Piotr Cichocki May 2026
Secro Inc. – Maritime & Trade Solutioning, Managing Director
LOI. Syndrome or Solution?
Letters of Indemnity in commodity trade: what digitalization can – and cannot – fix.
I. The instrument nobody wants and everybody uses
Ask any commodity trader, shipowner, or trade finance banker whether Letters of Indemnity are a good thing. The answer is almost always the same: they are a necessary evil, a workaround, a symptom of something broken. And yet they appear in virtually every bulk commodity trade at some stage – under charter parties, under financing agreements, across all cargo types and all trade lanes. The instrument that nobody wants is the one everybody uses.
The received wisdom in digital trade circles is straightforward: electronic Bills of Lading (eBL) will make Letters of Indemnity (LOI) obsolete. If the document can be transferred instantaneously, the gap between physical delivery and documentary availability disappears, and with it the need for indemnity. This paper tests that proposition honestly.
Two categories of LOI are examined here. The first is the Charter Party LOI, issued by a Charterer to a Shipowner authorising discharge of cargo without production of an original Bill of Lading (BL) at the port of discharge. The second is the Financial LOI, issued by a Seller to a financing institution – a bank, custodian, or trade finance counterparty – where the parties to a Sale and Purchase Agreement (SPA) have agreed to process payment against an LOI pending delivery of original documents. These are distinct instruments with distinct legal characters, distinct obligors, and distinct risk profiles. Conflating them produces bad analysis – and bad conclusions about what eBL adoption actually changes.
The central argument of this paper is this: LOI is sometimes a syndrome – a symptom of documentary lag that digitalization can compress. And it is sometimes a solution – a planned instrument within a functioning trade finance structure that digitalization does not remove, and was never designed to remove. Honest engagement with eBL adoption requires being clear about which is which.
II. What LOI actually is – and what it is not
A Letter of Indemnity is not a document of title. It is an indemnity instrument: one party accepts liability for consequences that would otherwise fall on another, in exchange for that other party acting without the documentary protection they would ordinarily require. Its enforceability depends entirely on the credit and legal standing of the party issuing it, and in some cases on a bank counter-guarantee that converts the issuer’s personal undertaking into a bank-backed obligation.
The Charter Party LOI and the Financial LOI share a name and a general structure but operate in different legal relationships. The Charter Party LOI is issued by – in principle – a Charterer to a Shipowner, requesting discharge of cargo at the port of destination without surrender of the original BL. The Shipowner’s obligation under the contract of carriage is to deliver cargo against presentation of the original; agreeing to discharge without it exposes the Shipowner to a claim from any subsequent holder of that original. The LOI transfers that exposure to the issuer. Some charter parties go further and oblige the Shipowner to discharge against LOI as a matter of contractual obligation rather than commercial discretion – a reflection of how embedded the instrument has become in bulk trade practice.
The Financial LOI operates differently. It is issued by a Seller to a financing institution – a bank acting as custodian, collecting bank, issuing bank, or facility agent – in circumstances where parties to Sale and Purchase Agreement (SPA) agreed to process payment based on Seller’s Financial LOI covering scenario of a delay in delivery of documents’ originals or of their non-delivery. The beneficiary here is not a carrier but a financial counterparty. The indemnity covers the bank’s exposure in the event of fraud, loss, or divergence between physical delivery and documentary flow. The risk profile is fundamentally different from the Charter Party context: the bank’s exposure may be larger, its ability to assess the underlying position more constrained, and the duration of the indemnity potentially longer.
III. The document set condition
A BL does not travel alone. Under SPA or a Letter of Credit (LC), the Seller’s obligation is typically to present a conforming set of documents – of which BL is one. The remainder of the set is assembled according to the terms of the contract and may include commercial invoices, certificates of origin, certificates of quantity and quality, cargo declarations, and other instruments as agreed between the parties.
For eBL’s instantaneous transferability to deliver its full promise – for the documentary lag to be genuinely eliminated – the entire agreed document set must be acceptable to the receiving party in digital or electronically authenticated form. Where an LC or SPA requires paper originals of companion documents, the eBL’s speed advantage is neutralized at the point of presentation. A bank examining a mixed set begins its review when the last conforming document in the set arrives – and if that document is a paper original in courier transit, the clock has not yet started. The eBL arrived instantaneously. The overall presentation did not.
IV. Documentary lag: where eBL changes the calculus
Charter Party LOI and documentary lag
The clearest case for eBL as an LOI remedy is also the most familiar one. A vessel arrives at the port of discharge. The cargo is ready for discharge. The Shipowner’s obligation is to deliver against surrender of the original BL. The original has not arrived – it is in transit through the banking chain, or delayed in issuance, or held pending instructions that have not yet been given. Demurrage may accrue. The Charterer issues an LOI. The Shipowner accepts and discharges. The instrument exists to bridge a gap that paper processing created.
In this scenario, eBL’s instantaneous transferability is directly relevant. The original eBL can be endorsed and transferred through every link in the documentary chain without courier transit, without banking dispatch delays, without the accumulated friction of paper handling. Where the gap between vessel arrival and document availability is caused by processing speed, eBL closes that gap.
The condition established in Section III applies here too. Where the BL is one of several documents that must accompany the cargo’s release – under Port Authority requirements, Customs procedures, or contractual terms – the overall documentary position depends on the speed of the slowest instrument in the set. eBL eliminates its own processing time. It does not accelerate the remainder.
Financial LOI and documentary lag
The same logic applies to the Financial LOI in its documentary lag form. Where a Seller is obligated to deliver BL to a financing institution – as a condition of payment under open terms, as the instrument triggering release under a documentary collection, or as part of a conforming presentation under a Letter of Credit – delay in the document’s availability creates the same type of gap as in the charter party context.
Across financing structures – open payment terms, documentary collection, and Letters of Credit – eBL’s instantaneous transferability directly removes the Financial LOI wherever documentary lag is the cause, provided the agreed document set meets the digital acceptability condition and every node in the chain has adopted such format. Documentary collection requires both Remitting and Collecting Banks to accept the electronic record; where either reverts to paper, the transit delay is restored. Under LC terms, eBL removes the non-availability LOI, but the examining bank’s contractual right under UCP 600 Article 14(b) to take up to five banking days for documentary review is unaffected by document format – the Seller’s payment timeline remains governed by the examination period, not by document delivery speed. Some Letters of Credit already anticipate this reality explicitly, providing for payment against a commercial invoice and LOI where the full document set is not available by the due date – a practical acknowledgement that documentary lag and payment timing are separate problems requiring separate instruments. One exemplary trade practice deserves note here. In FOB sales of agricultural commodities from South America, it is common for the Seller to obtain payment against a Mate’s Receipt rather than an original BL. The original BL itself may be issued days after the shipped-on-board date, on the Buyer’s or Trader’s instructions, as a matter of commercial practice rather than process failure. This is documentary lag that is intentional – the deferral of the BL issuance is a feature of the trading arrangement, not a malfunction of the documentary chain. eBL’s instantaneous transferability compresses the processing time once instructions are given, but it does not – and cannot – substitute for the instruction itself.
V. Structural hold and trading-driven delay: where eBL does not remove the LOI
Custody and borrowing base financing
Not all LOIs arise from processing speed. In custody and borrowing base financing arrangements, a bank holds the BL not as a conduit passing the document toward the Buyer, but as a pledgee or security holder under a financing facility. The bank’s possession of the original constitutes its primary or contributory security interest in the cargo or its proceeds. The document does not flow toward the Buyer on delivery-against-payment logic. It is retained by the financing bank until the conditions of the facility are satisfied – repayment, proceeds assignment, compliance clearance, waterfall release, or mark-to-market confirmation.
In these structures, physical delivery of the cargo proceeds under a Charter Party LOI while the financing layer runs on its own timeline. The LOI is not plugging a gap in documentary processing speed. It is a planned instrument that allows the commercial transaction – physical delivery – to close while the financing transaction remains open. Eliminating documentary lag does not eliminate this LOI. The bank’s decision to retain the BL is not a function of document’s format; it is a function of the financing structure.
An eBL retained in a platform vault post-discharge is a legal artefact in a precise sense: it represents an enforceable record of the bank’s priority claim rather than a live possessory security over physical cargo that no longer exists. The goods are gone. What the bank holds is its claim over proceeds and other collateral that survive physical delivery. This is not unusual and not problematic – it is how these financing structures are designed to work. The Charter Party LOI in this context persists regardless of whether the BL is paper or electronic.
Trading-driven delay in instructions and issuance
A second category of structural delay is commercial rather than financial. Traders in commodity markets may defer instructions to issue BL for entirely legitimate reasons: ongoing price negotiation, cargo diversion to a different destination, title chain management across a back-to-back trading structure, or simply the sequencing of a multi-leg transaction. The instruction to issue the BL has not been given – not because the process is slow, but because the trading position has not yet been resolved.
In these cases, eBL’s instantaneous transferability is irrelevant. The instrument cannot be transferred before it is issued. The Charter Party LOI for non-availability at the port of discharge arises not from the speed of documentary processing but from the deliberate management of the trading position. This is not a failure of the documentary system. It is the documentary system accommodating commercial reality.
VI. Visibility, risk, and the confidentiality question
Across all the scenarios described above – whether the LOI is bridging documentary lag or accommodating a structural hold – one variable in the Shipowner’s decision to discharge against LOI has remained constant under paper practice: opacity. The Shipowner knows that an original BL exists. The Shipowner does not know where it is, who holds it, through how many hands it has passed, or what relationship exists between the current holder and the party requesting discharge. The decision to accept a Charter Party LOI is made under informational conditions that are structurally poor.
eBL changes this in a material way. As the issuing Carrier – or its authorised representative – the Shipowner is entitled to access the History Log of the eBL: the auditable record of its issuance, endorsements, transfers, and current status. Before deciding whether to discharge against a Charter Party LOI, the Shipowner can verify who currently holds the eBL, confirm whether the party requesting discharge has any documentary relationship to that holder, and assess the overall status of the instrument. This is not a marginal improvement in risk management. It is a structural change in the Shipowner’s informational position.
Traders, however, have a countervailing interest. BL whereabouts are commercially opaque under paper practice – who holds the document, through how many intermediaries it has passed, and when presentation is expected are signals about the trading position, potentially price-sensitive in active commodity markets. This opacity has no formal legal basis: no provision of applicable BL legislation or the MLETR grants a holder the right to conceal their identity from the Carrier. But it is embedded in market practice and dismissing it as legally unfounded does not make it commercially irrelevant.
The tension is real, but it is not irreconcilable. The visibility granted to Carrier does not mean unrestricted access to the full commercial chain for all parties. A platform architecture that provides only the Carrier with BL’s audit log, without exposing it to commercial counterparties, can satisfy both interests. This is a design question, not a legal one, and it is one that eBL platforms serving commodity trade are positioned to answer.
VII. What honest digitalization looks like
The proposition that eBL will make LOI obsolete is not wrong in every case. It is wrong as a general claim. The honest version of the argument is narrower, more precise, and ultimately more useful to the practitioners who need to make decisions about digital adoption.
Where documentary lag is the root cause of an LOI – where the cargo has arrived before the document, because paper processing is slower than ship – eBL’s instantaneous transferability directly addresses the problem. In these cases, across charter party and financing structures alike eBL reduces or eliminates the circumstances that generate indemnity. The benefit is real, provided the full document set meets the digital acceptability condition, and provided every node in the endorsement chain has adopted the platform.
Where structural financing hold or deliberate trading practice is the cause, eBL does not remove the LOI. The financing bank retaining a document as security, or the trader deferring instructions pending commercial resolution, generates an LOI for reasons that have nothing to do with documentary processing speed. Digitalization changes the format of the instrument being held. It does not change the financing structure or the commercial logic that drives the hold.
What eBL does change – in all scenarios where it is in use – is the Shipowner’s risk position. The History Log provides the Carrier with visibility that paper practice never offered. The decision to accept a Charter Party LOI can be made on the basis of verified information about the document’s status and current holder, rather than commercial assumption and counterparty trust alone. That is a genuine and significant benefit, and it applies whether the underlying LOI is bridging a documentary lag or accommodating a planned financing hold.
A platform built for the specific realities of commodity trade finance – one that understands the difference between a financing hold and a processing failure, and that provides Carrier visibility while respecting the commercial confidentiality interests of trading counterparties – contributes something more than speed. It contributes architecture: the infrastructure for decisions that practitioners currently make under conditions of unnecessary uncertainty.
LOI will not disappear. But the conditions under which it is issued, and the risk under which it is accepted, can be managed with considerably more precision than paper practice has ever permitted.
This paper is part of a series examining the digitalization of international commodity trade.