1) For the Beneficiary – Ensuring Payment and Reducing Risk
- Request a Confirmed SBLC: Request that the beneficiary’s bank (or a reputable third-party bank) confirms the SBLC. This creates a payment undertaking from two banks (issuing + confirming bank) and reduces the risk related to the issuing bank.
- Direct MT760 Receipt: Request the transmission of a SWIFT MT760 message, which proves the authenticity of the SBLC and can be used as valid evidence during the claiming process.
- Simple “On-Demand” Wording: Stipulate that the SBLC must be “unconditional, on-demand, payable at sight upon presentation of a demand letter only.” The simpler and fewer the documents required for a claim, the stronger the ability to receive payment.
- Inclusion of Partial and Multiple Draw Clauses: Include these clauses in the text if there is a need to make partial withdrawals.
- Request Governing Law and Arbitration Clause: Specify the governing law and an international arbitration authority (e.g., LCIA/ICC) for resolving disputes related to the SBLC.
- Automatic Rollover Clause: Ensure the SBLC includes an automatic rollover clause until the obligation is fully performed, or at least requires renewal 60-90 days before the expiry date.
2) For the Applicant – Reducing Costs, Maintaining Liquidity, and Ensuring Legitimacy
- Using Guarantee Funds/Bank Collateral: Negotiate to use lower-cost collateral or deposits with a local bank to reduce fees.
- Requesting a Conditional SBLC with Specific Terms: If an on-demand payment poses a high risk for you, try to establish precise and documented conditions so that payment is only made under specific, clearly defined circumstances.
- Back-to-Back or Transferable SBLC: If you have a supply chain, you can use the primary SBLC as collateral to issue subsidiary SBLCs to subcontractors.
- Negotiating the Wording of the Document: The wording of the SBLC is critically important. Avoid using vague phrases that allow for multiple interpretations.
- Facilitating Confirmation by a Reputable Bank: If possible, negotiate in advance for the beneficiary’s bank to confirm the SBLC to build the counterparty’s trust.
3) Important Technical and Legal Points for Both Parties
- Precisely Defining Documents Required for Drawing: Specify documents clearly – e.g., solely “payable on demand” with a demand letter, or specify documents like a “photocopy of the unpaid invoice + a statement.” Simpler is better for the beneficiary.
- Specifying Communication Methods and Addresses (Advising/Issuing/Confirming Banks): Clearly state which bank will send the MT760 message and which bank will act as the advising/confirming bank.
- Including a Clause to Prevent Unfair Calling: To prevent abuse, consider including a clause in the underlying contract allowing the applicant to challenge claims if there is evidence of contract breach – however, this should not undermine the beneficiary’s right to claim under the SBLC.
- Using Parallel Guarantees (Escrow, Insurance, Parent Company Guarantee): Combining an SBLC with other guarantee instruments increases the efficiency and security of the transaction.
4) Solutions for Dealing with Sanctions and Banking Restrictions
- Selecting an Issuing Bank with a Reliable Legal and Banking Framework: Use banks with a strong correspondent banking network and acceptance in the beneficiary’s country.
- Using Banks in a Neutral Third Country: Utilize banks in countries like UAE, Turkey, Oman, or Kazakhstan that facilitate banking relationships with both parties.
- Establishing an SPV or Using an Intermediary Company: Use a Special Purpose Vehicle or an intermediary company in a third country to manage issuance and collection, but always seek legal advice to avoid violating sanctions.
- Using Local Currency Guarantees or Domestic Guarantee Funds: Utilize guarantee instruments in local currency or domestic guarantee funds backed by the central bank or state funds – a secure method with minimal exposure to sanctions.
- Seeking Sanctions Compliance Legal Advice: Always obtain legal advice regarding sanctions compliance before taking any action.
Operational Checklist for Issuing or Accepting an SBLC
Before Requesting Issuance (Applicant)
- Check your own banking history and obtain credit pre-approval.
- Prepare necessary collateral or security.
- Determine the type of SBLC (on-demand vs. conditional) and its tenure.
- Agree on the proposed text with the beneficiary.
- Inquire with the beneficiary’s bank about the need for a confirming or advising bank.
Upon Receiving the SBLC (Beneficiary)
- Request receipt of the SWIFT MT760 or a direct copy of the SBLC.
- Verify and confirm the authenticity with the issuing bank (Reference to SWIFT/MT760).
- Have the SBLC text reviewed by a banking/commercial lawyer.
- Check the expiry date, claim conditions, communication methods, and the advising bank.
- Request confirmation if necessary.
At the Time of Claim (Draw)
- Precisely prepare the demand letter according to the SBLC text.
- Send it as per the instructions (usually via the advising bank or directly to the issuing bank).
- Track the SWIFT message and follow up on the payment.
- If payment is not made, initiate legal or arbitration proceedings as per the SBLC/contract terms.
Sample Suggested Clauses for the Contract Related to the SBLC
- “The payment guarantee from the Buyer shall be provided in the form of an irrevocable, unconditional, on-demand SBLC issued by a bank with a minimum credit rating of A-/A3 (or equivalent), confirmable by Bank […], within 10 business days from the contract date.”
- “The SBLC must be automatically extendable (automatic rollover) for at least 30 days after the final delivery date of the goods; renewal requires 60 days prior notice.”
- “All messages related to the SBLC issuance must be sent via SWIFT MT760/MT767 and confirmed to the advising bank.”
- “In case of failure to issue the SBLC within the specified period, the Buyer is obliged to pay a penalty of […].”
Summary – Key Executive Recommendations
- For the Seller: Use a confirmed, on-demand SBLC; choose simple and actionable wording; request the MT760.
- For the Buyer: If you want to minimize risk, use a conditional SBLC with clear terms, and simultaneously consider confirming the issuing bank or providing a cash deposit to gain the seller’s trust.
- For Both Parties: The SBLC text must be professional and reviewed by banking/legal advisors; clauses regarding renewal, currency, communication methods, and required documents must be precise.
- Under Sanctions Conditions: Use banks and regulated mechanisms in third countries or domestic guarantee funds, and take sanctions compliance advice seriously.
- In the Main Contract: Always treat the SBLC as an ‘independent instrument’ from the underlying contract; but keep the main contract strong and clear for resolving disputes and allocating responsibilities.
