Letter of indemnity invocation clauses: What to check

by 20, Nov, 2020Regulation

Invoked LOIs can be just as valid as printed, signed LOIs, and they have the advantage of saving the parties time and administration, explains Louis Shepherd, Senior Claims Adviser at Gard Club.

However, LOI invocation is not always as straightforward as is assumed, and there are a number of points that should be considered by owners and charterers, when drafting the LOI invocation clause:

  • What requests can an LOI be invoked for? The most common requests are for delivery without original bills of lading or at a different port from the one named in the bill of lading, but others are possible, for example split delivery. An invocation clause is an agreement that the owners will comply with a (compliant) request against the LOI terms, so clarity is needed here.
  • Make sure the LOI wording is clear. For maximum clarity, it is best to set out the full LOI text(s), either in the clause itself, or a schedule. Another option would be to refer to the IG LOI or ‘owners’ P&I club wording’. IG P&I Clubs has a standard published wording for delivery without presentation of an original bill of lading and delivery at a port other than stated in the bill of lading, but there is no standard IG LOI wording for other operations, such as splitting bills of lading or switching bills of lading.

The IG LOI wording may therefore need amending if the invocation clause is intended to cover a wider range of situations than the two standard IG wordings.  Also check that the LOI wording is suitable for the nature of the requests.

  • Consider if there should be express restrictions on when the charterer can invoke an LOI. Should owners have an express right to reject an invoked LOI request where there are reasonable grounds to do so? Examples of this may be if there has been a material adverse change to the charterers’ creditworthiness, or where there is a known dispute relating to the charterers’ request.
  • Consider what steps the charterers need to take to invoke the LOI. Some clauses require the charterer to specifically refer to the clause number when invoking – that can increase certainty if it is done properly, but if the requirement is overlooked for some reason it may cause problems later on.

For that reason, if there are requirements for charterers to invoke an LOI, consider giving owners a specific right to waive those steps.

  • What information should be provided when invoking an LOI? LOIs normally have several gaps that need to be completed before being printed and signed –which of those gaps should charterers specify when invoking? Some may be obvious from the voyage, but not always.
  • When is the LOI deemed to have been issued? Normally this would be at the time when charterers make the request to the owner, but clauses can be drafted in different ways, so check that yours is clear.
  • When should a formal signed LOI be issued? There may be thought to be no need for this in some cases, but in others the owners may want a formal signed LOI to be issued later, when there is less time pressure.
  • Do other charterparty clauses affect the LOI wording? Normally LOIs are viewed as separate contracts, that are dealt with on their own terms, but there can sometimes be arguments that the wording needs to be read in conjunction with other charterparty clauses.

November 2020