A typewritten two-page document that spent more than 30 years filed away in an Illinois government department is partly to blame for jitters among US banks and their clients over the security offered by standby letters of credit (SBLCs).
SBLCs are widely used as security for contracts and lending in the US, including by banks, insurers, corporations and governments. Just over US$340bn-worth of these instruments was on the books of the country’s banks as of March this year, led by Citi, Wells Fargo, JP Morgan and Bank of America on a net basis, according to data published by Documentary Credit World.
But two recent rulings handed down by US judges have cast doubt over wording that had until recently been widely interpreted as allowing SBLCs to auto-renew each year, rendering the instruments “evergreen”. Lawyers and an industry group said the language is commonly found in SBLCs issued in the US.
The decisions have triggered consternation among banks with sizeable portfolios of SBLCs because of the possibility that some instruments may have expired, despite none of the parties involved intending them to.
The first judgment came from an Illinois appeals court in March last year. The long-defunct First National Bank of Wood River had issued a US$320,608 letter of credit (LC) for the benefit of the Illinois Department of Natural Resources in December 1985, to be drawn on if a coal mining company operator failed to adhere to its mining permit.
The mining company collapsed in 2005. After a series of largely unexplained delays, a draw on the SBLC was finally made by the department in 2016, against Regions Bank, the ultimate successor to First National following a long series of mergers. Regions refused to pay, citing its primary objection: the letter of credit had expired in December 1987.
In the second case, a trucking company obtained a US$950,000 LC from a mortgage provider in 2017 to secure an insurance policy with Starr Insurance. Starr attempted to draw part of the amount in April 2025, which was rejected by the issuer.
The issuer, a mortgage provider, said the LC had expired no later than 2022 – the five-year maximum tenor allowed under the Uniform Commercial Code for a “perpetual” LC.
In both cases, the judges sided with the issuers of the SBLCs. They ruled that the language – slightly different in each case – allowed for at most one 12-month extension of the credit.
The rulings have unsettled what had been common market practice. “Taken together, these decisions suggest a judicial trend toward strictly construing auto-extension language, even where the parties clearly intended the LC to renew indefinitely,” law firm Holland & Knight said in a March client alert.
Paul Roder, a lawyer specialising in trade finance, said the Starr case was “troubling” because the language at issue is commonly found in SBLCs.
“We see variations of this from, frankly, most banks,” Roder, a Moses & Singer partner, said.
“We received, gosh, probably calls from over a dozen banks, issuers in the space asking us to review their auto-extension clauses, asking us: what do you do with LCs that are already issued?”
In addition to being large issuers, banks are also beneficiaries of standbys as part of counter-issuance arrangements and as security for credit lines they extend.
A boom in construction of data centres has also triggered a rise in the issuance of big-ticket, syndicated standbys that use auto-renewal provisions, GTR reported in June.
Extension or extensions?
The LC issued in the Starr case included a clause stating, in part: “This Letter of Credit is deemed to be automatically extended without amendment for one (1) year from the expiration date hereof…” – unless the issuer elects not to renew it.
Starr contended that because the issuer never sent a notice of non-renewal, the instrument “automatically renewed for successive one-year periods”, a court document filed by the insurer shows.
But Judge Jed S Rakoff instead found that “read in context, the provision allows for a single automatic renewal and contemplates the possibility of later amendments; it does not provide for indefinite renewal”. The decision was handed down in January in New York, a jurisdiction that governs many letters of credit.
The court’s reading hews closely to the wording advised by the International Chamber of Commerce (ICC), which says an instrument “shall be automatically extended for successive one year periods” rather than the language referring to an extension for “one (1) year” found in both the Starr and Regions Bank cases.
To support its case, a lawyer for Regions Bank pointed out that in 2005 the Department of Natural Resources had started using language referring to successive periods in its letter of credit templates, instead of the original wording found in the 1985 SBLC. The lawyer told a judge in 2019 that this was “the best evidence” that the original instrument was not in fact evergreen, according to a transcript. The court found against Regions, but the decision was later overturned on appeal.
Regions Bank declined to comment. The Illinois Department of Natural Resources and Starr did not respond to requests for comment.
In light of the two judgments, lawyers said those issuing, applying for and benefiting from SBLCs should ensure there is a clear expiration date and auto-extenstion provisions on future instruments that reflect both parties’ intentions.
Baft (the Bankers’ Association for Finance and Trade) said in a June legal alert on the Starr case that because the ruling “departs from widely held industry expectations regarding evergreen clauses, Baft would encourage banks to consult with their legal counsel to review their standard standby letter of credit templates and outstanding instruments to ensure that auto-extension clauses clearly reflect the intended commercial outcome”.
“What I’m seeing in the industry is a renewed focus on evergreen provisions and an attempt to try and standardise them as a result of these decisions,” said Rick Martinez, a partner with law firm Eversheds Sutherland. “Many people are looking at these provisions with a view towards drafting provisions that can be used across the industry in a standardised way.”
His UK-based colleague Tom Parry added that the reasoning of the US judgments was also likely to be taken up by an English judge if a dispute over an evergreen clause were to be heard in London. “All of it is probably how it would play out in an English court as well,” he said.
In addition to the ICC’s template, the New York-based Institute for International Banking Law and Practice has previously advised those formulating evergreen SBLCs to state that the instruments will be “automatically” renewed, to avoid doubt about the mechanics.
Martinez said wording can often appear unproblematic at first glance. But, he said, “when there’s a problem, every single word, every single comma, can make a difference in how a letter of credit will be interpreted by a court. And I think this is a perfect case in point for that.”
