Pub. 5 2014 Issue 2

www.wvbankers.org 22 West Virginia Banker U nfortunately, as bankers in West Vir- ginia know, these forms are in several respects at odds with letter of credit law and practice. Thus the forms not only are problematic from the standpoint of issuers, but also, they may fail to protect the very agencies that draft them. A project led by the Institute of Inter- national Banking Law & Practice, a non-profit educational organization, seeks to offer some guidance to these agencies. This article will summarize some of the issues that commonly arise with govern- mentally-mandated forms, using a West Virginia form as an example, and summa- rize the Task Force’s work. Nature of the Problem An exhaustive list of the issues that arise in governmentally-mandated standby letters of credit is beyond the scope of this article. Indeed there may be thousands of such forms in existence. Using a West Virginia form as an example, though, the issues that can arise in such forms without careful consideration can be shown. The West Virginia Department of Labor mandates a form standby letter of credit that may serve as a wage bond pursuant to W. Va. Code § 21-5-14. As many bankers know, any discussion of letter of credit practice in West Virginia begins and ends with this form and the Supreme Court of Appeals’ decision in Leary v. McDowell County Nat’l Bank, 552 S.E.2d 420 (W. Va. 2001). The decision is viewed as ex- ceptional in the letter of credit community for the extent to which it went to favor the government agency beneficiary over letter of credit policy. Even after the Leary decision, the wage bond form exhibits several issues common to governmentally-mandated standby letter of credit forms. First, letters of credit are interpreted according to rules of practice, and a letter of credit may incorporate one Task Force on Governmentally-Mandated Standby Letters of Credit The State of West Virginia, like other government agencies, allows standby letters of credit to be used to support certain obligations. Those agencies become beneficiaries of the letters of credit and require that the letter of credit be issued in a mandated form that the agency drafts. of two primary sets of rules of practice: the Uniform Customs and Practice for Documentary Credits (UCP) or the Inter- national Standby Practices (ISP98). It is apparent that many governmental entities are simply inexperienced with letter of credit rules and practice and choose no rules or rules of practice that are not ideal for standby letters of credit. The wage bond form does not state that either set of rules of practice are incorpo- rated into the letter of credit. Incorporat- ing a set of rules of practice—particularly ISP98, which was drafted for standby letters of credit—more clearly protects the parties’ rights and obligations. One of the Task Force’s goals is to educate both the agencies and their counterparties on the importance of those rules. Second, the wage bond form unnecessarily directly conflicts with letter of credit law. The wage bond form is titled, “Perpetual Irrevocable Letter of Credit”. According to the letter of credit, it “may only be terminated with the approval of the Com- missioner of the West Virginia Division of Labor. . . .” Other than stating that it is perpetual, the letter of credit gives no expiration date. West Virginia Code § 46-5-106(c) states, “If there is no stated expiration date or other provision that determines its du- ration, a letter of credit expires one year after its stated date of issuance...” Section 46-5-106(d) goes on to state that “[a] letter of credit that states that it is perpetual expires five years after its stated date of issuance...” According to Section 46-5-106, then, the wage bond should expire five years after its issuance (though that was not the holding in Leary). But what effect does the lan- guage of Section 21-5-14(g) have? If the State’s purpose was to ensure that the letter of credit would not expire until at least five years had passed, there is no reason that the letter of credit could not simply state an expiration date of five years (or more). There also is no reason that automatic extension clauses could not be used to ex- tend the expiration date. And if the letter of credit were made subject to ISP98, the letter of credit could include an extend or pay provision that protects the Department of Labor when the letter of credit is about to expire. In short, there is no reason that this form should so clearly conflict with By Jacob Manning, Dinsmore & Shohl LLP