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A bank's conditional undertaking to pay a beneficiary if the specified claim conditions are met.
The customer arranges the standby and usually pays a fee. If the underlying obligation is not fulfilled, the beneficiary presents the required documents within the letter's validity period. The issuing bank assesses the presentation under the applicable terms and rules. If it pays, it generally has a reimbursement claim against its customer, supported by whatever collateral or arrangement was agreed.
Suppose a contractor provides a J$10 million standby to a project owner. A qualifying failure occurs and the owner presents the documents required by the letter before expiry. The bank pays the valid J$10 million claim and then seeks reimbursement from the contractor under their arrangement. If no valid claim is made, the standby may expire without that payment ever occurring.