Letter of Indemnity (LOI)
A letter of indemnity is a written promise to compensate another party for any loss caused by acting on a request. In shipping it is what a receiver gives a carrier to obtain delivery of cargo without presenting the original bill of lading.
Also called: LOI for delivery without bill of lading · bank letter of indemnity · back letter · indemnity letter
A carrier is meant to deliver cargo only against an original bill of lading. If it delivers to someone else and the true holder of the bill later appears, the carrier is liable for misdelivery. Yet cargo often arrives before the bills, especially on short voyages or where the bills are moving through banks under a letter of credit or along a chain of traders. The carrier can wait, which runs up demurrage, discharge into storage, or deliver against a letter of indemnity. The last is the most common.
The International Group of P&I Clubs publishes standard wordings. The UK P&I Club's guidance is blunt: liabilities from delivering without the original bill are not covered by P&I insurance, and obtaining an LOI does not restore that cover. The carrier is relying on the creditworthiness of whoever signs, so the clubs recommend that the indemnity be countersigned by a first-class bank. An LOI given in exchange for a false statement on a bill, such as a clean bill for damaged goods, was held unenforceable in Brown Jenkinson v Percy Dalton (1957).
For the bank, a countersignature is a contingent liability tied to the value of the cargo, so it is treated like a guarantee: it needs a credit line, often security, and the bank wants the original bills surrendered to the carrier as soon as they surface. An electronic bill of lading that reaches the buyer before the ship reduces the need for LOIs altogether.
In practice
An LOI moves risk between parties; it does not remove it. If the indemnifier cannot pay, the carrier faces the misdelivery claim alone and without P&I cover.
Example
A cargo of soybean meal worth US$12 million reaches port while the bills of lading are still passing between banks under a letter of credit. The receiver asks for immediate discharge and provides an LOI on the standard wording, countersigned by its bank. Three weeks later the bills arrive and are surrendered to the carrier, and the LOI is returned and cancelled.
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Commonly confused with
| Term | How it differs |
|---|---|
| Letter of intent | A letter of intent, also abbreviated LOI, records the outline of a proposed deal before contracts are signed. A letter of indemnity is a binding promise to cover another party's losses. |
See also
- Bill of LadingA bill of lading is a transport document issued in connection with the carriage of goods by sea. Depending on its form, it can evidence receipt of the goods, contain the carriage terms and function as a document controlling delivery.
- DemurrageDemurrage is a charge for keeping a ship or a cargo container beyond the free time allowed. Under a charterparty it compensates the shipowner when loading or discharge overruns the agreed laytime; in container shipping it is a daily fee for boxes left at the terminal.
- Letter of CreditA letter of credit is a bank’s conditional undertaking to pay when the seller presents documents that comply with its stated terms. Banks examine documents rather than confirming the physical quality or performance of the goods.
- Document of TitleA document of title is a document whose holder is treated, in law or commercial practice, as entitled to receive and deal with the goods it covers, so that transferring the document transfers control of the goods themselves.
- Electronic Bill of LadingAn electronic bill of lading is a bill of lading created, held and transferred as an electronic record on a system that ensures only one party controls it at a time, so that it can do the job of a paper original, including as a document of title.