Background
The most common use of an LOI is to permit delivery of cargo at the discharge port without production of the original bill of lading. The carrier is contractually and statutorily bound to deliver only against the bill, and is exposed to misdelivery liability and to loss of P&I cover if it delivers without it. The LOI from the receiver, supported by the receiver’s bank in some cases, is the carrier’s commercial protection: if a third party turns up with the bill claiming the cargo, the LOI funds the carrier’s defence and any liability. Other common uses include switch bills (issuance of a new bill in place of an existing bill), change of destination, broken seals, mate’s receipt issues, and clean-on-board issues at loading.
This article examines LOI fundamentals, the principal use cases, the comparison with bank guarantees, the BIMCO standard LOI wording, the enforceability of LOIs under English law, the P&I exclusions for LOI-based actions, the club rules on LOI, the fraudulent LOI risks, and the recent dispute patterns. The discussion is anchored in English law because of its dominance in international shipping contracts, with comparative notes on US and Singapore law where relevant.
LOI Fundamentals
A typical LOI has six structural elements. First, it identifies the requesting party (the party asking for the action) and the indemnified party (typically the carrier). Second, it identifies the action requested (e.g. “deliver the cargo without production of the original bills of lading”). Third, it sets out the indemnifying party’s undertakings: to indemnify against all losses, to provide funds for defence, to procure release of the indemnified party from any arrest or detention, and to deliver up the original bills of lading on receipt. Fourth, it sets out the consideration (typically the action itself). Fifth, it sets out the duration (typically until the original bills are produced, or for a defined period). Sixth, it sets out the governing law and dispute resolution (typically English law and English jurisdiction or London arbitration).
The LOI is a contract of indemnity, not a contract of guarantee. The distinction matters under English law: an indemnity is a primary obligation (the indemnifying party promises to indemnify in any event), while a guarantee is a secondary obligation (the guarantor promises to pay if the principal does not). The Statute of Frauds 1677 requires guarantees but not indemnities to be in writing; LOIs are typically in writing in any case, but the distinction affects construction and enforceability.
The LOI is typically given by the receiver to the carrier; in many transactions, particularly in the oil trade, the LOI is countersigned by a first-class international bank, converting the indemnity into a bank-backed undertaking. The bank countersignature dramatically increases the LOI’s commercial value, since the carrier now has recourse to the bank rather than only to the receiver, who may be a single-purpose company with limited assets.
When LOIs Are Used
The principal use cases for LOIs in shipping are:
Delivery Without Bills of Lading
The dominant LOI use case. In international trade, the bill of lading travels through the banking chain (issuing bank, advising bank, negotiating bank, presenting bank), often by courier, often with delays for documentary checks. The cargo, by contrast, sails directly to the discharge port. The discrepancy is particularly acute in short-haul trades (Persian Gulf to South Asia, intra-Mediterranean) where the voyage is shorter than the documentary cycle.
The receiver presents a delivery LOI to the carrier (typically through the carrier’s local agent), the carrier delivers the cargo, and the receiver undertakes to deliver up the original bills of lading on receipt and to indemnify the carrier against any third-party claim. The risk to the carrier is that a third party (a fraudster, a bank holding the bills as security, a financier with a claim against the receiver) may turn up later with the bills and demand the cargo or its value.
Switch Bills of Lading
Switch bills are bills of lading issued by the carrier to replace the original bills, typically to change the named consignee, the named shipper, or the named discharge port. Switch bills are commonly used in commodity trading where the cargo is sold and re-sold during the voyage, with each successive trader needing bills in its own name to present to its sub-buyer.
The carrier is exposed to misdelivery and to fraud risk when issuing switch bills, particularly because the carrier loses sight of the original bill chain. The LOI from the trader requesting the switch indemnifies the carrier against these risks. The BIMCO Switch Bill of Lading LOI is a standard form for this purpose.
Change of Destination
A change of destination after issuance of bills of lading requires the carrier to deliver to a port other than the bill’s named discharge port. The risk is that the original consignee at the original port may have a claim, and the carrier needs an LOI from the requesting party to cover this risk.
Broken Seals
Where seals on container shipments are found broken at delivery, the carrier may demand an LOI from the receiver before releasing the cargo, on the basis that the broken seals raise a presumption of cargo tampering and the receiver’s acceptance of the cargo without protest is being recorded by way of the LOI rather than by way of an unconditional receipt.
Mate’s Receipt and Clean-on-Board Issues
At loading, the master may have observations on cargo condition (rust, damage, pre-shipment defects) and may want to claus the bill of lading. The shipper, who needs a clean bill of lading for letter-of-credit presentation, may offer an LOI in exchange for the clean bill. This is a particularly fraught area because the LOI is essentially a contract to deceive the receiver, and most P&I clubs decline cover for such LOIs (see below).
Bank Guarantees vs LOIs
The choice between an LOI and a bank guarantee depends on the parties’ commercial position and the carrier’s risk tolerance.
A bare LOI from the receiver is a contract between two private parties. Its enforceability depends on the receiver’s solvency and willingness to perform. In a dispute, the carrier’s recourse is litigation or arbitration against the receiver, with all the cost and delay that entails.
An LOI countersigned by a bank converts the indemnity into a bank-backed undertaking. The carrier’s recourse is to the bank, which has assets and reputation. The bank typically charges a fee (a fraction of one per cent of the cargo value) and requires its own security (a counter-indemnity from the receiver).
A bank guarantee is a separate document by which the bank guarantees the receiver’s obligations under the LOI. The mechanics are similar to a bank-countersigned LOI, but the legal architecture is different (a guarantee is a secondary obligation, an indemnity is primary).
In high-value cargoes (oil, LNG, refined products), bank-countersigned LOIs are the market standard, and most carriers will not deliver without one. In lower-value cargoes (containerised goods, dry bulk parcels), bare receiver LOIs are sometimes accepted, particularly where the receiver is a known and well-financed counterparty.
LOI Wording: BIMCO Standards and Individual Variants
BIMCO publishes standard LOI forms for the most common situations. The principal BIMCO LOIs are:
- BIMCO Letter of Indemnity for Delivery of Cargo Without Production of Bills of Lading (Form A: receiver’s LOI; Form B: receiver’s LOI countersigned by bank).
- BIMCO Letter of Indemnity for Delivery of Cargo at Port Other Than That Stated in the Bill of Lading.
- BIMCO Letter of Indemnity for Delivery of Cargo Without Production of Bills of Lading and at Port Other Than That Stated in the Bill of Lading.
- BIMCO Switch Bill of Lading Letter of Indemnity.
The BIMCO forms have several common features: the indemnity covers all losses, damages, costs, expenses, and liabilities (including legal costs); the indemnifying party undertakes to provide funds on demand for defence and settlement; the indemnifying party undertakes to procure release of the vessel from arrest or detention; the indemnity continues until the original bills are delivered up; the LOI is governed by English law and subject to English court or London arbitration jurisdiction.
Individual carriers and traders have their own LOI variants, often based on the BIMCO templates with carrier-specific modifications. Major oil companies and trading houses have proprietary LOI forms that they expect counterparties to use. The market practice is sufficiently standardised that most LOIs are recognisable variants of a few master texts.
Enforceability Under English Law
LOIs are generally enforceable under English law as contracts of indemnity. The leading principles, drawn from a substantial body of case law, are:
The LOI is a primary obligation, enforceable on its terms regardless of the existence or non-existence of any underlying liability of the carrier. The carrier need only show that it has acted in accordance with the LOI’s request and has incurred liability (or a credible claim of liability) for the LOI to be triggered. The leading authority is The Bremen Max [2008] EWHC 2755 (Comm), which confirmed the broad scope of indemnity LOIs.
The LOI’s “deliver up the original bills” undertaking is specifically enforceable: the carrier may obtain an injunction requiring the indemnifying party to procure the bills, and if the bills cannot be procured, the indemnifying party must continue to indemnify until the limitation period for misdelivery claims has expired (typically six years under English law, or one year under Hague-Visby Rules where they apply).
The LOI is not generally voidable for illegality, even where the underlying transaction is unusual or unconventional, unless the LOI itself is part of a fraudulent scheme. In The Stena Nautica (No 2) [1982] 2 Lloyd’s Rep 336 and subsequent cases, the courts have been reluctant to inquire into the underlying commercial purpose.
However, the LOI may be unenforceable where its purpose is to facilitate a fraud on a third party, or where it is given in connection with a “clean” bill of lading that the LOI’s giver knew to be false. The Brown Jenkinson v Percy Dalton [1957] 2 QB 621 case established that an LOI given in exchange for a clean bill of lading where the cargo was known to be defective is unenforceable as a contract to deceive, even though both parties to the LOI knew the truth.
P&I Exclusions for LOI-Based Actions
P&I clubs traditionally exclude cover for liabilities arising from delivery of cargo without production of bills of lading. The rule is fundamental: clubs cover the carrier’s normal contractual and tortious liabilities, but they do not cover liabilities the carrier has voluntarily assumed by ignoring the bill of lading regime.
The exclusion is found in the Rules of all International Group clubs. For example, the UK P&I Club Rule 19(13) (or its equivalent in other clubs’ rules) excludes cover for:
“liabilities, costs and expenses arising out of the discharge or delivery of cargo at a port or place other than the port or place provided for in the contract of carriage, or without production of the original bill of lading or other document of title or, in the case of a non-negotiable bill of lading or sea waybill, otherwise than in accordance with the provisions of that bill or waybill”.
The exclusion is broad and self-enforcing: the carrier that delivers without bills loses club cover for that delivery, regardless of the existence of an LOI. The LOI is the carrier’s commercial protection; the club is no longer the carrier’s protection on this risk.
The practical consequence is that the carrier must rely entirely on the LOI for protection against misdelivery claims. If the LOI is bare (uncountersigned by a bank), the carrier’s protection is only as good as the receiver’s solvency. If the LOI is bank-backed, the carrier’s protection is the bank’s credit. In either case, the club will not step in.
Club Rules on LOI
Beyond the misdelivery exclusion, club rules address LOIs in several specific contexts:
Clean bills against LOI: clubs generally exclude cover where the carrier issues a clean bill of lading in circumstances where the master has identified cargo defects and the shipper has provided an LOI. The Brown Jenkinson principle is reflected in club rules (e.g. UK Club Rule 19(2) and equivalents).
Switch bills: clubs typically maintain cover for switch bills properly issued in accordance with the carrier’s standard procedures, but require the carrier to follow defined procedures (verifying the original bills, ensuring the switch is at the request of a person entitled to the bills, taking up the original bills against the new ones).
Change of destination: clubs typically require the carrier to obtain an LOI before changing destination and may require the club’s specific approval for high-value cargoes.
Broken seals: clubs typically require the carrier to issue protest letters and to take photographs of broken seals, and the LOI from the receiver supplements rather than replaces the carrier’s documentary protection.
The clubs publish “circulars” updating these rules, and the IG club correspondence (the Pooling Agreement and the IG Reinsurance Programme) ensures consistency across the major clubs.
Fraudulent LOI Risks
The LOI system depends on the integrity of the parties giving and receiving LOIs. Fraudulent LOIs (forged signatures, fabricated bank countersignatures, identity theft) have been a persistent problem, particularly in high-value commodity trades and in trades involving less-regulated banking jurisdictions.
Major fraud incidents in recent decades include:
- The 2014 Qingdao copper financing fraud, in which the same physical cargo was financed multiple times against multiple sets of warehouse receipts and bills of lading, with fraudulent LOIs facilitating the deception.
- The 2018 Singapore oil trading collapses (Hin Leong, Hontop), in which fraudulent LOIs were used to obtain release of cargoes that had already been pledged to other lenders.
- Recurring container-trade frauds where LOIs are used to extract cargoes from carriers without the genuine consent of the cargo owner.
The carrier’s protection against fraudulent LOIs lies in counterparty due diligence, in independent verification of bank countersignatures (calling the issuing bank’s documentary credits department), and in robust internal procedures. The major carriers and the major P&I clubs maintain shared databases of suspicious counterparties and known frauds.
Recent Disputes
Recent LOI disputes have addressed several recurring themes:
Quantum and proof of loss: the indemnified party must prove the loss it has suffered. In The Songa Winds [2018] EWHC 397 (Comm) and related decisions, the courts have addressed the quantum of indemnification, including the carrier’s costs of defending itself against third-party claims.
Counterparty insolvency: where the receiver giving the LOI becomes insolvent, the carrier’s recovery depends on whether a bank countersignature exists and on the nature of any counter-indemnity. The Hin Leong-related litigation has produced extensive discussion of these issues.
Sanctions interaction: where the underlying trade is sanctioned (Russian crude, Iranian product), an LOI given in connection with the trade may be unenforceable as a matter of sanctions compliance. The London commercial court has addressed several Russian-cargo-related LOI disputes since 2022.
Bills of lading “production” through electronic systems: the rise of electronic bills of lading (e-B/Ls) under platforms approved by the IG (e.g. essDOCS, Bolero, edoxOnline, WAVE) reduces the need for physical-bill LOIs in some trades, but introduces new questions about what constitutes “production” of an electronic bill. The Electronic Trade Documents Act 2023 (UK) provides a statutory basis for treating e-B/Ls as the equivalent of paper bills.
Related Wiki Articles
- Bill of Lading
- Voyage Charter Party
- Time Charter Party
- Statement of Facts
- Notice of Readiness
- Force Majeure in Shipping
- Demurrage
- Classification Society
See also
Related wiki articles
References
- BIMCO Letter of Indemnity for Delivery of Cargo Without Production of Bills of Lading (Forms A and B)
- BIMCO Letter of Indemnity for Delivery of Cargo at Port Other Than That Stated in the Bill of Lading
- BIMCO Switch Bill of Lading Letter of Indemnity
- Hague-Visby Rules 1968 (as enacted in the Carriage of Goods by Sea Act 1971 (UK))
- US Carriage of Goods by Sea Act 1936 (COGSA)
- English Marine Insurance Act 1906
- English Statute of Frauds 1677
- English Sale of Goods Act 1979
- Electronic Trade Documents Act 2023 (UK)
- Brown Jenkinson v Percy Dalton (London) Ltd [1957] 2 QB 621
- The Bremen Max [2008] EWHC 2755 (Comm)
- The Stena Nautica (No 2) [1982] 2 Lloyd’s Rep 336
- The Songa Winds [2018] EWHC 397 (Comm)
- Aikens, Lord and Bools, Bills of Lading (3rd edn)
- Treitel and Reynolds, Carver on Bills of Lading (4th edn)
- Cooke et al, Voyage Charters (5th edn)
- UK P&I Club Rules
- North Standard Club Rules
- Gard Rules
- Steamship Mutual Rules
- International Group of P&I Clubs, Pooling Agreement
- International Group of P&I Clubs, Approved Electronic (Paperless) Trading Systems
- ICC Uniform Customs and Practice for Documentary Credits (UCP 600)
- ICC International Standard Banking Practice (ISBP 745)