Standby Letters of Credit with “Pay and Walk” Clauses: How They Work and What to Watch for

Certain banks issuing standby letters of credit subject to ISP98 (or demand guarantees subject to URDG758) have been including “Pay and Walk” clauses in the terms and conditions of some standbys. This practice was first reported in standbys and guarantees issued by some Australian banks, and more recently has been occasionally observed in standbys issued by banks in other countries, including the United States. One example:

“Issuer may at any time, without being required to do so, pay to the beneficiary the maximum amount less any amount or amounts it may previously have paid under this standby letter of credit or such lesser sum as may be required and specified by beneficiary and thereupon this instrument expires and all liabilities of the issuer under this instrument shall then immediately end.”

The clause allows the issuing bank to “Pay” (un-demanded) the beneficiary and “Walk” away from the standby.  This serves as an exit mechanism for the issuing bank.  For issuing banks the advantages include the ability to extinguish its obligations under the standby, take earlier reimbursement from the applicant and remove the standby from their books before the stated expiry date.  Conversely, use of such clauses can raise concerns for applicants, beneficiaries, and any confirming banks.