Standby Letter of Credit to Secure Payment Clause
(General Contract)

Summary

This clause is an example of a standard payment provision for inclusion in a general contract for the sale of goods or services that requires a buyer to secure its payment obligations to a seller using a standby letter of credit. This clause includes practical guidance, drafting notes, and alternate and optional clauses. A standby letter of credit provides a secondary source of payment to the seller under a contract for the sale of goods or services. The bank that issues the standby letter of credit is only obligated to make payment if the seller, as beneficiary, makes a draw request under the letter of credit due to a default by the buyer on its payment obligations under the contract. By using the letter of credit, the seller relies on the creditworthiness of the issuing bank for a secondary source of payment, rather than relying solely on the buyer which may be located in a foreign country or unfamiliar to the seller. The specific required letter of credit terms should be tailored to the specific transaction. The capitalized terms in this clause must be conformed to the defined terms in the agreement that will include the clause. Number the clause in accordance with the section of the agreement that will include the clause. For a full listing of letter of credit content, see Letter of Credit Resource Kit. This clause should be read in conjunction with Credit Support in Sale of Goods Transactions and Standby Letters of Credit and Trade Finance Checklist. For general guidance on letters of credit, see Letters of Credit: Purpose and Types and Letters of Credit: Parties and Documentation. For templates of standby letters of credit, see Standby Letter of Credit for Commercial Transactions and Irrevocable Standby Letter of Credit and Exhibits. For general contract payment clauses, see Payment and Collection Clauses.