Irrevocable letter of credit (procurement)

In Canadian federal procurement, an irrevocable standby letter of credit is one of the accepted forms of security deposit — a bank's written undertaking to pay Canada on demand, used both as bid security and as contract security. It is the cash-equivalent alternative to a surety bond: the buyer draws against it directly, so the issuer's obligation does not depend on proving a default first.

What the SACC manual says

PSPC's Standard Acquisition Clauses and Conditions (SACC) Manual defines a "security deposit" as a bill of exchange payable to the Receiver General for Canada and certified (or drawn) by an approved financial institution; or a government guaranteed bond; or an irrevocable standby letter of credit; or such other security as the Contracting Authority considers appropriate and Treasury Board approves. SACC defines the instrument as "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 behalf, will make a payment to or to the order of Canada, as the beneficiary" — accepting and paying bills of exchange drawn by Canada, or authorizing another financial institution to do so, against written demand(s) for payment provided the conditions of the letter of credit are complied with.

What a compliant letter of credit must contain

The SACC text sets out mandatory elements for the letter of credit used as a security deposit: it must 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; and permit more than one written demand for payment, subject to the sum of demands not exceeding the face amount. It must be subject to the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits (the 2007 Revision, ICC Publication No. 600, in the current SACC text) — and, pursuant to the ICC UCP, a credit is irrevocable even if there is no indication to that effect. Finally, it must be issued or confirmed, in either official language, by a financial institution that is a member of the Canadian Payments Association (Payments Canada), on the letterhead of the Issuer or Confirmer; the format is left to the issuer's discretion.

How Canada draws on it

For bid security, SACC provides that if a successful bidder refuses to enter into contract, the amount of the security deposit will be forfeited to Canada or a demand for payment will be made against the letter of credit — and the amount forfeited or demanded will not exceed the difference between the bid price and the amount of the contract awarded. The same instrument can back contract security after award, with SACC text accepting security deposits (including irrevocable standby letters of credit) to a stated percentage of the contract price. If your letter of credit is your bid security, watch the expiry date against award timelines: a competition that slips past your expiry date leaves you replacing the instrument or bidding without compliant security.

Common questions

Letter of credit vs. bid bond — do I get to choose?

Federal buyers must let offerors choose the form of offer financial security they provide — surety bonds (bid bonds) or security deposits such as government guaranteed bonds, bills of exchange, or irrevocable standby letters of credit — per PSPC's guidance described in our bid security and bid deposit definitions. The choice is economic: a bid bond draws on a surety's bonding line for a premium; a letter of credit occupies your bank credit capacity.

Why does it say "standby"?

Standby means the credit sits unused unless the beneficiary (Canada) makes a compliant demand — the procurement equivalent of the fire extinguisher behind glass. This differs from a commercial documentary letter of credit, which is the expected payment mechanism in a trade transaction. Federal tenders ask specifically for the standby form.

Does "irrevocable" matter if the wording omits it?

Under the ICC Uniform Customs and Practice, a credit is irrevocable even if there is no indication to that effect — but SACC still requires the credit to follow the UCP, so the safest course is wording that tracks the SACC elements exactly: face amount, expiry date, Receiver General sight payment, multiple demands up to the face amount, Payments Canada member issuer, either official language, letterhead.

Related definitions

Bid security · Bid deposit · Performance security · Consent of surety