Standby Letters to Credit: Does the Risk Outweigh the Benefits?

Friday, January 1st, 1988 at 12:00 am by Henry D. Gabriel
Henry D. Gabriel, Standby Letters to Credit: Does the Risk Outweigh the Benefits?, 1988 Colum. Bus. L. Rev. 705

The usefulness of the standby letter of credit in modern commercial practice is unquestioned. It is inexpensive, easy to obtain, and almost without risk for the beneficiary. The risks inherent in use of the standby fall almost totally in the lap of the customer, and ultimately on the issuing bank. The risks to the bank include the customer’s inability or failure to reimburse the bank once payment to the beneficiary has been made, the possibility that the bank will become embroiled in litigation between the contracting parties, the fact that there is usually no provision for reduction in the amount payable under the credit in proportion to its customer’s performance before default, and the contingency that the bank will be forced to pay under several or many standby letters of credit at the same time, jeopardizing its solvency.

Author Information

Associate Professor of Law, Loyola University of New Orleans. B.A., York University, 1977; J.D., Gonzaga University, 1980; LL.M., University of Pennsylvania, 1981.