The auto-extension clause used in a UCP 600 standby that gave rise to ICC Opinion TA954 illustrates the serious concerns that can emerge when ambiguous wording is inserted in a credit. Li Huang identifies and examines issues to consider.
On 24 December 2013, a bank (Issuer) issued a Standby Letter of Credit (SBLC) subject to UCP 600 in favor of a government entity using beneficiary-required text. The SBLC contained auto-extension wording as follows:
"This letter of credit is effective December 24, 2013 and shall expire on December 24, 2014 but such expiration date shall be automatically extended for a period of at least one (1) year on December 24, 2014 and on each successive expiration date unless, at least 120 days before the current expiration date, we notify both the beneficiary, at the above referenced address, and applicant by certified mail that we have decided not to extend this letter of credit beyond the current expiration date. In the event you are so notified, any unused portion of the credit shall be available upon presentation of your sight draft for 120 days after the date of receipt by both applicant and beneficiary as shown on the signed return receipts."
In August 2024, Issuer sent non-extension notices by certified mail to both Beneficiary and Applicant. Based on the return receipts, Beneficiary received its notice on 26 August 2024, that is, 120 days before the then-current expiration date but Applicant did not receive its notice until 28 August 2024. Applicant sought to waive the notification and have the SBLC expire on 24 December 2024. Issuer is reluctant to cancel its LC even as Beneficiary never drew against the SBLC nor indicated any disagreement with the notice of non-extension.
Core Views of ICC Opinion TA954
(1) Issuer’s non-extension notice to Applicant was untimely, rendering the non-extension notice ineffective According to Opinion TA954, Applicant received Issuer’s non-extension notice on 28 August 2024, which was less than 120 days prior to the current expiration date. This failed to comply with the SBLC’s stipulation that the Issuer shall notify both Beneficiary and Applicant “at least 120 days before the current expiration date", so the non-extension notice was ineffective against Applicant and further rendered the entire non-extension notice ineffective. The reasons cited by the ICC Banking Commission include:
The query indicates the intention of the relevant provisions in the SBLC was to base the 120-day period upon "the date of receipt by both beneficiary and applicant as shown on the signed return receipts".
The issuing bank is responsible that notice is made in a timely and effective manner.
Therefore, based on the clause, the issuer bears the risk of delay or non-delivery, rather than the parties whose rights the clause was designed to protect.
The above rationale implies that, in ICC Banking Commission’s view, the meaning of "notify" in auto-extension is to give notice to, or to bring information to the attention of the addressees; mere dispatch of the notice cannot fulfill this requirement.
(2) Applicant cannot overcome the ineffectiveness of the untimely notice by waiving the defect in the notification period According to TA954, the triggering of the SBLC’s expiration date requires the Issuer to send timely non-extension notices to both Beneficiary and Applicant. Since UCP 600 contains no provisions granting the Applicant the ability to "waive its notification period" and there is no international standard banking practice supporting this action, the Applicant cannot overcome the ineffectiveness of the untimely notice to render the non-extension notice effective.
Comments on the content of ICC Opinion TA954’s Query
(1) Determination of the SBLC’s expiration date by the triggering of an "expiry notice" The SBLC states: "This letter of credit … shall be automatically extended … on each successive expiration date unless, at least 120 days before the current expiration date, we notify both the beneficiary … and applicant by certified mail that we have decided not to extend this letter of credit". This stipulation not only governs the auto-extension of the SBLC but also specifies how the SBLC’s expiration date is determined.
Pursuant to the SBLC’s requirement, the only means for determining the SBLC’s expiration date is that the Issuer notifies both Beneficiary and Applicant by certified mail of its decision not to extend the SBLC at least 120 days before the current expiration date. This stipulation clearly refers to a specific act to be performed by the Issuer, which constitutes an "expiry notice" with a definite time element and the Issuer can take this action solely based on its own.
(2) Determination of the SBLC’s expiration date does NOT require notice be received The auto-extension clause only stipulates "we notify ... by certified mail"; by certified mail is the required method of notification. In my view, this refers to the act of the issuer dispatching the notice rather than the result of the recipient receiving the notice. If the SBLC clause had intended to require notice be received, a reasonable wording would have been "both beneficiary and applicant have received our notice ... by certified mail."
In UCP 600, provisions involving notification actions, e.g., Article 16(c) "give a single notice to" and Article 16(g) "has given notice to" are practically interpreted as "dispatch of the notice" rather than requiring "receipt of the notice". In letter of credit practice, "notify" and "give notice" are often used interchangeably.
Furthermore, pursuant to UCP 600 Article 35: "A bank assumes no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents, when such messages, letters or documents are transmitted or sent according to the requirements stated in the credit." For the SBLC in question, the Applicant’s receipt of Issuer’s non-extension notice on 28 August 2024 may have resulted from various factors beyond the Issuer’s control, such as postal sorting delays, a change to the Applicant’s address, or delays in internal receipt by the Applicant. The Issuer is only liable for the notification act under the SBLC clause and not for the risk of document transmission delays.
According to the ICC Banking Commission, "the intention was to base the 120 day period upon the date of receipt", implying that the Issuer’s notification under the SBLC shall take effect only upon delivery. In my view, this appears to involve over-interpretation of the SBLC clause itself and a deviation from the clause’s original meaning.
(3) The two periods of "120 days" in the SBLC clause respectively refer to the "expiry date triggering period" and the "Beneficiary’s claim period" with NO inherent connection Notably, the auto-extension clause contains two 120-day requirements. The first 120 days ("at least 120 days before the current expiration date") function to define the time window for the Issuer to trigger the “non-extension expiration date” and primarily serving to lock in the duration of the Issuer’s obligation, which relates to whether the expiration date is confirmed. The second 120 days ("120 days after the date of receipt by both") included in the clause function to define the time frame for the Beneficiary to claim payment after the notification takes effect and primarily serves as the term of the Beneficiary’s rights, which relates to whether the claim is timely.
Pursuant to the auto-extension clause, the Beneficiary may submit a sight draft for the entire unused amount of the SBLC to claim payment within 120 days after the date of receipt by both Applicant and Beneficiary as shown on the signed return receipts. Even if the Applicant received Issuer’s non-extension notice on 28 August 2024, 120 days from this date would be 26 December 2024. However, pursuant to UCP 600 Article 6(d)(i): "A credit must state an expiry date for presentation. An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation." The beneficiary’s presentation by 24 December 2024 would be timely which fully satisfies the content of the clause and the provisions of UCP 600.
The two 120-day periods serve two different transaction links, i.e., expiration arrangement and claim arrangement, and have no functional dependency. Moreover, the auto-extension clause contains no wording or requirement linking the two 120-day periods. The ICC Banking Commission’s view that the intention was to base the 120-day period upon "the date of receipt by both beneficiary and applicant as shown on the signed return receipts" appears to lack sufficient justification.
(4) Issuer’s reluctance to cancel the SBLC stems from risk aversion After receiving Issuer’s non-extension notice (on 26 August 2024), the Beneficiary did not object to the notice nor did it ever draw against the SBLC. Such silence is not equivalent to acceptance in letter of credit practice; instead, it suggests significant uncertainty.
First, the auto-extension clause itself does not treat silence as acceptance. The clause contains no stipulation that "the beneficiary’s silence shall be deemed a waiver of its claim rights". From the literal meaning of the clause, the Beneficiary may still assert rights under the SBLC by submitting a compliant sight draft within the SBLC validity period (e.g., claiming that Issuer’s non-extension notice is ineffective, leading to the SBLC’s automatic extension to 2025).
Second, the Beneficiary’s lack of expressed disagreement does not mean it will never draw. The Beneficiary may temporarily refrain from drawing due to internal process delays or doubts about the validity of the notice, rather than permanently abandoning its rights. The Issuer must assess its risks based on the "worst-case scenario". If Issuer recognizes the SBLC’s non-extension, it must simultaneously take two actions: first, cancel the SBLC after expiration to terminate its obligations under the SBLC; second, release the collateral provided for issuance of the SBLC in accordance with its agreement with the Applicant. If the Beneficiary subsequently claims that the non-extension notice is ineffective and draws under the SBLC, the Issuer may be liable for payment to the Beneficiary if the Beneficiary’s claim is valid and Issuer would have no means of repayment from the Applicant. The dual actions of canceling the SBLC and releasing the collateral fully expose Issuer to risk. Such dual risks are the practical considerations likely behind Issuer’s reluctance to cancel its undertaking even if it believes its obligations have been extinguished.
(5) Applicant Waiver of the Notification Period Defect affects the rights of Beneficiary and Issuer In TA954, the ICC Banking Commission holds that the Applicant has no right to "waive its notification period” on the grounds that UCP 600 contains no provisions supporting such practice, nor is there international standard banking practice on this issue.
Objectively speaking, there is no issue with the aforementioned reasons, but they remain superficial. The core logic behind the Applicant’s inability to "waive its notification period" is rooted in the independent nature of LCs. In LC transactions, the relationship between the Applicant and the Issuer is independent of the relationship between the Beneficiary and the Issuer. As mentioned above, the Beneficiary’s "silence" does not mean “no intent to claim” and "no disagreement" does not equate to tacit acceptance. In the absence of the Beneficiary’s explicit expression of its stance, recognizing the Applicant’s right to waive the notification period defect is equivalent to directly presuming that the Beneficiary agrees to the validity of the issuer’s non-extension notice. This means that the Applicant’s statement to the Issuer directly affects the Beneficiary’s right to assert claims against the Issuer, which violates the independence principle.
Similarly, as analyzed in understanding the Issuer’s reluctance to cancel the SBLC, recognizing the Applicant’s right to waive the notification period defect also impairs Issuer’s ability to exercise its rights under the SBLC. Furthermore, pursuant to UCP 600 Article 16(b): "When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies." The core logic of this provision also lies in the independence of letters of credit. By the same logic, under the SBLC, the Issuer has the right to independently decide whether to accept the Applicant’s waiver of the notification period defect.
In conclusion, even if the Applicant voluntarily waives the notification period defect, the bank dare not take the risk of agreeing to the validity of the non-extension notice it issued without the Beneficiary’s written consent.
Practical recommendations
(1) Clarify the meaning of core clauses to eliminate ambiguity The issues involved in the query leading to Opinion TA954 primarily stem from ambiguous wording in the SBLC issued by the bank. The auto-extension clause’s use of "notify" led to ambiguity over whether "notify" conveyed "dispatch" or "delivery". Additionally, the unclear logical relationship between the two "120 day" periods in the clause invited confusion over the validity of the non-extension notice. In practical operations, issuers must engage in sound drafting and carefully review text before issuing their independent undertakings. This includes clear meaning of core clauses to eliminate ambiguity. When the applicable rules do not address matters such as those manifest in this query, such terms and conditions should be clarified through clear and unambiguous wording that will not be open to misinterpretation.
As explained in the TA954 query, Issuer issued the SBLC based on text required by the beneficiary which is one of the reasons for the occurrence of ambiguity. As issuer-to-be, the bank should have proactively communicated with the beneficiary and applicant to resolve terms and conditions in the text before issuing the SBLC. The occurrence of the relevant issues in TA954 is largely attributable to the bank’s failure to adequately resolve defects and eliminate ambiguity in the text prior to issuance of the SBLC. Therefore, the resolution of potential problems and misinterpretation depends on the collective awareness of all parties involved in the LC transaction.
(2) Eliminate applicant-controlled condition to protect the independence of the beneficiary’s claim rights As stipulated in the auto-extension clause, the beneficiary can claim payment after the date of receipt by both beneficiary and applicant. Such a stipulation means that the beneficiary’s successful claim needs the applicant’s cooperation, making this clause an applicant-controlled condition. An applicant-controlled condition may cause the beneficiary to lose its claim rights due to non-cooperation from the applicant, rendering the function of the LC ineffective. This not only undermines the independence of the beneficiary’s claim rights but also impairs the core functions of LCs as independent guarantees and on-demand payment instruments. For the beneficiary, when agreeing on claim clauses, it should guard against applicant-controlled conditions and only on terms requiring documents that the beneficiary can independently obtain.
(3) Manage LC expiration and the release of collateral in phases to balance risks among all parties Issuer’s core concern about canceling this SBLC was likely that if it cancels the SBLC and releases the applicant’s collateral only to have the beneficiary subsequently claim that the non-extension notice is ineffective and draw, then Issuer would have payment liability without collateral protection. The collateral provided by the applicant is its core means of reimbursement after paying a compliant drawing.
For similar situations involving potential disputes, the issuer may stipulate in application documents required of the applicant conditions such as the applicant waiving of a notification period defect is contingent on the bank retaining collateral provided by the applicant until the potential dispute is resolved. Subsequently, the issuer may handle the matter in accordance with the stipulation that after receiving a compliant claim from the beneficiary, a statement of waiver of claims from the beneficiary, or upon the arrival of an undisputed expiration date. Such an arrangement not only resolves potential disputes under the LC but also avoids disputes between the applicant and the issuer, effectively controlling risks for all parties.
(4) Use dedicated rules for standby letters of credit The SBLC in TA954 was subject to UCP 600, but UCP 600 is primarily designed for commercial letters of credit. Although SBLC issuers may choose to apply UCP 600, there are significant adaptability issues. Dedicated rules such as ISP98 and URDG758 are more suitable for standby letters of credit and demand guarantees, respectively. For example, ISP98 addresses auto-extension. While use of such dedicated rules could not provide remedy for the clause in question here, they can drastically reduce the likelihood of disputes arising from rule gaps and enhance the certainty of standbys.
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