A perpetual letter of credit (LOC) does not last as long as you might think. In physics “perpetual motion” is movement that goes on forever. Commercial law is less ambitious. Under U.C.C. § 5-106(d), a “perpetual” LOC expires after five years. To further complicate the issue, a recent case from the 9th Circuit held that a LOC that continues indefinitely is not “perpetual.”
According to Golden West Refining Co. v. SunTrust Bank, 538 F.3d 1233 (9th Cir. 2008), a letter of credit is only “perpetual” if that word is used explicitly. Under U.C.C. § 5-106(d), “[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.” In Golden West the bank argued that its LOC was “perpetual” and had expired 5 years after it had been issued. Its LOC terminated after 1 year, but “automatically renewed” if the lender did not elect to terminate it. The 9th Circuit rejected the bank’s argument. It found that “a letter of credit is only perpetual if it expresses in words that it is perpetual.” Because the LOC in question terminated after a year and did not explicitly state that it was perpetual, it was not “perpetual” under U.C.C. § 5-106(d) and did not terminate after 5 years.
Golden West has not been cited by any court outside the 9th Circuit yet. Although not binding on states outside the 9th Circuit, its holding is instructive for anyone drafting a LOC, at least until there is further law interpreting perpetual LOCs. Accordingly, if you want a LOC to last indefinitely, state that it “renews automatically.” But if you want it to be “perpetual” and expire after 5 years, use the word “perpetual.”