A standby letter of credit is an undertaking by an issuer to pay a beneficiary on presentation of specified documents. Its defining characteristic is independence from the underlying transaction.

The independence principle. The issuer pays against conforming documents regardless of disputes between applicant and beneficiary. That is what makes the instrument valuable as security and frustrating to applicants.

Strict compliance. Documents must conform to the terms. Discrepancies — wrong name, missing statement, expired credit — justify dishonour, and the issuer must give notice of discrepancies within a defined period or lose the right to assert them.

The fraud exception. A court may enjoin honor where the presentation is fraudulent or forged and there is no colorable basis for it. The standard is high and injunctions are rare, and courts require security from the applicant.

Evergreen clauses. Automatic renewal unless the issuer gives notice of non-renewal a stated period before expiry. Beneficiaries should have a right to draw on receipt of a non-renewal notice.

Governing rules. International practice rules or the commercial code, which should be specified.

Applicant considerations. The credit is usually secured by cash or a borrowing base reduction, and reimbursement is immediate on honor. Objections belong in a separate action against the beneficiary, after payment.