Legal Definitions - SL/C

SL/C stands for Standby Letter of Credit.

A Standby Letter of Credit (SL/C) is a financial instrument issued by a bank on behalf of its client, guaranteeing payment to a third party if the client fails to fulfill a contractual obligation. Unlike a traditional letter of credit, which is typically used for payment upon successful completion of a transaction, an SL/C acts as a secondary payment mechanism or a safety net. It is only drawn upon if the primary party defaults on their agreement, providing assurance to the beneficiary that they will still receive payment or compensation.

• Example 1: Construction Project Assurance

  A large city government hires a construction company to build a new public library. To ensure the project is completed on time and within budget, the city requires the construction company to obtain an SL/C from its bank. If the construction company fails to meet key milestones or abandons the project, the city can present the SL/C to the bank and receive a specified amount of money to cover the costs of finding a new contractor or completing the work. This SL/C acts as a financial guarantee for the city, protecting it from the contractor's potential default.

• Example 2: International Supply Contract

  A technology company in the United States agrees to purchase a large shipment of specialized components from a manufacturer in South Korea. The South Korean manufacturer is concerned about the U.S. company's ability to pay if unforeseen financial difficulties arise. To mitigate this risk, the U.S. company's bank issues an SL/C in favor of the South Korean manufacturer. This means that if the U.S. company fails to pay for the components as per the contract terms, the South Korean manufacturer can present the SL/C to the U.S. bank and receive payment directly, ensuring they are compensated for their goods.

• Example 3: Commercial Lease Agreement

  A startup company wants to lease a significant office space in a prime downtown location. The landlord, wary of the startup's limited operating history, requires a financial guarantee beyond a standard security deposit. The startup's bank issues an SL/C to the landlord. If the startup defaults on its rent payments or causes significant damage to the property beyond what the security deposit covers, the landlord can draw upon the SL/C to recover the owed amounts. This provides the landlord with additional financial security against potential breaches of the lease agreement by the tenant.