BAFT Members and Colleagues,
We wanted to bring to your attention a recent court decision that presents a noteworthy departure from the prevailing understanding of standby evergreen/auto-extension clauses that commonly exist in standby letters of credit. A recent U.S. District Court decision in New York in Starr Indemnity & Liability Company v. Midwest Mortgage Associates Corporation ruled that the auto renewal language in the letter of credit at issue in the case only permittee a single extension (one-year, in this case), after which the letter of credit expired.
The ruling was based on the reading of the clause “for one (1) year from the expiration date hereof or any future expiration date,” which it found insufficient to evidence an intent for indefinite or rolling extensions. As a result, a beneficiary’s presentation was refused on the basis of the Letter of Credit having expired. Notably, the Court acknowledged that the clause was: “less than artful,” and construed the ambiguity in favor of the issuer rather than the beneficiary.
While this is a trial level decision in New York and does not have precedential value, it may nonetheless have persuasive value to another court looking at the same issue. It therefore potentially creates risk for banks who have similarly worded language in their letters of credit. Since this 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.
BAFT will continue to monitor legal developments on this issue, consult other industry and trade associations, and keep you informed of any new developments on this issue.
Please contact Craig Weeks ([email protected]) with any questions.