Automatic Extension LC Issues

Under Article 5 of the Uniform Commercial Code (UCC) in effect in all states of the United States, the statute of limitations or time to bring an action against an issuing bank for a wrongful dishonor of its letter of credit is normally one year from the later of the expiry date of the LC or the date of the wrongful dishonor.[[1]]

What happens if there is no expiration date stated in a standby LC and by its terms it continues to be outstanding or auto-extends for one-year periods until notice of non-extension is given prior to the then current extended expiration date?

In that instance, the SBLC could be considered to be available for drawing indefinitely. Moreover, if the issuing bank did give notice of non-extension of its LC, would it be necessary for the bank to retain in perpetuity evidence that it gave that notice to avoid having to honor a draw years, sometimes decades, later than the date of the SBLCs issue?     

The 1995 Amendments to UCC Article 5 did away with some of the risk not dealt with by original UCC Article 5 arising from “perpetual” LCs by imposing a five-year expiration date on them.  A letter of credit that states that it is “perpetual” expires five years after its stated date of issuance, or if none is stated, five years after the date it was issued.[[2]]

Beneficiaries can still argue that UCC Sec. 5-106(d) only applies to an LC if it states verbatim that the LC is perpetual; something certain Middle East oil companies or countries required of LCs issued in their favor before Revised Article 5 was adopted. Apparently this was in the minds of the drafters of Revised UCC Article 5 when Sec. 5-106(d) was drafted.  The verbatim argument was approved by the Ninth Circuit in the case of Golden West Refining v. SunTrust Bank, 538 F.3d 1233 (9^th Cir. 2008) [USA].  The court stated that for the five-year expiration date of Sec 5-106(d) to apply “the plain language of UCC § 5-106(d) requires that a letter of credit state that it is perpetual to qualify as a perpetual letter of credit.” 

Official Comment 4 to UCC Sec. 5-106 states that “all letters of credit should specify the date on which the issuer’s engagement expires”.  As noted, this avoids an issuer, out of caution, having to maintain in perpetuity records evidencing that a non-extension notice had been sent to the beneficiary as required by the LC to show that it has expired. Accordingly, issuing banks usually specify an expiration date, and if they are auto-extend LCs,[[3]] a final or outside expiration date beyond which the LC does not extend.  The outside or final expiration date will apply to terminate their SBLC even if no notice of non-extension is given, or if given, evidence of its having been given cannot be found.   

The case of People of the State of Illinois ex rel. Department of Natural Resources v. Regions Bank, 2025 IL App. 4th 230085(U) (Mar. 27, 2025) involves the wording of an auto-extend clause in a Regions Bank SBLC which the appellate court concluded provided for only a single one-year extension, and therefore was not perpetual. 

In this case, Regions Bank’s predecessor bank issued an SBLC for USD 320,608 on December 12, 1985 to the Illinois Department of Natural Resources (DNR) to secure reclamation costs of the applicant, Surefire Coal Company, based on a form of SBLC prescribed by the DNR.  It contained the following provision:

This Letter of Credit will automatically extend for an additional term of One (1) year unless [issuer] provides at least ninety (90) days notice prior to the expiration date that it does not wish to extend the Letter of Credit for an additional period.

No non-renewal notice[[4]] was sent by Regions Bank or its predecessor issuing bank to the DNR.  On June 16, 2016, over 30 years after the Regions Bank’s SBLC was issued, the DNR presented a sight draft for payment of the full amount of the Regions Bank SBLC because Surefire Coal defaulted on its reclamation obligations in 2005 when it filed for bankruptcy. Regions Bank dishonored, arguing that its SBLC had long since expired. The DNR then filed suit against Regions Bank for dishonoring the DNR’s draw under the SBLC. 

The trial court entered judgment in favor of the DNR, finding that the Regions Bank SBLC auto-extend provision “renewed” the SBLC indefinitely because neither Regions Bank nor its predecessor bank tendered a notice of non-renewal to the DNR. 

Regions Bank appealed and the appellate court reversed.  The court ruled that the plain language of the clause in question called for an automatic extension “for an additional term of one year” without notice of non-renewal (emphasis added).  Regions Bank successfully argued that the language in the auto-extend clause using the singular to modify “term” extended the SBLC only once; the singular words “an” and “term” were used in the SBLC rather than the plural word “terms”.  The Court distinguished cases where an auto-extend clause indicated plural future extensions for an indefinite term and cited an Illinois case where only one extension was intended.[[5]]

The Regions Bank appellate court also distinguished cases where the auto-extend or evergreen provision contained a final or outside expiration date. See, e.g., J.P. Morgan Trust Co., N.A. v. U.S. Bank, N.A., 446 F. Supp. 2d 956, 958 (E.D. Wis. 2006) (The letter of credit automatically extended for an additional one-year period from the present or any future expiration date unless the issuer tendered a notice of nonrenewal, but “in any event, this letter of credit shall not be automatically extended beyond May 15, 2003, the final expiration date.”). 

The DNR argued that because there was no final expiration stated in the SBLC, it should be interpreted to mean it continued indefinitely.  The appellate court rejected that argument, ruling that there are different ways of stating how an LC may terminate and no one set way.  A set number of extensions stated in the LC was one way to calculate the LC’s duration.  The appellate court also rejected DNR’s argument that the duration of the SBLC should be interpreted to cover the life of the mine permit for later reclamation events.  That evidence was extrinsic, violated the LC independence principle, and was not proper in any event because the wording of the extension clause of the SBLC was unambiguous.     

The takeaway from the above discussion is that although there may be more than one way of doing so, issuing banks should make clear a final expiration date on their SBLCs, especially those that contain auto-extend provisions where permitted to do so; they should not rely on UCC Sec. 5-106(d)’s five-year limitations period to terminate their obligations under their evergreen SBLCs.

[[1]]: UCC Sec. 5-115 (Statute of Limitations) 

[[2]]: UCC Sec. 5-106(d) (Issuance, Amendment, Cancellation, and Duration) provides: “A letter of credit that states that it is perpetual expires five years after its stated date of issuance, or if none is stated, after the date on which it is issued.” 

[[3]]: An auto-extend provision in an LC is sometimes referred to as an “auto-renew,” “automatic renewal” or “evergreen” provision, but the preferred, proper way to refer to it is as an auto-extend or automatic extension provision as in the wording of that provision in the Regions Bank case quoted above.  See, e.g., ISP98 Rule 2.06(a) and ISP98 Model Form 2.

[[4]]: Although the clause in question used the word “extend”, the court referred to it as the letter’s renewal clause and used “renewal” and “nonrenewal” in the decision. As referenced in note 3, “extend” is preferred. BAFT’s 2019 Guidance Paper for Auto Extensions advises the terms “renew” or “renewal” should be avoided as they could be misinterpreted to include the re-creation of an original instrument as opposed to an extension of a previous instrument with all terms in place. The term “extend” clarifies this as an extension only to the time period in which a standby is available for drawing.   

[[5]]: In Stringer Construction Co. v. La Grange State Bank, 148 Ill. App. 3d 621 at 626 (1984), the letter of credit “authorized [the beneficiary] to request an extension of the expiration date for `an additional period of up to one (1) year.’”