Q: Because our agency's cash sales have recently increased, ARC is requiring that we increase our letter of credit from $20,000 to $25,000. ARC sent the notice of the required increase a couple of months ago. Our bank told us that it would notify ARC that the existing letter of credit will be terminated and that the bank would issue a whole new letter of credit for $25,000. Apparently, the bank gave the notice of cancellation but neglected to follow through with issuing the new letter of credit. We forgot to follow through, too, by making sure that the bank was doing what it committed to do. So, as of this morning, we have no letter of credit. Is this a serious problem? How much time do we have to get this problem fixed? What will happen to us if we don't fix it today? Could the bank be liable for any loss we suffer?
A: Having no letter of credit in effect and on file with ARC, even for a day, is a serious matter. ARC places your agency in default, withdraws your ticket stock and airline plates, notifies all ARC-participating carriers and requires your GDS to inhibit ticketing.
If you remain in default for 30 days, ARC terminates your agency. This is the same routine that ARC follows with agencies that bounce ARC drafts and do not cover them by cashier's check or wire transfer.
Since you will certainly get your bank to solve the problem within a few days, it might sound like being declared in default for a few days is no big deal. However, you would be wrong.
The big problem with being declared in default is that one or more major carriers might unilaterally decide to withdraw their plates when they get ARC's notice, which means you will no longer have authority to issue tickets on those carriers, even after ARC withdraws its default.
In my experience, the major carrier that most often ceases to do business with agencies declared in default is British Airways. If BA withdraws its ticketing authority, you might never get it back.
Other major carriers might take similar action following ARC's notice of default. ARC cannot stop them or force them to reinstate you.
To avoid such an unfortunate outcome, you could ask ARC for a grace period of a day or two to get the new letter of credit or alternative security in place.
Aside from a surety bond, which will take many days to get into place, there is a step you can take in just a day or two of scrambling, if ARC will agree to the grace period.
In lieu of a letter of credit or surety bond, you can send ARC a cashier's or certified check for the required $25,000, along with a $100 fee for the privilege of having ARC hold your money permanently, interest-free.
Finally, there is yet another downside to letting your letter of credit be canceled. Just before termination, ARC will draw on your letter of credit for the full amount. Your bank might then require more collateral from you before it issues a new letter of credit.
Your bank could be liable for any loss that you suffer, unless your letter of credit agreement absolved the bank of liability, which would not surprise me.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].