rules for a security instrument such as a demand guarantee or standby letter of credit. Firstly, the UCP rules are not designed to deal with any of the relevant issues such as indirect schemes (issuance of a local undertaking backed by an incoming counter-undertaking), extend or pay demands, extensions, or reductions. In many other cases, the UCP rules cover situations inadequately, such as transfer. Nevertheless, some still opt for UCP 600 for standbys! It is most commonly for a quite simple commercial standby.1 For such standbys which are usually issued for short periods of time and only call for a demand with a statement of payment default (and possibly a copy of an unpaid invoice, sometimes also a copy of a transport document), the deficiencies of UCP 600 are well known and can be easily remedied in the wording of the standby.
It is true that there are several ICC Official Opinions which deal with UCP 500 and UCP 600 matters in relation to their use with standbys, so many of the problems are known and can be avoided. However, for more complex security undertakings and counter-undertakings, use of UCP 600 presents serious problems and should be completely ruled out.
Consequently, the choice is then between a demand guarantee subject to URDG 758 or a standby letter of credit subject to ISP98.2 What are the main concerns for users when considering these governing rules? Cultural and historical aspects are among the primary reasons for choosing one instrument and rule type or the other. Setting this aside, let us focus on more technical features.
The overall backing of the rules is very important and plays a significant role in the perceived suitability of the rules. It is essential for the rules themselves to be clear and easy to understand. However, what if there is a dispute, who will provide the answer? Who will guide users and where can they learn about the rules so as to become comfortable using them?
UDRG 758 are rules created by ICC and thus are supported by ICC with its vast infrastructure of ICC publications such as ISDGP, various expert books, but also ICC Official Opinions and DOCDEX cases. ICC national committees provide many trainings on URDG 758; there are many books, articles, and studies that provide lots of information about the rules. Education is a key to the success of any rules.
Does ISP98 enjoy such supportive infrastructure? I see that there is confusion about the ISP98. They were created by the Institute of International Banking Law & Practice, Inc. (IIBLP) which holds the copyright to ISP98, however they were also approved by ICC banking commission and published as ICC Publication No. 590 but they are not ICC rules. Consequently, ICC is not mandated to publish any ICC Opinions on ISP98 related issues, IIBLP would do.3
IIBLP produced “THE OFFICIAL COMMENTARY ON ISP98” and other very detailed publications dealing with standbys and other undertakings such as demand guarantees. Additionally, the standby industry benefitted greatly from the excellent practical tool with explanatory endnotes – the freely available collection of ISP98 Model Forms. They provide any user with comprehensive know-how related to most common types of standbys and clauses.
Bankers Association for Finance and Trade (BAFT) has its own Standby Letters of Credit/ Guarantees Committee which serves as another valuable resource. ICC’s DOCDEX system is also available to standby letters of credit subject to ISP984 (or any other trade finance transaction) if so chosen by parties for settling disputes. Leading qualifications on documentary credits (CDCS), demand guarantees (CDGS), and standby LCs (CSGP) include questions on ISP98 and training material. As it does for other practice rule sets, ICC Academy has a course on ISP98.
Many local and international institutions (including many ICC national committees) conduct trainings on standbys and demand guarantees which include sessions on ISP98, therefore, in my view, there is a strong base supporting ISP98 and anyone who wants to learn about the rules can do so.
ISP98: Present Day and the Future
a) Is ISP98 up-to-date?
”I think that a discussion about possible update based on experience of using the rules within the last 25 years might be very fruitful.”
Interestingly, people recently seem to be concerned whether ISP98 is still a modern rules set suitable for today´s practice. It is true that the rules were created in 1998 and there has been no revision of them. At that time UCP 500 and URDG 458 were in place and both UCP and above all URDG subsequently went through significant overhaul. So the question is certainly relevant to ask but, it seems, ISP98 has not been revised as there was absolutely no need to do so. There are only a few court cases which would relate to the ISP98 rules themselves. When I ask my US colleagues about court cases or issues related to standbys, they always lead me to UCP cases or when the standby was not issued subject to any set of practice rules. It seems there are no noticeable issues with ISP98.
Nevertheless, I think that a profound look at the rules might be still beneficial. While I also do not think there are any provisions which need to be fixed, ISP98 does use some phrases and concepts which have been re-addressed in UCP and URDG. Therefore, nowadays, when we make a comparison between the rules this might cause some degree of confusion.
For instance, ISP98 Rule 5.01 (Timely Notice of Dishonour) refers to “unreasonable” time. This reflects UCP 500 Article 13 “a reasonable time not to exceed seven banking days” and URDG 458 Article 10(a) “reasonable time within which to examine a demand”. Both UCP 600 and URDG 758 abandoned the “reasonable time” concept and fixed the period to be in any case up to “five banking (business) days.
ISP98 Rule 4.03 (Examination for Inconsistency) uses the word “inconsistency” which corresponds to UCP 500 Article 13(a) and URDG 458 Article 9 wording. Both UCP 600 and URDG 758 dropped the concept of “no inconsistency” and replaced it with “no conflict”. Under both UCP 600 and URDG 758 “inconsistency” in data is allowed; only “conflict” is not.
ISP98 Rule 4.03 states: “An issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the standby.”
Consequently, in my view, in the context of ISP98, the word “inconsistency” is interchangeable with “conflict”. So the rule effectively says: “An issuer or nominated person is required to examine documents for inconsistency (or conflict) with each other only to the extent provided in the standby”. (added by the author).
I am not suggesting that ISP98 revision is needed. But I think that a discussion about possible update based on experience of using the rules within the last 25 years might be very fruitful.
b) Is ISP98 well known by judges so proper judgements will be achieved?
Sometimes I hear concerns about proper interpretation of ISP98 by courts in jurisdictions other than the US. Evidently, outside the US it is presumed there is a lower knowledge base about ISP98. In any event, in case of a dispute, it is incumbent on the parties involved to bring relevant interpretative authorities to the table. Most certainly a knowledgeable court witness, an expert on the matter, would be also employed. Courts regularly decide on very technical matters for which they themselves do not have relevant deep knowledge.
Also, as mentioned, there are very few court cases on standbys and demand guarantees. Most of the disputes seem to be related to general aspects of the law such as fraud, abuse, and sanctions where the rules themselves play a minor role, if any.
And, if there is a dispute about a technical aspect of a standby LC or a demand guarantee it is often due to bad issuance, wrong or ambiguous wording of the instrument, so again, the rules themselves are not the root cause.
c) What are the main challenges for ISP98 users?
In countries outside the Americas, where the standby letter of credit is widespread, the preeminent challenge is the lack of knowledge and practice. As argued above, the absence of theoretical knowledge can be relatively easily dealt with, however, the lack of practice is a real drawback.
The standby letter of credit, due to limited use, is seen as an additional trade finance product. In the past, standby LCs were processed by documentary credit personnel in many banks. However, with the recent changes of relevant SWIFT messages, namely the remake of MT760 to cover both standbys and demand guarantees, many banks shifted standbys to their guarantee departments.
I see that many of these guarantee personnel struggle with some well-established standby LC concepts. For instance, the concept of “confirmation”, “nomination” and the role of the “nominated bank”, “automatic evergreen extension clauses”, reimbursing nominated (confirming) bank, place of presentation being with the nominated bank not necessarily only at my counters, etc. Consequently, one must firstly fully grasp these LC aspects of standbys which are strange to a guarantee practitioner. Those impacted need to plunge themselves deeper into the rules.
Deep knowledge of URDG 758 (and UCP 600) is certainly an advantage. Some differences between the rules are well known (e.g. different treatment of “force majeure” or “no conflict in data”); others are less evident (e.g. ISP98 Rule 3.06 (b) allows presentation via SWIFT (ie. electronic form in this format) if only a demand is presented and the beneficiary is a SWIFT participant or a bank. In case of a URDG 758 guarantee, such presentation would have to be expressly allowed.
There are some standby LC practices which might cause problems if not properly thought through and then drafted. I recall some intensive discussions about confirmation, evergreen extension clauses in case of a confirmed standby, extension clauses in cases of a counter-standby and the local standby. Particularly challenging are requests to issue a demand guarantee against a counter-standby or the other way around. One should also fully realize that ISP98 treats a counter-standby and a local standby (or any other undertaking issued as instructed) as completely separate and independent from each other. UDRG 758 sets the same rule in its Article 5 but then modifies the rule by Article 21 (Currency of payment) and Article 26 (Force majeure).5
In my view, the biggest challenge is lack of practice, experience, and the resulting lack of confidence. This is understandable and true with all other instruments and rules which we do not deal with on daily basis. My general advice would be:
Conclusion
The more I learn about ISP98, the more I admire them and the mastermind behind them, Professor James E. Byrne. They are indeed a masterpiece of rulemaking and remain fully relevant after 25 years since their creation. I wish them the very best in the coming 25 years!
* Pavel Andrle is an international trainer and consultant. He is founder, owner, and managing director of Trade Finance Consulting, s.r.o., www.tradefinanceconsulting.com. He can be reached at: pa@cmail.cz
1Also referred to as a “payment standby“ as it secures a payment obligation of the buyer to pay for delivered goods or services.
2Certainly, we might make subject to the governing only only, but such choice is not addressed by this article.
3There have been some official interpretations to ISP98 and a Response to an Query. See https://iiblp.org/pages/ isp98-official-interpretations
4There are three recent DOCDEX cases on ISP98 standby letters of credit.
5See also the provision of ISDGP Paragraph 108.