Standby Letters of Credit (SBLC) in Bolivia: Legal and Practical Guide

Essential Legal Characteristics

Autonomy and Independence: The bank’s obligation is independent from the underlying contract. The issuing bank does not analyze the merits of the contractual dispute but only verifies documentary compliance.

Documentary Nature: Payment depends strictly on the presentation of the required documents in the form and within the time limits established in the SBLC.

Contingent Character: It is triggered only upon default, functioning as a guarantee rather than as an ordinary means of payment.

This structure aligns with the constitutional principle of freedom of enterprise and contractual autonomy recognized by the Political Constitution of the State (2009), ensuring lawful economic activity and legal certainty in commercial relationships.

What Is an SBLC Used For? Common Uses in the Bolivian Market

In Bolivia, SBLCs are primarily used in transactions involving significant financial risk and the need for strong banking security.

Payment Guarantee

If the buyer fails to pay the agreed price, the seller may draw under the SBLC by presenting the required documentation (e.g., a formal declaration of default).

Performance Guarantee

In construction or specialized service contracts, the SBLC allows the contracting party to enforce the guarantee if the contractor fails to meet technical obligations or deadlines.

Advance Payment Guarantee

Where a substantial advance is granted, the SBLC secures reimbursement in the event of supplier default.

Lease and Long-Term Corporate Contracts

In corporate lease agreements, an SBLC may replace large security deposits, preserving liquidity for the lessee.

These applications are grounded in the general regime of obligations established in the Bolivian Civil Code (1975), which governs contractual breach and liability for damages.

Difference Between an SBLC and a Commercial Letter of Credit

Although both are documentary instruments, their purposes differ:

Commercial Letter of Credit: Operates as the regular method of payment in a sale of goods transaction.

SBLC: Functions as a contingent guarantee activated upon default.

In practical terms, the commercial letter of credit forms part of the normal transaction flow, whereas the SBLC serves as a risk mitigation mechanism.

Applicable Legal Framework for SBLCs

The regulatory framework operates at two complementary levels: international and domestic.

International Rules

In international banking practice, SBLCs are typically subject to uniform rules issued by the International Chamber of Commerce, mainly:

• ISP98 (International Standby Practices).
• UCP 600 (Uniform Customs and Practice for Documentary Credits).

These rules provide standardized interpretation and banking practices. Their application depends on express incorporation in the SBLC text.

Bolivian Legal Framework

Domestically, SBLCs are governed by:

• Financial system regulation and banking supervision under the Authority for Supervision of the Financial System, pursuant to the Financial Services Law (2013).
• Civil and commercial law, particularly in matters of obligations, contracts, and liability for breach.
• Foreign trade and international transfer regulations when correspondent banks are involved.
• Civil procedural rules applicable in case of judicial disputes or precautionary measures.

Additionally, international treaties ratified by the Bolivian State, in accordance with constitutional hierarchy principles, may impact cross-border enforcement or recognition of arbitral awards.

Legal Risks and Preventive Measures

Although the SBLC is an efficient instrument, improper drafting may generate disputes.

Abusive Drawing

This may occur when the beneficiary draws on the SBLC despite an existing contractual dispute. To mitigate this risk, the required documents must be clearly and precisely defined.

Documentary Ambiguity

If the drawing clause lacks clarity, the bank may refuse payment or litigation may arise.

Governing Law and Jurisdiction

It is advisable to expressly establish:

• The applicable international rules (ISP98 or UCP 600).
• The substantive law governing disputes.
• The competent jurisdiction or arbitration clause.

Proper technical drafting significantly reduces litigation risk.

When Is It Advisable to Use an SBLC?

An SBLC is generally recommended when:

• The contractual amount is substantial.
• There is a real risk of default.
• The counterparty is foreign.
• A bank guarantee is required to enable the transaction.

It may not be suitable where the financial cost is disproportionate to the risk or where sufficient contractual guarantees already exist.

In summary, the Standby Letter of Credit is an effective legal and financial tool to mitigate contractual risks, provided that its structure respects the principle of documentary autonomy, incorporates clear international rules, and is coherently integrated into the underlying contract. In Bolivia, its effectiveness depends on both the financial regulatory framework and the proper application of civil obligations law and sound drafting technique.