Bad Standby LC Wording from Beneficiaries: Push Back or Get Pulled In

A chronic concern for banks is when intended LC beneficiaries – often government agencies, municipalities, insurance companies, and other so-called power beneficiaries – supply banks with certain terms and conditions that must be included in standby letters of credit issued in their favor. An experienced specialist at a regional bank in the US reported to DCW areas in which some beneficiaries have insisted specified wording must be used and have refused to budge:

1. With regard to force majeure, beneficiary wants the letter of credit to extend the expiration date if the LC expires during the time period in which the bank is closed, instead of presentation being honored after 30 days of business re-opening;
2. LC with auto extension must extend with identical terms as the initial credit issued. (What if there were previous draws?);
3. Multiple beneficiaries without wording allowing for binding terms and conditions for all by any action taken by one or more beneficiaries;
4. Restricting jurisdiction to a specific court in a small US county;
5. Mandating the LC be governed by the law of a US state that is unclear or untested.

The vast majority of troublesome clauses are seen in standbys designed to be subject to UCP600 or no practice rules at all. In many such instances, although not all, reliance on problematic standby wording can be attributed to unfamiliarity or unwillingness to utilize ISP98, the industry standard set of rules specifically developed for standby LCs, and the ISP98 Model Forms subsequently drafted to complement use of the rules.

Shortly after release of the freely available ISP98 Model Forms in 2012, it was observed that the forms and the various suggested alternatives contained in their endnotes are far more preferable than the bad forms that customers frequently hand to banks and that banks must either fix, reject, or issue in the hope that ambiguities and non-documentary conditions in the text will be resolved if and when they later arise and are tested.