ISP 98 Documentary and Standby Letters of Credit 

(Source:  Robert J. Spjut)

Effective January 1, 1999, banks may incorporate, by reference, the International

Standby Practices, referred to as ISP 98, into their standby letters of credit. 1 In doing so,
banks will supplement and vary Article 5 of the Uniform Commercial Code ("UCC"),2
which governs letters of credit in most of the United States, and replace, as to such
credits, the Uniform Customs and Practices ("UCP"),3 a statement of practices
published by the International Chamber of Commerce ("ICC") that is nearly universally
incorporated by reference into letters of credit. The purpose of this article is to describe
when ISP 98 applies and how certain of its rules follow or vary from the UCC and the
UCP.

Documentary and Standby Letters of Credit 

Letter of credit law and practice, until quite recently, has evolved with the use of letters
of credit in commercial sale of goods transactions. Stated simplistically, letters of credit
have enabled sellers, unwilling to rely simply upon the promise of the buyers to pay for
goods once the goods are loaded on board a vessel destined to the buyer’s country, to
be assured that they can obtain payment once those goods are so loaded. A seller may
present the agreed shipping documents to, and thereby obtain payment from, a bank
whose undertaking to make such payment would be primary and independent of the
contract between the seller and his buyer.

The letter of credit (or credit) is part of a three-party relationship in a commercial

transaction: (1) the contract between the parties (applicant and beneficiary) pursuant to
which one party (the applicant) is obligated to obtain the credit for the benefit of the
other (the beneficiary), (2) the contract between the applicant and the person whom the
applicant asks to issue the credit (the issuer), usually a bank or other financial
institution, and (3) the undertaking by the issuer in favor of the beneficiary, to honor a
presentation by payment or delivery of an item of value.4 The undertaking of the issuer
in the letter of credit, however, is primary and must be honored without any claim,
counter claim, setoff or defense that the issuer or the applicant may have against the
beneficiary.5 This ‘independence’ of the letter of credit from the transaction between the
applicant and the beneficiary is its special feature.6

A letter of credit will be either a documentary or standby credit. Common to all credits is
that the issuer undertakes to pay or give an item of value against a specific document or
documents which accompany the request for payment. Such payment can be at the
time of presentation, known as at sight, or at a later time, known as deferred payment.
The issuer can give an item of value, such as a bill of exchange drawn on the bank, also
payable at sight or at a later time. The documentary credit specifies the documents that
must accompany the presentation, such as an invoice, bill of lading and insurance
certificate. With a standby credit the presentation required by the undertaking may be
the request for payment itself, with or without other documents. Frequently, a standby
credit is given to support an obligation of the applicant: the beneficiary can obtain
payment under the standby credit by presenting a simple demand, as specified in the
credit, to the issuer. Standby credits are also used to support an obligation by the
applicant to make an advance payment; they are used as bid bonds to support the
bidder’s duty to execute a contract; they are used a credit support in loan transactions
to ensure repayment by the borrower; and they may be used as a method of obtaining
direct payment under a contract. Standby credits, as in the preceding examples, are
performance, financial or direct pay undertakings.

As both documentary and standby credits are undertakings to pay against the
presentation of one or more documents,7 the distinction between them is nowhere
precisely stated and probably unnecessary to state.8 The UCP states that it applies to
both types of credit without defining them (the definition was unnecessary). 9 Similarly,
the UCC, which applies to both,10 has no need to distinguish the two. ISP 98 states that
it applies to standby letters of credit without defining them.11 In practice, the parties will
determine whether a credit is a standby by choosing to incorporate ISP 98 or not. If they
do, it will be subject to the special rules in ISP 98 applicable to standby credits; if not,
they will presumably choose the UCP and the credit will be subject to that regime, which
was developed principally for documentary credits.

UCC, UN Convention, UCP and ISP 98

In the absence of a statement in the credit as to the law, which is to govern it, the law of
the jurisdiction in which the issuer is located will govern the issuer’s liability. 12 The
parties are free to choose the laws of any jurisdiction to govern the credit and may
incorporate terms such as the UCP or ISP 98 into their credit.13 Although the UCP and
ISP 98 reflect letter of credit law and practice in the banking industry, the credit will not
necessarily be subject to one or the other unless the credit expressly incorporates it by
reference.14 The drafters of Article 5, in fact, recognized that the parties to letters of
credit issued by banks regularly incorporate the UCP. Section 5-103(c) permits the
parties, with a few exceptions, to vary Article 5 "by agreement or by a provision stated
or incorporated by reference in an undertaking."15 The Official Comment to this section
says, referring to Section 5-108, "it is appropriate for the parties and the courts to turn to
customs and practice such as the [UCP]."16 The drafters of ISP 98 anticipated that it,
like the UCP, will similarly be incorporated by reference in a letter of credit and, thus,
vary and supplement Article 5 as it applies to standby credits.17

Although the UCP states that it applies to both documentary and standby credits, has
been nearly universally used in international banking letter of credit practice for more
than three decades and is published by the ICC–ISP 98 was prepared and is published
by Institute of International Banking Law & Practice, Inc. in the United States–its use will
most likely be limited to documentary credits. In 1998 the ICC adopted ISP 98, an
acknowledgement that it, rather than the UCP, should be incorporated into standby
credits.

The United Nations Commission on International Trade Law prepared the United
Nations Convention on Independent Guarantees and Stand-by Letters of Credit
("CIGSLC"),18 which has been signed by two and acceded to by five states (including
the United States)19 and ratified in five (but not the United States)20 and will enter into
force on January 1, 2000. The CIGSLC will apply to an 'international’ undertaking if the
place of business of the guarantor or issuer is in a state that has adopted the
Convention or if the rules of private international law lead to the application of the laws
of such a state, unless the undertaking excludes the application of the CIGSLC. 21 The
Convention also applies if it expressly states that it applies to an international letter of
credit.22 An undertaking is international if any two of the issuer, the applicant, the
confirmer and the beneficiary are located in different states.23 Because of its limited
ratification, it is unlikely to have a significant impact on standby credits in the near
future.

At present, ISP 98 will apply to both domestic and international standby credits
expressly stated to be subject to it (notwithstanding that that "International" is used in
the title of ISP 98).24 If the United States ratifies the CIGSLC, ISP 98 will still apply to
international standby credits expressly stated to be subject to it; ISP 98 would
supplement and, to the extent permitted, vary both the UCC and the CIGSLC. ISP 98
would continue to apply to domestic standby credits expressly stated to be subject to it
(and supplement and vary, to the extent permitted, the UCC).

Applicant's rights and obligations 

ISP 98, like the UCC and the UCP, contains only a few provisions concerning the
contract between the issuer and the applicant: These concern the issuer’s right to be
paid certain charges for issuing the credit, to reimbursement and limitations on its
liability to the applicant. Not surprisingly, few differences between the UCP and ISP 98
are found. The relationship between applicant and issuer under both types of credit is
quite similar.

Fees and Charges

Neither the UCC nor the UCP states the fees or charges the applicant must pay for a
letter of credit; rather the subject is left to agreement between applicant and issuer. ISP
98, however, expressly provides that the applicant must pay the issuer’s charges,
without specifying how these are to be determined if the issuer fails to advise the
applicant before it issues the credit.25 Other payments, such as indemnification for
withholding and other taxes, must be included in the agreement between the parties.

Reimbursement
ISP 98 follows the UCC by expressly providing that the applicant must reimburse the
issuer for payment under a complying presentation. The UCC states clearly that the
issuer is entitled to reimbursement for a drawing under a letter of credit in immediately
available funds not later than the date of its payment of funds.26 The UCP obligates the
issuing bank to reimburse any bank it has nominated after the nominated bank honors a
complying presentation.27 It is, however, silent on the duty of the applicant to reimburse
the issuer. ISP 98 states that reimbursement must be made against a complying
presentation without stating the time within which payment is to be made.28 Although
ISP 98 supplements any agreement, course of dealing, practice, custom or usage
concerning reimbursement,29 it may vary, rather that partially restate, the applicant’s
duty under the UCC to reimburse the issuer the same day as payment under the
standby credit. Issuers will no doubt wish to provide clearly when reimbursement is due
in their agreements with applicants.

ISP 98 follows the UCP by imposing broad indemnity obligations upon applicants. First,
the UCP requires the applicant to indemnify "the banks against all obligations and
responsibilities imposed by foreign laws and usages."30 Second, the applicant must
reimburse the issuer for the charges the issuer incurs to perform the services requested
by the applicant.31 ISP 98 is narrower than the first indemnity under the UCP, in one
sense, obligating the applicant to indemnify only the issuer, but broader, in another, by
extending the indemnity to all claims, obligations and responsibilities arising out of not
only foreign law and practice but also the fraud, forgery or illegal actions of others or the
issuer’s performance of the obligations of a confirmer that wrongfully failed to honor the
standby credit.32 ISP 98 is clear that the issuer is to be reimbursed for its attorney’s fees
in these cases. In addition, the applicant must reimburse the issuer for charges it pays
any issuer nominated with the applicant’s consent to advise, confirm, honor, negotiate,
transfer or issue a separate undertaking.33

Limitations on Liability
ISP 98 mirrors certain of the UCP’s limits on the issuer’s liability to the applicant . The
UCP disclaims, in broad terms, for banks any "liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for
the general and/or particular conditions stipulated in the document(s) or superimposed
thereon."34 Banks are not liable "should the instructions they transmit not be carried out"
even where they choose the bank which fails to concerned. 35 ISP 98 likewise states that
the issuer is not responsible for "performance or breach of any underlying transaction;
accuracy, genuineness, or the effect of any document presented under a standby;
action or omission of others even if the other person is chosen by the issuer or
nominated persons; or observance of law or practice other than that chosen in the
standby or applicable at the place of issuance."36

However, the UCP includes a disclaimer not found in ISP 98: Banks are relieved of
liability "for the consequences arising out of delay and/or loss in transit of any
message(s), letter(s) or document(s), or for delay, mutilation or other error(s) arising in
the transmission of any telecommunications." 37 ISP 98 contemplates electronic
transmission of standby credits, presentations thereunder and assignments thereof.
While the bank’s responsibility is limited to ascertaining "whether the information has
remained complete and unaltered, apart from the addition of any endorsement and any
change which arises in the normal course of communication, storage and display,"38 the
bank does not escape liability so clearly for mistakes in the transmission of messages
and documents.

Beneficiary's rights and obligations

The most significant differences between the UCP and ISP 98 exist in the issuer’s (or a
nominated person’s) and the beneficiary’s respective rights and obligations, not
surprisingly, since it was the differences between presentations under documentary and
standby credits that prompted the publication of ISP 98.
Strict Compliance 
ISP 98, following the UCP and departing from the UCC, does not prescribe a specific
standard to which the issuer should require that the presentation comply. Four
standards have been suggested over the years: the "strict compliance" test, articulated
first more than seventy years ago in England39 and adopted by most courts in this
country, the "precise and mirror image" test, which does not tolerate even immaterial
variations, the "bifurcated" standard, which sets different standards for the applicant’s
obligation to reimburse the issuer and the issuer’s obligation to honor the beneficiary,
and the "substantial compliance" test, which is somewhat less demanding than the strict
compliance standard. Revised Section 5-108(a) expressly requires that a presentation
must on its face strictly comply with the terms of the credit for the bank to be obligated
to honor that presentation, although the bank’s examination of the demand must follow
standard practice. The Official Comments to that section explain that it is intended to
reject the ‘substantial compliance’ rule adopted by some courts, so that the issuer must
not overlook minor discrepancies. On the other hand, following standard practice, minor
typographical errors in a credit not replicated in the presentation should not result in
dishonor of the credit.40 The UCP charges banks with the task of exercising reasonable
care to ascertain "whether or not [the documents stipulated in the credit] appear, on
their face to be in compliance with the terms and conditions of the Credit. Compliance . .
. shall be determined by international standard banking practice as reflected in these
Articles."41 ISP 98 similarly states, "Whether a presentation appears to comply is
determined by examining the presentation on its face against the terms and conditions
stated in the standby as interpreted and supplemented by the Rules." 42 The
Commentary states that the rule avoided the use of the strict compliance test, which,
while more accurate than the substantial compliance test, is still crude and abstract.43

However, ISP 98 expressly addresses certain shortcomings in the wording in standby

credits or in presentations thereunder that have raised the question about whether such
demands comply. First, standby credits sometimes specify that the demand must certify
that a certain event has occurred without stating the exact language in which that
certification is to be made. The problem, it seemed to the authors of ISP 98, seemed
analogous to the situation under documentary credits where goods are described
generally in the credit.44 The UCP requires only that the invoice contain a description of
the goods, which is not inconsistent with that in the credit.45 ISP 98 provides that in such
a case the demand "must appear to convey the same meaning as that required by the
standby."46 Strict or exact compliance would seem impossible and inappropriate in such
a case. Second, standby credits often include blanks and spaces for data, such as
amounts, dates and names, as the beneficiary may be left to specify the amount owed
as a result of a breach by the applicant on the underlying contract. These may be
completed, and typographical errors do not have to be replicated. 47 If, however, the
credit sets out the wording to be included in the demand in quotation marks and states
that any demand must be exact or identical, then the blanks, brackets, spaces and
typographical errors must be reproduced.48 ISP 98’s solutions to these problems are
pragmatic and mitigates the difficulties that have arisen with effort to resolve all such
issues with a rigid use of either the strict and substantial compliance tests.
Non-documentary Conditions 
Conditions in letters of credit are either documentary, identifying a document or
documents through which the bank can determine that the conditions have been
satisfied, or non-documentary, failing to identify any such document. Non-documentary
conditions are of two types, relating to the effectiveness of the issuance, amendment or
cancellation of the credit, or relating to the obligation to honor. A condition in the credit
that the beneficiary must deposit a certain amount with the issuer for the credit to
become effective is of the former type and is referred to as an inoperative clause. The
credit becomes operative only when the issuer is satisfied the condition is fulfilled. Such
clauses are usually, but not always, within the competence of the beneficiary to perform;
where they are not, the beneficiary should not agree to the credit. A condition in the
credit that the beneficiary must deposit a certain amount with the issuer before the
demand will be honored is of the latter type. The bank can determine whether this
condition is satisfied, but does so by examining facts outside the documents. Such
conditions have the potential to frustrate the beneficiary’s ability to draw on the credit.

ISP 98 adopts a pragmatic solution found neither in the UCC nor the UCP. The UCC
obligates the issuer "to disregard the non-documentary conditions and treat them as if
they were not stated."49 It has been suggested, however, that as the UCC defines a
letter of credit as an undertaking to honor a "documentary" presentation, the issuer’s
undertaking falls outside of Article 5 if the non-documentary condition is material to the
undertaking.50 In other words, as Article 5 of the UCC does not apply to the undertaking
the condition is not to be ignored. The UCP directs banks to deem non-documentary
conditions "as not stated" and to disregard them. 51 Like the UCC and UCP, ISP 98
directs banks to disregard non-documentary conditions, and clarifies that they should do
so whether or not such conditions relate to the issue, amendment or cancellation of the
standby credit or relate to compliance of the demand.52 ISP 98, however, qualifies the
definition of non-documentary conditions: a term or condition is non-documentary if the
standby credit does not require presentation of a document in which they are evidenced
and "if their fulfillment cannot be determined by the issuer from the issuer’s own records
or within the issuer’s normal operations."53 In the example above, the deposit by the
beneficiary of a specific sum with the issuer, the condition would be non-documentary
under both the UCC and UCP but not under ISP 98 since the issuer, by examining its
own records, can determine whether the deposit had been received. Rule 4.11(c)
provides four examples of conditions which the issuer can determine from its records or
normal operations: (i) when, where and how documents are presented to the issuer, (ii)
when, where and how communications affecting the credit are sent or received, (iii)
amounts transferred into or out of accounts with the issuer, and (iv) amounts
determinable from a published index (for example, a published interest rate).

Force Majeure 
ISP 98 does not include the force majeure clause in the UCP, which relieves banks of
"liability or responsibility for the consequences arising out of the interruption of their
business by Acts of God, riots, civil commotions, insurrections, wars or any other
causes beyond their control, or by any strikes or lockouts."54 Under the UCP, if the bank
at which presentation is to be made is closed as a result of such a cause, that bank is
not obligated, when it reopens, to accept or negotiate a credit which expired while it was
closed. If, however, the bank is closed for other reasons on the day on which
presentation must be made, the period for presentation is extended until the next day
that the bank is open.55 ISP 98 recognizes that beneficiaries are unwilling to bear the
risk of force majeure events imposed by the UCP and extends, if the person to which
presentation is made is closed "for any reason" on the day on which presentation must
be made, the time for presentation until the thirtieth day following the day such person
reopens for business unless the standby credit provides otherwise. 56 ISP 98 chooses
thirty days because this period is included in standby credits in which the United States
Government is the beneficiary and because insurance regulators require that period in
reinsurance standby credits.57

Time For Examination and Dishonor 

The time within which an issuer must examine documents is linked with the sanction
that the issuer’s failure to do so or to notify the beneficiary of any of their shortcomings
precludes the issuer from later raising those shortcomings. ISP 98 follows both the UCP
and UCC and adopts this rule of preclusion.58

Standby credits vary considerably in the complexity of the documents required for a
presentation, and, as issuers do not necessarily have staff who can immediately begin
to process a demand, the time it needs to examine such documents is bound to vary.
The UCP and UCC obligate each bank (issuer, confirming and nominated bank) to
complete their review within a ‘reasonable time’ but not more than seven banking days,
in the case of the UCP, and seven business days, in the case of the UCC. 59 Although
seven banking or business days is the outer limit, the formulation of the duty under the
UCP and UCC does not preclude a bank from taking the entire seven days to notify the
beneficiary. ISP 98 states this duty negatively: notice of dishonor must be given "within
a time after presentation of documents, which is not unreasonable." 60 Rule 5.01(a)(i)
sets parameters within which issuers are safe: less than three business days "is
deemed to be not unreasonable" and more than seven days is "deemed to be
unreasonable." Depending upon the circumstances, more than three business days
may be reasonable.61 For purposes of calculating the time for dishonor, ISP 98 follows
the UCP and UCP, and begins counting from the day after the presentation is made.62

Fraud Exception 
Not infrequently in standby credits the applicant so disputes the beneficiary’s right to
draw under the credit that it asserts that any such presentation is fraudulent. Neither the
UCP nor ISP 98 prescribe rules concerning when the issuer may or should refuse an
otherwise complying presentation because the beneficiary’s draw is fraudulent. The
UCP does not mention the exception. ISP 98 states expressly that it does not provide
for "defenses to honor based on fraud, abuse or similar matters."63 These issues are left
to applicable law, which, in the United States, is the UCC, under which the issuer is
relieved of its obligation to honor a complying presentation where the document
presented to it is forged or fraudulent or honoring the presentation would facilitate a
material fraud.64 This exception, known as the fraud exception, is available in narrow
circumstances.
Warranties 
ISP 98 follows the UCP’s omission of any warranties on behalf of the beneficiary. Under
the UCC a beneficiary, when a presentation is honored, warrants (i) to the issuer that
there is no fraud or forgery in the presentation and (ii) to the applicant that the drawing
does not violate the agreement between them and in respect of which the drawing is
made.65 Since the warranties are made only when the presentation is honored, any
defense based on forgery or fraud must not rest on breach of warranty, but on the fraud
exception itself.

Nominated Persons, Syndications and Participations 

Nominated Persons
An applicant may be able to procure a letter of credit from a bank with whom it has a
relationship, which in many cases will be in the country in which applicant is located.
The beneficiary of that credit will often prefer to have a bank or financial institution
located elsewhere, most often in the country in which the beneficiary is located, be
nominated as an advising or confirming bank, so that the beneficiary can obtain
payment from that bank, rather than the issuer. Convenience, comfort with the banking
and letter of credit laws and the practices of the financial institutions in the beneficiary’s
own country and unwillingness to take the credit risk on certain financial institutions
motivate beneficiaries to request that the credit nominate another institution as an
advising or confirming bank.

Letter of credit law and practice leaves to the issuer strict control over the process of
nominating other persons to advise, negotiate and confirm the credits it issues, and ISP
98 follows this established law and practice. ISP 98 requires that the standby credit
designate or nominate another person to advise, receive a presentation, effect a
transfer, confirm, pay, negotiate, incur a deferred payment obligation or accept a draft
for that person to acquire any rights under that credit.66 A person nominated to advise or
confirm is not obligated to accept such nomination.67 Unless the credit is freely
negotiable or authorizes a person nominated to advise to also negotiate the credit, a
person who accepts a nomination to advise undertakes only to examine and forward the
documents to the issuer; it is not obligated or authorized to negotiate the draft or pay the
beneficiary.68 If the credit is negotiable or the adviser is authorized to negotiate the
credit, the person acting as such adviser can negotiate, and, in effect, purchase, the
documents, and seek reimbursement from the issuer.69 If the credit is not freely
negotiable or the adviser is not authorized to negotiate the documents any payment on
the credit by that person is as a stranger and does not transfer to that person any rights
in the credit.70 A person nominated to act, and which undertakes to act, as a confirmer
acts as an issuer of the credit to the beneficiary.71 It is entitled to reimbursement from
the issuer upon its honoring of a proper presentation under the credit.72

ISP 98 clarifies the relationship between the different branches and agencies of a bank
for purposes of letter of credit law. Each branch or agency of a bank is for purposes of a
standby credit a separate legal person even though the bank may be itself a single
person.73
Syndications and Participations
ISP 98, unlike the UCC and UCP, recognizes that issuers and confirmers may spread
their risk that the applicant (or issuer) will not reimburse them, following a complying
presentation, through syndication and participation of standby credits. Issuers syndicate
a standby credit by having more than one issuer issue the credit. Typically, each
standby credit will state the proportionate and several liability of the issuer and the order
in which presentations are to be made. If not, the beneficiary may draw on any of the
credits and the liability of all of the issuers is presumed to be joint and several.74

An issuer "issues" or "sells" "risk participations" in a letter of credit by entering into

participation agreements with other institutions which provide that in the event of a draw
under the credit and a failure by the applicant (or, in the case of a confirming credit, the
issuer) to reimburse within a specified period, the participant will pay the issuer (or
confirmer) its proportionate share of the drawing. There is a single issuer and credit. ISP
98 permits the issuer (and confirmer) to sell such participations unless the agreement
with the applicant provides otherwise.75 In connection with a proposed sale of such
participation, an issuer (and confirmer) may disclose information about the applicant (or
issuer) and the credit even though it may be confidential under applicable bank secrecy
laws or an agreement with the applicant. If an applicant desires to control such
disclosures, it will have to provide otherwise in its agreement with the issuer.

Transfer and Subrogation 

A beneficiary’s ability to transfer its rights under a letter of credit facilitate its ability to
obtain credit for financing the underlying transaction, but letter of credit law and practice
has, unlike other areas of commercial law where the free alienability of property
recognized, restricted the beneficiary’s right to transfer its rights in a credit. ISP 98, like
the UCC and UCP, while not expanding the transferability of standby credits, modifies
certain of the UCP’s rules governing the transfer of credits. A credit subject to ISP 98
will, like credits subject to the UCP, not be transferable unless the credit expressly
states it is so.76 A standby credit that states that it is transferable without further
provision cannot, like credits subject to the UCP,77 be partially transferred.78 A
documentary credit may contemplate several transactions, but standby credits, in
general, do not. A standby credit, on the other hand, may be transferred more than
once,79 whereas credits subject to the UCP may not be so. 80 Under ISP 98 (and the
UCP), the transfer of a credit is subject to the issuer’s consent, 81 ISP 98 clarifies letter of
credit practice by providing that once a credit is duly transferred, the beneficiary’s name
and signature will be substituted for the prior beneficiary on the credit, and such a
presentation complies with the requirements of the credit.82

Both the UCC and ISP 98 recognize transfers of credits by operation of law, whether or
not the credit states that it is transferable. 83 A successor corporation, a trustee in
bankruptcy, an executor of an estate, a legatee or heir, or a guardian of an incompetent
beneficiary are examples of transferees by operation of law. Even though the transferee
cannot use the beneficiary’s name in making the presentation since it is not truly his or
its name and cannot make a complying presentation using his or its own name, as a
transferee by operation of law, he or it can make a presentation in his or its own name.
ISP 98, unlike the UCC, specifies the documents additional to those required under the
credit which the successor by operation of law must submit to establish that it is such a
successor.84

ISP 98, like the UCC and the UCP, also distinguishes an assignment of proceeds under
a credit from of the credit itself, but includes more elaborate rules than the UCP. The
assignee of the proceeds under a credit has not right to draw thereunder but must wait
until the beneficiary makes a complying presentation. Under ISP 98 an assignment of
proceeds does not bind the issuer (or other nominated bank) until it has acknowledged
the same, and it is under no obligation to give such acknowledgment. 85 The UCC,
however, softens the rule by providing that the nominated person may not unreasonably
withhold its consent to an assignment of proceeds.86 Although acknowledgment and
consent are not the same, the nominated person would have difficulty unreasonably
withholding its acknowledgment where no consent is required. Notwithstanding such
acknowledgement, the assignee’s rights to the proceeds are subject to prior, competing
claims of the nominated person, transferee beneficiaries, other acknowledged
assignees and other rights or interests that may have priority under applicable law.87

In recent years, the courts in the United States have considered whether the
independent undertaking of an issuer precludes a claim by it that it is subrogated to the
beneficiary’s rights upon honoring a presentation. In response, section 5-117 has been
added to the UCC, which provides that an issuer that honors a credit is subrogated to
the rights of the beneficiary to the same extent as if the issuer were a secondary obligor
of the underlying obligation owed to the beneficiary and of the applicant as if the issuer
were the secondary obligor of the underlying obligation owed to the applicant. This
section enables the issuer to exercise whatever rights the beneficiary may have had
against the applicant and whatever rights the applicant may have had against the
beneficiary. An applicant upon reimbursing the issuer is subrogated to the issuer’s
subrogation rights. ISP 98, however, has remained silent on subrogation rights.

Conclusion 
This brief review of ISP 98 highlights its key provisions. In view of the importance of
standby credits in the banking industry, its significance to letter of credit law and
practice should not be underestimated. Its clarifications and innovations are also likely
to offer useful resolutions to some of the questions that will arise under documentary
credits as well.