A Letter of Indemnity (L/I) is a written undertaking issued by a bank, insurance company, or guarantor at the request of an applicant to a beneficiary, guaranteeing that the guarantor will pay a certain amount or assume compensation liability if the applicant fails to fulfill its obligations. It is commonly used in scenarios such as delivery indemnity (taking delivery without original bill of lading), performance bond, and advance payment bond. Usage scenarios include: the buyer takes delivery with an L/I when goods arrive before documents; the seller requires the buyer to provide a payment guarantee; or in bidding and performance stages. Precautions: An L/I is usually independent of the underlying contract, but the validity period, amount, claim conditions, and applicable law must be clearly specified; for bank guarantees, the creditworthiness of the issuing bank must be verified; a delivery indemnity may expose the carrier to legal risks due to delivery without original bill of lading. Difference from a Letter of Credit (L/C): An L/C is a payment instrument where the bank assumes primary payment liability; an L/I is a guarantee instrument that triggers compensation only upon the applicant's default. Similar to a Standby Letter of Credit (SBLC), but SBLC is more widely used in international guarantees and follows UCP600 or ISP98.
📝 Examples
1. Due to tight shipping schedules, the goods have arrived at the port but the original bill of lading has not yet been delivered. The importer issues a bank letter of indemnity to the shipping company, applying to take delivery without the original bill of lading, and promises to assume all responsibilities arising therefrom. (Note: A typical application of a delivery indemnity, solving the problem of goods waiting for documents, but with higher risks.)
2. In an export contract, the buyer requests the seller to ship first and pay later, and the seller requires the buyer to open a payment guarantee through a bank. If the buyer fails to pay upon maturity, the bank will pay on its behalf. (Note: A payment guarantee protects the seller's payment security, similar to a conditional payment undertaking.)
💡 Foreign Trade Tips
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