Risks of Letter of Indemnity (LOI)

As well as the risk that an LOI will be an illegal contract and thus unenforceable, the beneficiary of an LOI runs other risks: • The creditworthiness of the LOI provider – it is possible that the LOI beneficiary will not have an opportunity to examine the creditworthiness of the LOI provider. Even if he does, that is no guarantee that the LOI provider will be able to pay. In a case of discharge without production of bills of lading, the goods may be worth millions of dollars. The beneficiary may then find out that the reason the bills of lading were not collected by the LOI provider was that he did not have funds to pay for the goods. He will not then be able to pay the beneficiary, even if he is liable to under the LOI. • The LOI providers may argue that the beneficiaries’ losses would have occurred anyway and did not occur as a result of doing what the LOI provider asked. • Some P&I Clubs consider the acceptance of any LOI (even an enforceable LOI) to be a breach of their rules and they may cancel their P&I cover. Thus, an owner may lose P&I cover for crew claims, cargo damage etc unconnected with the circumstances of the LOI.