Standby Letters of Credit in Cross-Border Transactions: When and How to Use Them

March 11, 2026

Current as of: September 6, 2026. Rules, thresholds, agency guidance, and administrative practice may change after that date, and the analysis may not apply the same way to every set of facts.

By Rene Hinojosa, Principal, Hiro Law. Licensed in Texas, California, and Mexico.

In cross-border deals along the US-Mexico corridor, parties face a fundamental problem: how to secure performance when each party operates under different legal systems and enforcement mechanisms. A standby letter of credit (SBLC) addresses this by placing a bank's independent documentary payment obligation between the parties, separate from disputes over the underlying contract. This Insight addresses what an SBLC is, when it makes economic sense in cross-border contexts, and how to structure one to avoid common pitfalls.

SBLCs are often made subject by express incorporation to either the ISP98 (International Standby Practices) (ICC Publication No. 590), which became effective on January 1, 1999, or the ICC's UCP 600 (Uniform Customs and Practice for Documentary Credits), which entered into force on July 1, 2007. If neither is incorporated, the standby is governed by its terms and applicable domestic law. Applicable domestic law supplies the statutory framework; Texas Business and Commerce Code Chapter 5 is one enacted Article 5 framework, subject to choice-of-law rules. Understanding these frameworks is essential because they shape what obligations the bank may honor and how quickly a beneficiary may collect.

Key Points

• SBLC basics. A standby letter of credit is generally an irrevocable, independent documentary undertaking under which a bank may be required to honor a complying presentation under the terms of the credit.

• Independence principle. The issuing bank is generally expected to honor a facially complying presentation under the terms of the credit, the incorporated rules, and applicable law. An ordinary underlying contract dispute does not itself justify dishonor; applicable fraud, forgery, and other mandatory-law qualifications remain.

• Security instrument alternatives. SBLCs compete with escrow accounts, personal or corporate guarantees, promissory notes, and performance bonds. Each has different cost, speed, and enforceability trade-offs in cross-border contexts.

• Cross-border enforcement edge. The beneficiary obtains the issuer's independent obligation and may collect through a complying presentation without first suing the applicant. Issuer credit risk, presentation requirements, and applicable court remedies remain relevant.

• Common applications. SBLCs secure lease guarantees, M&A earnout payments, real estate deposits, performance obligations under service or supply contracts, and payment security in multi-phased transactions where one party performs first.

• Cost and conditions. Bank fees, collateral requirements, and issuance timing vary materially by issuer, applicant credit profile, collateral package, term, jurisdiction, and market conditions.

• Drafting and enforcement pitfalls. Ambiguous draw conditions, mismatched expiry dates, failure to renew before expiration, transferability restrictions, and auto-renewal mechanics that trap parties in unintended extensions all create disputes and loss of value.

I. What a Standby Letter of Credit Is

A. Definition and Core Mechanics

An SBLC is a bank's independent documentary undertaking to honor a complying presentation (that is, to perform its payment undertaking according to the credit’s terms when the beneficiary makes the required presentation). In the basic structure, the applicant arranges issuance with a bank. The applicant (typically a buyer, lessee, or party with a performance obligation) requests the bank to issue the credit in favor of a beneficiary (typically a seller, lessor, or party to whom performance is owed).

When the beneficiary presents the required documents, the bank must examine them to determine whether they constitute a complying presentation under the credit's terms. If they do, the bank must honor according to the credit’s terms and applicable law. The applicant's underlying obligation to the beneficiary is separate. The bank ordinarily examines documentary compliance rather than deciding the underlying performance dispute. This separation is the defining feature of the SBLC.

B. The Independence Principle

The independence principle holds that the issuing bank's obligation is independent of the underlying contract or transaction. ISP98 Rule 1.06 codifies this - a standby is an "independent" undertaking, meaning the bank's liability to pay does not depend on facts or disputes between the applicant and beneficiary regarding contract performance, non-performance, damages, or setoff rights.

The practical effect is dramatic. If the beneficiary presents a demand for payment, the bank must decide whether the documents comply with the credit's terms. Documentary compliance, rather than the applicant’s agreement that an underlying breach occurred, governs the ordinary examination. The issuer does not ordinarily adjudicate the underlying contract dispute. Fraud, forgery, and applicable mandatory law remain separate qualifications.

This changes the payment and dispute sequence; it does not eliminate the applicant's ability to litigate or guarantee prompt receipt of funds. However, it also creates risk - if the credit is poorly drafted, the beneficiary may draw funds even when no breach occurred. The applicant's principal recourse is usually against the beneficiary under the underlying contract. Relief against the issuer is limited and depends on the governing law. For example, in the United States, UCC §5-109 addresses limited circumstances involving forged or materially fraudulent documents or material fraud by the beneficiary, including possible dishonor or injunctive relief.

C. Irrevocability and Autonomy

Once issued, an SBLC is irrevocable unless the credit explicitly provides otherwise (and explicit revocability is rare). The applicant may request amendment or cancellation, but an irrevocable credit generally cannot alter an affected party's rights without the required consent, subject to its terms, incorporated rules, and applicable law. The beneficiary's rights under an irrevocable standby generally cannot be reduced or eliminated without the beneficiary's consent, typically through amendment, cancellation, release, or expiration in accordance with the credit's terms.

The credit is autonomous in the sense that claims, setoffs, and disputes under the underlying contract do not affect the bank's duty to pay. If the beneficiary sues the applicant and the applicant counterclaims for damages, the counterclaim alone does not prevent a complying draw; any fraud-based or other mandatory-law relief requires its own applicable legal basis.

II. SBLCs versus Other Security Instruments

A. Escrow Accounts

An escrow holds funds or documents with a neutral third party (the escrow agent) until specified conditions occur. A typical real estate purchase escrow holds the buyer's deposit with a title company until closing.

Escrows are common but have drawbacks in cross-border contexts. First, the escrow agent’s jurisdiction may create enforcement or access issues if the parties dispute whether the release conditions were satisfied. Second, if the escrow agent is in Mexico and the applicant is in the US, the US applicant may face difficulty auditing the account or instructing the agent. Third, a cash escrow ties up the deposited funds for the agreed holding period.

An SBLC does not inherently require the beneficiary to hold prefunded escrowed cash. However, the issuing bank may require the applicant to provide collateral, margin, or a cash deposit depending on the applicant's credit arrangements. The applicant pays a fee, and the bank issues a contingent obligation.

B. Guarantees and Promissory Notes

A personal or corporate guarantee is a party's promise to pay if another party defaults. A promissory note is an instrument evidencing a debt; some promissory notes qualify as negotiable instruments if they satisfy the applicable legal requirements (such as UCC Article 3 in the US). A note evidences the maker's payment obligation to the payee or holder; a guarantee adds a guarantor's undertaking. The parties and available defenses differ by instrument and governing law.

A conventional accessory guarantee or promissory note differs from an independent standby; the actual undertaking and governing law determine its defenses. If a beneficiary sues to enforce a guarantee, the guarantor may, depending on the terms of the guaranty and applicable law, assert defenses that are unavailable against an issuer under an independent standby, such as defenses based on the underlying contract, claims that the beneficiary breached first, that the guaranteed obligation was conditioned on something that did not occur, or that the beneficiary modified the underlying obligation without the guarantor's consent.

If payment under a guarantee or note is disputed, the holder may need litigation, arbitration or another available enforcement process. The required proof, defenses, timing and remedies depend on the undertaking, governing law, forum and available assets.

For guarantees and promissory notes, identify the applicable substantive law separately from the enforcement forum, including valid choice-of-law provisions and mandatory local rules on interest, fraud and disclosure. ISP98 or UCP 600 can standardize many operational and documentary issues when incorporated into the credit, but enforcement and court remedies remain subject to applicable domestic law.

C. Performance Bonds and Surety Agreements

Performance bonds are typically issued by surety companies and protect a project owner if a contractor defaults. A surety bond is a three-party instrument: the surety, the contractor (principal), and the project owner (obligee).

A performance bond may require a claims investigation and allow remedies or defenses under the bond, underlying contract, and applicable suretyship law. A standby generally calls for documentary examination under its terms and incorporated rules, subject to applicable fraud and other legal qualifications. The comparison turns on the actual instruments and procedures; an SBLC does not guarantee faster payment in every case.

III. When SBLCs Are Used in Cross-Border Transactions

A. Lease Guarantees and Occupancy Deposits

A landlord in Mexico or the US may require a tenant to guarantee rent for the remainder of the lease term, often for a multi-year term. Cash deposits are common, but they tie up the tenant's capital. An SBLC issued by the tenant's bank serves as independent payment security for the tenant's obligations. The landlord draws if rent is unpaid. The tenant pays the bank's negotiated fees and may preserve liquidity that might otherwise be tied up in a cash deposit, to the extent the bank does not require equivalent cash collateral.

In cross-border leases, this is valuable because the landlord may not easily obtain a judgment against a foreign tenant, and enforcement of a foreign judgment is time-consuming. An SBLC sidesteps this problem because the issuer's obligation is determined by the terms of the standby, any incorporated rules such as ISP98 or UCP 600, and the applicable domestic law governing enforcement, rather than requiring the landlord to litigate in a foreign jurisdiction.

B. M&A Earnout Payment Security

In cross-border acquisitions, the seller may retain an earnout (a contingent payment based on post-closing performance). The buyer may arrange for a bank to issue an SBLC as security for an earnout payment that becomes due. Draft the required presentation to match the earnout obligation and any agreed determination process; the bank does not calculate the underlying earnout merely because it issued the standby.

The beneficiary receives the issuer's independent credit support, while the buyer remains exposed under its reimbursement and collateral arrangements with the bank. Texas §5.108(i)(1), for example, recognizes the issuer's reimbursement entitlement.

C. Real Estate Deposits and Escrow Substitutes

In many real estate transactions, a buyer is asked to post a deposit or other credit support as evidence of serious intent. In cross-border deals, the buyer and seller may not trust the other's choice of escrow agent. An SBLC issued by the buyer's bank and payable to the seller serves the same function: if the buyer breaches by not closing, the seller may draw. If the sale closes, release, reduce or retain the credit as its terms and the underlying agreement require, including any remaining secured obligations.

This can reduce reliance on a cross-border escrow arrangement and avoid the need to prefund a cash deposit with a third-party escrow agent in another jurisdiction.

D. Payment Security in Supply and Service Contracts

A supplier in Mexico may perform first (manufacture goods, deliver them, or provide services) while the US buyer pays on terms (net 30, net 60, net 90). The supplier may not trust the buyer's creditworthiness or jurisdiction. An SBLC issued by the buyer's bank provides independent documentary payment security if the buyer fails to pay as required and the beneficiary makes a complying presentation. The supplier draws if the buyer does not pay.

This structure can be used where the supplier seeks bank credit support for the buyer's obligations. The SBLC brings the buyer's bank credit rating into the picture, securing the supplier against buyer insolvency.

IV. International Frameworks: UCP 600, ISP98, and UCC Article 5

A. UCP 600

The Uniform Customs and Practice for Documentary Credits (UCP 600) is the ICC's ruleset for letter of credit transactions. UCP 600 contains 39 articles and entered into force on July 1, 2007. It is an ICC ruleset commonly incorporated into commercial documentary credits worldwide; it applies only when the credit expressly indicates that it is subject to UCP 600.

UCP 600 addresses the bank's examination of documents, the standard for a complying presentation, time limits for notice of refusal, and amendment procedures. It is less detailed on standby credits than ISP98, but banks and parties may apply UCP 600 to SBLCs.

B. ISP98

The International Standby Practices (ISP98) is a more comprehensive ruleset for standby letters of credit specifically. Developed by the Institute of International Banking Law & Practice and endorsed by the ICC as Publication 590, ISP98 became effective on January 1, 1999.

ISP98 is organized into principal rules with numerous subrules addressing issuance, presentation, examination, transfer, reimbursement, and related standby matters. Because ISP98 was written for standby practice, it is more granular than UCP 600 and specifically addresses standby mechanics. Many international banks reference ISP98 in the credit itself to make clear which ruleset applies.

C. UCC Article 5

In the United States, UCC Article 5 applies as enacted in the relevant state to letters of credit within its scope, typically based on the issuer, relevant branch or nominated person, and applicable choice-of-law rules. Article 5 defines the letter of credit, the bank's duty to honor, the applicant's reimbursement obligation, and related matters.

Article 5 reflects the independence principle by treating letter-of-credit rights and obligations as independent of the underlying transaction, subject to the statute's fraud provisions and the terms of the credit. However, UCC Article 5 permits limited relief against honor in cases involving forgery or material fraud as provided in UCC §5-109. This "fraud exception" provides some protection to the applicant against improper draws. Evaluate the specific fraud and injunction requirements of the applicable enactment of §5-109, including its evidentiary and other statutory conditions; an underlying contract dispute alone does not establish a right to prevent honor.

In cross-border deals, when a US bank issues an SBLC to a Mexican beneficiary, the credit may be governed by both ISP98 (by reference in the credit itself) and by the applicable state enactment of Article 5 under the relevant choice-of-law rules, including any effective choice in the credit. The interplay between these two frameworks requires careful drafting.

V. Key Drafting Considerations

A. Draw Conditions and Triggers

The credit must specify precisely what documents the beneficiary must present to draw. Common requirements include a written demand, a certificate signed by the beneficiary stating that the applicant breached a specified obligation, and perhaps an invoice or document proving the underlying loss.

Ambiguity can create disputes. If the credit requires "proof of default" without defining what "proof" means, the bank faces difficulty deciding whether the presentation complies. If the credit uses terms like "material breach" in the required certificate or documentary conditions, disputes may arise over what the certificate must say or whether the presentation facially complies; the issuer does not ordinarily adjudicate the underlying merits of materiality.

Effective practice is to make draw conditions mechanical and documentary. For example, require a signed beneficiary certificate stating that identified rent due on a specified date remains unpaid, together with a demand in the prescribed form. Merely naming an event does not make it a documentary condition. Texas §5.108(g), UCP 600 Article 14(h), and ISP98 Rule 4.11 address nondocumentary conditions; ISP98 also accounts for facts determinable from issuer records or normal operations. Match the required wording and documents to the agreed exposure.

B. Beneficiary Rights and Transferability

Some SBLCs are non-transferable; the initial beneficiary may not transfer its drawing rights to another party. Others are transferable, allowing the beneficiary to transfer the right to draw under the credit (useful if the beneficiary sells its business or assigns a contract). Transfer of the right to draw is distinct from assignment of proceeds, and the availability and mechanics of each depend on the terms of the credit and applicable law.

Transferability is especially important in cross-border M&A or supply chain contexts where the beneficiary may be acquired or may reassign its obligations. A non-transferable SBLC can create significant issues if the beneficiary is acquired or undergoes a restructuring, because the successor entity may be unable to draw unless the credit, applicable rules, or applicable law recognizes the succession or the credit is amended appropriately. The original beneficiary may no longer have an interest in monitoring the credit.

Drafting must address this explicitly. If the parties want transferability, the credit will state it. If not, the credit will state that the credit is personal to the initial beneficiary.

C. Expiry Dates and Auto-Renewal Clauses

Specify duration expressly. UCP 600 Article 6 requires a presentation expiry date; where an instrument omits duration, applicable law may supply a default; for example, Texas §5.106 generally supplies one year for an omitted duration and five years for a stated perpetual credit. Expiry dates are often tied to contract milestones: expiration of a lease, completion of a project, or final payment of an earnout.

A common pitfall is mismatched expiry dates. For a lease ending June 30, the parties should separately identify remaining payment exposure and the period needed to prepare a complying presentation. The claim limitation period and the negotiated standby term are different questions; expiry cuts off future draws, not necessarily every right arising from a timely presentation.

Auto-renewal clauses typically provide that the standby will extend automatically unless the issuer gives timely notice of nonrenewal to the beneficiary, often pursuant to its arrangements with the applicant. Auto-renewal can be helpful to avoid accidental expiry, but it can also trap parties in unintended extensions if the notice deadline is missed.

Effective practice is to make auto-renewal explicit in the credit and to require the bank to notify both the applicant and beneficiary of the upcoming renewal deadline well in advance. Alternatively, parties may negotiate a specific expiry date tied to a clear event and require affirmative agreement to any extension.

D. Amendment and Cancellation

The credit ordinarily specifies whether it may be amended or cancelled and under what conditions. Applicant/beneficiary agreement alone does not override affected issuer or confirmer rights. Determine whose consent is required under the credit, incorporated rules, and governing law. ISP98 Rule 2.06, for example, does not require applicant consent for an amendment to bind the issuer, confirmer, or beneficiary.

In cross-border contexts, securing the required consents may be slow and cumbersome. Drafting must contemplate this delay and make clear who bears the cost and burden of seeking amendments.

VI. Cross-Border Enforcement Advantages

A. Bank Obligation versus Party Obligation

A guarantor may pay voluntarily. If payment is disputed, the holder may need litigation, arbitration or another available enforcement process under the undertaking and governing law. The required proof, defenses and remedies differ from the documentary presentation mechanism of an independent standby.

When a beneficiary holds an SBLC, the beneficiary sends a demand to the bank. Identify the designated recipient, presentation place and permitted delivery method in the credit. The bank examines the documents. If the presentation facially complies, honor is ordinarily expected under the credit and applicable rules, subject to the terms of the credit, the issuer's examination period, and limited fraud-based defenses under applicable law. The applicant's recourse is usually against the beneficiary under the underlying contract and, in limited circumstances under applicable law, may include seeking to prevent or challenge honor by the issuer in cases involving forged or materially fraudulent documents or material fraud.

This shift can reduce reliance on underlying-contract litigation, but issuer performance, examination periods, fraud remedies, and enforcement risk remain. UCP 600 Article 14(b), for example, allows up to five banking days following presentation for examination; that is not a guaranteed cash-receipt period.

B. SBLC Enforceability across Jurisdictions

Although ISP98 and UCP 600 can standardize documentary practice when incorporated, the enforcement of standby obligations and related remedies can vary materially by jurisdiction. A bank in Mexico issuing an SBLC to a US beneficiary, or vice versa, will apply the document-examination standard of the incorporated rules, but court remedies, fraud standards, insolvency effects, and procedural mechanisms remain subject to local law.

Uniform rules such as ISP98 or UCP 600 can reduce variability in documentary examination and presentation practice, but disputes over enforcement, remedies, jurisdiction, fraud, insolvency, and other court-supervised issues remain subject to applicable domestic law.

US-Mexico Overlay. In cross-border US-Mexico transactions, SBLCs offer an efficiency advantage because both US and Mexican banks participate in the international letter of credit system. A Mexican issuer may issue a standby advised through a US bank. If the parties want presentation, honor, or reimbursement to occur through a bank in the United States, the credit ordinarily expressly provides the relevant advising, nominated, confirming, or reimbursement arrangements. Similarly, a U.S. applicant may arrange for a U.S. bank to issue an SBLC payable to a Mexican beneficiary. An advising bank authenticates and communicates the credit but ordinarily adds no payment obligation. A confirmer assumes an independent obligation to the extent of its confirmation; nomination alone does not ordinarily require honor. A local adviser is therefore not a substitute for an agreed local payment undertaking. See Texas §5.107 and ISP98 Rules 2.01, 2.04–2.05.

In US-Mexico SBLC transactions, currency risk arises when the credit is denominated in one currency but the underlying obligation is in another. Parties may mitigate this through currency-matched SBLCs or contractual FX adjustment mechanisms.

VII. Cost Considerations

A. Fee Structure

Bank charges and their payment schedule depend on the agreed terms, including the applicant’s creditworthiness, collateral, term, jurisdiction and market conditions.

Whether an SBLC is economically justified requires a transaction-specific comparison against the cost of escrow, guarantees, cash collateral, or other credit support.

VIII. Common Pitfalls and Lessons

A. Ambiguous Draw Conditions

Vague or difficult-to-verify draw conditions can create enforcement disputes. If the credit requires a beneficiary certificate stating that the applicant has materially breached, disputes may arise over whether the certificate's wording satisfies the credit and whether the condition is drafted clearly; the issuer generally examines the certificate for facial compliance rather than adjudicating whether a material breach actually occurred.

Solutions include defining "material breach" specifically in the credit, requiring objective evidence (such as a notice from a court or regulatory authority), or limiting the beneficiary's right to self-certify by requiring third-party attestation. Requiring a court notice or other outside determination can delay or defeat the intended documentary payment route; negotiate that trade-off expressly.

B. Expiry Mismatches

If an underlying obligation extends beyond the SBLC expiry date, later exposure may fall outside the available presentation period. An expired credit ordinarily no longer supports a new presentation, but expiry does not itself extinguish rights arising from a timely presentation or an existing wrongful dishonor. Such expiry mismatches can arise when the credit’s term is not coordinated with the underlying contract or the period during which a claim may arise.

Solution: Work backward from the last possible date a claim could arise under the underlying contract. Negotiate a presentation period, nonrenewal notice, and replacement-or-draw mechanism matched to that exposure. A 30–60-day buffer is only a possible commercial example, not a legal minimum or a substitute for analyzing limitation periods.

C. Failure to Renew

SBLCs issued for specific periods (e.g., a two-year lease) may expire unexpectedly if neither party tracks the renewal deadline. If the lease renews but the SBLC does not, the lessor loses security. If the SBLC auto-renews but the parties negotiated a release on certain conditions, neither party may remember, and the credit renews unintentionally.

Solution: Assign responsibility for tracking the expiry date and communicate renewal decisions in writing well in advance of the deadline.

D. Transferability Restrictions and Assignment Issues

A non-transferable SBLC creates problems if the beneficiary is acquired or reassigns its contract obligations. A successor or assignee may be unable to draw unless the credit permits transfer, the standby is amended, or applicable rules or law recognize the succession. The original beneficiary may not care about monitoring the credit if it is no longer the party to the underlying contract.

Solution: Negotiate transferability at the outset and make clear whether the credit may be transferred, to whom, and under what conditions.

IX. Practical Structuring for US-Mexico Deals

Possible US-Mexico structures include:

1. A US applicant requests an SBLC from its US bank, payable to a Mexican beneficiary. The US bank issues the SBLC and arranges for a Mexican correspondent bank to advise the beneficiary. Determine the applicable state enactment of Article 5 under the credit’s choice-of-law rules and any incorporated rules, such as ISP98.

2. A Mexican applicant requests an SBLC from its Mexican bank, payable to a US beneficiary. The Mexican bank may transmit the standby through SWIFT MT760 or another agreed channel, with a US correspondent acting in the specifically agreed advising, nominated, or confirming role. SWIFT describes MT760 as a message for issuing a demand guarantee or standby; confirm the operative instrument and current messaging requirements with the issuer. The credit may be governed by Mexican banking law and ISP98. The enforceability and mechanics of standby letters of credit under Mexican banking law are distinct from US frameworks. A Mexican issuer remains subject to applicable mandatory banking law. Determine the governing law, relevant issuing-branch rules, incorporated practice rules and dispute forum separately; valid choice-of-law provisions and conflict rules may govern other obligations.

In both scenarios, the applicant and its bank negotiate the credit terms, and the issuing bank forwards the credit to the beneficiary (often through a correspondent bank in the beneficiary's country) through the agreed channel.

Fees and timing vary materially depending on bank onboarding, KYC, collateral, documentation, and cross-border compliance requirements. Issuance, commission, amendment and drawing charges, and when they are payable, depend on the issuer’s agreed fee schedule. Model the actual terms. Fees compensate the bank for providing credit support and may remain payable even if the beneficiary never draws.

X. Conclusion

A standby letter of credit is generally used as a bank-backed documentary payment mechanism that can reduce collection and enforcement friction in cross-border transactions. Its practical value depends heavily on drafting precision, incorporated rules, bank practice, and the governing law applicable to honor, fraud, and related remedies.

Common Questions

What does a standby letter of credit do in a cross-border deal?

A standby letter of credit creates an independent payment obligation from an issuing bank if the beneficiary presents the required documents. It is designed to reduce reliance on later litigation over the underlying commercial contract.

Why are standby letters of credit useful in US-Mexico transactions?

They can provide credit support where the counterparty, assets, and enforcement forum are split across jurisdictions. The beneficiary can seek payment from the bank under the letter of credit rather than first pursuing the counterparty in court.

Do UCP 600, ISP98, and UCC Article 5 matter?

The credit may incorporate ISP98 or UCP 600. Applicable domestic law supplies the statutory framework; U.S. Article 5 does not automatically govern every standby issued anywhere. UCP 600 or ISP98 (the ICC practice rules a credit elects) govern presentation, document review, expiry, honor, and dishonor when the credit expressly states it is subject to them. Where applicable, the relevant state enactment of UCC Article 5 applies as background law (it is US state law, adopted with variations) and supplies remedies and fraud defenses, which the ICC rules leave to applicable law; certain Article 5 provisions cannot be overridden by the elected rules. Naming the governing framework in the credit and keeping it consistent with the transaction documents reduces interpretation gaps. Which framework applies, and how these rules interact, is fact-specific, so anyone evaluating a particular letter of credit may want to consult counsel licensed in the relevant jurisdiction.

What terms should be drafted carefully?

Key terms include amount, expiry, automatic extension, permitted draws, partial draws, required certificates, documentary conditions, governing rules, bank identity, transferability, and how the letter of credit interacts with default notices in the underlying agreement.

Does a standby letter of credit replace the main contract?

No. The letter of credit supports payment, but it does not replace the purchase agreement, supply agreement, lease, or other underlying contract. The documents should work together so draw rights are clear and commercially aligned.

Related Insights

If a standby letter of credit is part of your transaction planning, you may also want to review our insights on seller financing in cross-border M&A and asset versus stock deal structure. Readers negotiating a live credit instrument should consult a lawyer licensed in the relevant jurisdiction.

For counsel on an acquisition or sale involving transaction security, see our US-Mexico M&A and strategic transactions practice.

This Insight is provided by Hiro Law for general informational and educational purposes only. It does not constitute legal, tax, investment, or other professional advice and should not be relied upon as such. No attorney-client relationship is created by your receipt of or access to this material. The information contained herein may not reflect the most current legal developments and is not guaranteed to be complete, correct, or up to date. You should not act or refrain from acting based on any information in this Insight without first seeking qualified counsel licensed in the relevant jurisdiction(s). Each cross-border transaction, investment, and compliance matter involves unique facts and circumstances that require individualized analysis. Prior results do not guarantee a similar outcome.

Primary rules: ISP98, relevant incorporated provisions; UCP 600; Texas Chapter 5.