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Appendix R - Policy on the Use of Standby Letters of Credit as an Alternative to Bid or Contract Security for Federal Government Contracts

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Published March 6, 1998. This appendix contains mandatory instructions.

1. Definitions

1.1 For the purpose of this policy, a standby letter of credit (hereinafter referred to as "letter of credit") means any arrangement, however named or described, whereby a financial institution (the "Issuer"), acting at the request and on the instructions of a customer (the "Applicant"), or on its own behalf, is to make a payment to or to the order of the Crown, as the beneficiary, or is to accept and pay bills of exchange drawn by the Crown, or authorises another financial institution to effect such payment, or accept and pay such bills of exchange, or authorises another financial institution to negotiate, against written demand(s) for payment, provided that the terms and conditions of the letter of credit are complied with.

1.2 A bid support letter of credit is a letter of credit pursuant to which demand may be made if the proposed contractor refuses or fails to enter into a written contract in accordance with the terms and conditions of the bid or fails to provide the required contract security.

1.3 A contract support letter of credit is a letter of credit pursuant to which demand may be made if the contractor, having entered into a contract with the Crown, does not perform the contract in accordance with the terms and conditions of that contract.

1.4 The expression "member of the Canadian Payments Association" is defined in the Canadian Payments Association Act.

1.5 The expression "UCP" means the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No 500.

2. Nature of Letters of Credit

2.1 The UCP provides that letters of credit, by their nature, are separate transactions from the contracts on which they may be based and financial institutions are in no way concerned with or bound by such contracts, even if any reference whatsoever to such contracts is included in the letters of credit. In letters of credit operations, all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate.

2.2 The undertaking of a financial institution to pay, accept and pay bill(s) of exchange or negotiate and/or to fulfil any other obligation under the letter of credit, is not subject to claims or defences by the Applicant resulting from its relationships with the financial institution or the Crown.

3. Policy on use of Letter of Credit

3.1 A letter of credit which is issued by a financial institution which is a member of the Canadian Payments Association, may be accepted by a contracting authority either to provide an incentive for entry into or performance of a contract, or to provide a source of funds to mitigate damages if the successful bidder fails to enter into or perform the contract.

3.2 An irrevocable letter of credit which is issued by a financial institution (the "Issuer") which is not a member of the Canadian Payments Association is acceptable provided it is confirmed by a financial institution (the "Confirmer") that is a member of the Canadian Payments Association and is otherwise in compliance with this policy.

3.3 A revocable letter of credit is one that may be amended or cancelled by the Issuer at any moment and without prior notice to the Crown as beneficiary. The Crown shall only accept letters of credit that clearly specify that they are irrevocable or are deemed to be irrevocable pursuant to article 6 c) of the UCP.

3.4 A letter of credit described in this section may be accepted as an alternative to bid or contract security for all contracts.

3.5 A letter of credit shall:

• state the face amount which may be drawn against it;
• state its expiry date;
• provide for sight payment to the Receiver General for Canada by way of the financial institution's draft against presentation of a written demand for payment signed by the authorized departmental representative identified in the letter of credit by his\her office;
• provide that more than one written demand for payment may be presented subject to the sum of those demands not exceeding the face amount of the Letter of Credit;
• provide that it is subject to the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No 500.

4. Form of Letter of Credit

4.1 The letter of credit may be issued or confirmed in either official language and shall be on the letterhead of the Issuer or Confirmer. The format is left to the discretion of the Issuer or Confirmer.

5. Determination of Face Amount and Term of a Letter of Credit

5.1 The face amount of a bid or contract support letter of credit for all types of contract is to be determined by the contracting authority, taking into account pertinent factors, such as the inherent risks of the contract and the custom generally accepted in the particular profession or trade involved.

5.2 The face amount of a contract support letter of credit may be increased or reduced commensurate with the change in risk that has occurred. The face amount may be changed by an amendment to the letter of credit. Alternatively, the letter of credit may contain an express provision for change by a specified or determinable amount or amounts on a specified date or dates or upon presentation of the document(s) specified for this purpose such as an interim certificate of completion.

5.3 Any letter of credit received by the Crown must have an appropriate expiry date. The letter of credit should not have its expiry coincide with the projected cessation of the risk which it covers: for instance, the expiry date stated in the letter of credit should not be the same date as that which is projected for the award of the contract or the completion of the work. Rather, the expiry date should allow for a comfortable turn-around time from the estimated date of award of contract or completion of the work, to ensure that the contracting authority is satisfied that the bidder or contractor has discharged its obligations for which the letter of credit was provided. If the contractor has not met its obligations, the contracting authority must have sufficient time to prepare and present the required demand for payment under the letter of credit.

6. Payment of a Letter of Credit

6.1 After an offer is accepted within the specified time after the closing date for bidding, and if the contractor refuses to enter into the contract or refuses or is unable to furnish any required contract security or contract support letter of credit, the Crown may demand payment under the bid support letter of credit in accordance with its terms. Proceeds from the letter of credit shall be applied in accordance with the terms and conditions governing the bid solicitation.

6.2 During the performance of a contract, if the contractor does not comply with all the terms and conditions of the contract, the Crown may demand payment under the contract support letter of credit in accordance with its terms. Proceeds from the letter of credit shall be applied in accordance with the terms and conditions of the contract.

6.3 The Crown demands payment under the terms and conditions of a letter of credit by presenting one or more written demand(s) for payment, signed by an authorized departmental representative identified in the Letter of Credit by his office.

7. ICC Uniform Customs and Practice for Documentary Credits

7.1 The letters of credit used pursuant to this policy must contain reference to and follow the practices of the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, 1993 Revision in force since January 1, 1994, known as ICC Publication No 500.

8. Safekeeping

8.1 Where a Letter of Credit is received by a contracting authority, the contracting authority shall hold the Letter of Credit in a place adequate for safekeeping.