Standby LCs and Non-Extension Clauses

During a recent meeting of West Coast US bankers, a scenario was presented for purposes of discussing best practice considerations. A non-extension notice is sent to a beneficiary well ahead of 60 days prior to expiry of the standby letter of credit. The LC is then amended to extend expiry from 10 January 2023 to 10 June 2023. Once the non-extension notice is sent to a beneficiary, is the auto-extend clause removed from the LC? Does the original 60-day auto-extend clause remain in force or is the 10 June 2023 expiry date the final expiry date? As issuer, would you send another non-extension notice to the beneficiary? And if you did amend the LC to rescind the non-extension notice and extend for another year, do you mention also that the auto-extension clause is intact?

In discussion, consensus among those expressing an opinion suggested that once the non- extension notice is sent, the LC expiry date becomes final. At the discretion and on the instructions of the applicant, after the non-extension notice is sent and, later on, the credit is amended with a new expiry date, ideally the wording should have stated that the LC’s new expiration date is final since a non-extension had been already sent to the beneficiary. Commenters agreed that there is no need to send another non-extension notice as the amendment made the credit subject to a definite expiry date. If a non-extension notice is rescinded, and the credit is amended extending the expiration date, the automatic extension clause remains in place and the amendment would be clearer if it says so.

The scenario prompted further discussion of other variations. For a standby expiring on 5 January 2023 that does not contain an auto renewal clause and is amended to extend for 12 months and decrease by USD 10,000, if the issuer does not receive beneficiary acceptance of the amendment, can the issuer decrease its liability on 6 January 2023 since the beneficiary will only be able to accept the entire amendment? Alternatively, should an issuer send separate amendments for these two changes?

If the amendment is sent prior to the expiration date, the credit as amended is non-operative until the issuer receives the beneficiary’s consent and, only at that time, can liability be reduced. Conversely, if the amendment is sent after the expiration date (subject to a bank’s credit policy), it is not necessary to obtain beneficiary consent and the liability in the bank’s books can be reduced by USD 10,000. Commenters strongly suggested that one amendment, not two, should be sent containing both the expiry date extension and the LC amount reduction.

In an email to DCW, LC specialist Francisco Rodriguez said it is worth noting that this latter scenario refers to an “auto renewal clause” which is nowadays more commonly and accurately labeled an “auto extension clause” due to the stark differences and potential negative consequences of using “renewal” instead of “extension”. Rodriguez further pointed out ICC Technical Advisor Glenn Ransier’s comment on “evergreen clauses” from A COMPREHENSIVE GUIDE TO STANDBY LETTERS OF CREDIT (2021) – ICC Academy:

“Given the long-term expiry nature of SBLCs they often insert what is commonly referred to as an Evergreen or automatic-extension clause. The Evergreen Clause allows an SBLC’s expiry date to automatically extend for a fixed period-of-time (e.g. every six months or year). It also provides an issuer or confirmer and/or the applicant with an exit period (e.g. ‘unless XX days prior to any then current expiration date, the issuer notifies the beneficiary that the issuer elects not to extend the SBLC’). This allows them the possibility to have the SBLC expire with a simple cancellation notification and without the need for a beneficiary to agree to an amendment.

However, any cancellation notification must be sent or received by the beneficiary by the notification period indicated in the SBLC’s specific evergreen clause. This is normally anywhere between 30 and 90 days from a then current expiration date.”