Standbys without Expiration Dates

What can you, as a US bank, do when a customer tells you that they need you to issue a standby letter of credit with no expiration date? It is a violation of the Safety & Soundness regulations applicable to US banks (12 CFR 7.1016) to issue letters of credit (including demand guarantees) without expiration dates UNLESS the bank is cash collateralized. Also, US law in all 50 states says that an LC with no stated expiration date expires one year after it is issued and an LC that states that it does not expire still expires in five years. To get around this, you would need to make the LC subject to the laws of some other country, though another possibility is to see if the beneficiary will accept an expiry date 100 years in the future.

It has been suggested there are at least two other ways to issue an LC with no stated expiration date:

1. Instead of an expiration date, include a “pay-and-walk clause”, that is, a clause saying that you can terminate the LC at any time by simply paying the balance.

Example: The Issuer may, at any time, discharge its obligations under this standby letter of credit, whether or not required to do so, by paying the beneficiary the outstanding balance of this standby letter of credit or any lesser amount agreed to by beneficiary.

2. Include a “termination clause”, that is, a clause that says you can send notice at any time that the LC is being terminated in, say, 30 days and the beneficiary has until then to draw (probably by simply stating they are drawing because they received a termination notice). Note that this really amounts to the LC being an evergreen LC that is always expiring [30] days from the present day and extends by a day each day.

Example: This letter of credit may be terminated upon [number in words followed by (number in digits)] days’ written notice sent by overnight courier, registered mail, or other receipted means of delivery by the Issuer to the Beneficiary at the above-stated address or by email sent to Beneficiary’s above-stated email address and the effective date of such [number in words followed by (number in digits)]-day termination notice shall thereby be set as the expiration date of the Letter of Credit, it being agreed and understood that the Issuer will honor any drawings presented under and in compliance with the terms of this Letter of Credit at the address specified in the preceding paragraph on or before this expiration date. If no such termination notice is sent, this Letter of Credit will expire, in any event, on [insert date].

These ideas and examples are for informational purposes and not as legal or professional advice. They are approaches that have been seen in practice from time to time. DCW welcomes any feedback on these or other ways that LCs have been issued without stated expiration dates.