LOI review: assess the promise and the practical exposure

Key takeaways

• Review the proposed act before deciding whether the undertaking is acceptable.
• Keep enforceability, issuer capability and immediate response capacity distinct.
• Test a defined adverse scenario using explicit planning assumptions.
• Identify gaps that require advice, additional support or a different commercial decision.
• Issue an operational instruction only within the approved scope.

Start with the decision to be made

Steamship Mutual's LOI risk discussion emphasises the commercial question of whether the issuer will be willing and able to perform its undertaking. Check the current text and obtain legal and Club advice on the actual proposal rather than treating receipt of a document as sufficient protection.

The principal should know precisely what action it is being asked to authorise. A general instruction to accept an LOI is incomplete if the underlying request, recipient or transaction remains unclear. Define that act before assessing the promise offered in return.

Then identify what the review can establish. Legal advice may explain the document's scope and uncertainties. Financial review may assess the issuer. Operational information may describe the proposed action and practical alternatives. The commercial decision draws on all of these without pretending that one replaces the others.

Where the principal has an existing contractual obligation relevant to the request, include it in the advice sought. A risk assessment should not assume unrestricted freedom to accept or reject an arrangement without reviewing the actual agreement.

Distinguish ultimate recovery from immediate response

A principal may consider an undertaking valuable while still needing to plan for a period of uncertainty if a demand or dispute arises. The review should identify what practical action might be needed and who would be authorised to coordinate it.

Do not assume that a promising legal claim supplies immediately available funds. Nor should a cash estimate be described as a legal entitlement. The reviewer should present the different questions separately and seek the appropriate professional assessment.

The planning exercise can consider a defined adverse scenario. It should state what is assumed, what is known and what remains unquantified. Avoid inventing a typical claim amount or suggesting that the example predicts the outcome of the actual transaction.

The purpose is to expose a decision the principal may otherwise overlook: whether its response arrangements remain workable if the expected support is delayed or contested.

Illustrative planning scenario: a temporary funding gap

This ILLUSTRATIVE fictional scenario assumes that a principal wants to plan for a possible security-related funding need of USD 600,000 and separate immediate defence expenses of USD 40,000. These are invented planning inputs, not an assessment of a real claim, a required security amount or an LOI's legal obligations.

Assume that USD 250,000 of funding is confirmed as available for this scenario. The combined assumed need is USD 600,000 + USD 40,000 = USD 640,000. The planning gap is USD 640,000 − USD 250,000 = USD 390,000.

The gap does not establish a loss, debt or liability cap. It identifies a funding question under the stated assumptions. Expected reimbursement under an LOI is not counted as available funding in this model unless separately confirmed for the scenario. Timing, interest, currency movement and other expenses are excluded.

Test the assumptions before relying on the model

The useful discussion concerns the inputs, not merely the result. Ask who supplied each assumption, what evidence supports it and whether it is appropriate to the contemplated decision. A planning model should not gain authority simply because a spreadsheet produces an exact total.

Distinguish confirmed arrangements from anticipated assistance. If a participant says it expects to help, identify what remains to be agreed or verified before that support can be relied upon in the scenario. Do not describe a commercial intention as a committed resource.

The principal may decide that further review or a different arrangement is necessary. That decision should be informed by the actual facts and advice rather than a generic threshold. The fictional model does not recommend a required reserve or acceptable exposure.

If the requested act changes, revisit the assumptions. A model prepared for one transaction should not be reused automatically for a broader or materially different request.

Review proposed support on its actual terms

An additional undertaking or supporting party may improve a proposal, but its practical value requires review. Identify the exact party, scope and conditions rather than relying on a description such as supported or secured.

Ask the appropriate advisers to assess the proposed instrument and the financial reviewers to consider the relevant entity. The document desk should not provide its own assurance that the support resolves every scenario.

Also consider whether the support addresses the question identified by the review. A measure aimed at ultimate recovery may not resolve an immediate coordination or funding issue. Conversely, access to funds does not determine the legal scope of the indemnity.

The principal should receive a clear explanation of what the proposed measure changes and what remains uncertain. This helps avoid an apparent improvement that leaves the central decision unresolved.

Use a final decision checklist

This original checklist integrates the review without turning it into a guarantee of recovery or a prescribed risk policy. The principal must apply its own mandate and obtain the advice appropriate to the actual circumstances.

A conditional decision should specify the unresolved condition and the action permitted meanwhile. Operations should not have to decide whether the condition is important enough to observe.

Preserve the reason for the decision

Record the material basis of the principal's choice. This should explain the reviewed proposal, the relevant advice and the uncertainty accepted or resolved. A bare approved status gives the next team little help if the circumstances change.

Do not reproduce privileged or sensitive advice indiscriminately in operational channels. Provide the authorised instruction and the information each recipient needs for its task, while retaining the appropriate review record under the organisation's process.

If new information changes a material assumption, return the affected question for review. The principal's decision applies to the proposal it considered, not to every later variation carrying the same LOI reference.

After the authorised action, preserve an accurate factual record. It should show what occurred without being rewritten to fit a preferred view of the undertaking's scope.

Common mistakes

The main mistake is treating a potentially enforceable promise as immediately available funding. Another is allowing an exact calculation to conceal invented or weakly supported assumptions.

Avoid generic claims that additional support resolves every risk, unreviewed extension of the requested act and approval statuses without clear operational limits. Assess the promise and the practical response separately.

Where Zeaclub fits

Zeaclub provides a multi-party shared workspace for owners, charterers, brokers and port agents.

Zeaclub offers digitalised procedures across the voyage workflow.

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