What is an LOI (letter of intent)?
LOI · Letter of Intent
A non-binding note from a buyer setting out what it wants to buy and on what terms. It commits nobody to anything, and its real function is to open a conversation in enough detail that the seller can tell whether the enquiry is serious.
Key points
- Binds nobody — its value is descriptive, not legal.
- Sellers read it to judge whether the buyer understands its own requirement.
- Entirely superseded by the SPA; unreproduced terms fall away.
At a glance
| Issued by | The buyer |
|---|---|
| Binding | No |
| Typical contents | Commodity, specification, quantity, Incoterm, destination, target price, payment instrument |
| Superseded by | The sales and purchase agreement |
| Common failing | Forwarded through intermediaries, so the signatory is not the end buyer |
What it actually is
A letter of intent is a buyer’s written statement of what it wants: commodity, specification, quantity, delivery basis, destination, target price and payment instrument. It is issued on the buyer’s letterhead and signed, which gives it the appearance of a contract without any of the substance.
It is not binding. No obligation to buy arises from it, no obligation to sell arises from a reply to it, and no court will make anyone perform it. That is not a defect — it is the point. Both sides want a way to describe a possible trade before spending money on lawyers.
What a seller is really reading
An experienced seller reads an LOI as a screening document. Not for the price, which is negotiable, but for whether the buyer understands its own requirement. A specification with the right thresholds, a realistic delivery basis, a named discharge port and a payment instrument the buyer can actually raise are the signals that the enquiry is real.
The tells run the other way too. A target price well below any published index, a quantity that no producer runs in one shipment, an Incoterm used incorrectly, or a document that has clearly been forwarded through several intermediaries all suggest the sender is not the end buyer and may not be in contact with one.
Where it sits in the sequence
In practice, either side may open. A buyer issues an LOI or an ICPO; a seller issues a soft or full corporate offer. Which comes first depends on who approached whom, and any insistence that there is one correct order is a convention of the broker market rather than a rule of trade.
What matters is what follows. The LOI is superseded entirely by the sales and purchase agreement, which is the first document that binds anyone. Anything agreed in the LOI and not carried into the SPA has no effect.
Frequently asked questions
- Is a letter of intent legally binding?
- No. An LOI records what a buyer would like to do; it creates no obligation to buy or to sell. Only the sales and purchase agreement binds the parties. Some LOIs carry a binding confidentiality or exclusivity clause, but the commercial terms are not enforceable.
- What is the difference between an LOI and an ICPO?
- Both come from the buyer and both describe the same trade. An ICPO is styled as a purchase order and calls itself irrevocable, but that word carries no legal weight here — an unaccepted purchase order binds nobody. In practice the two documents are used interchangeably.
- Should I send an LOI or wait for an offer?
- Either works. A seller who holds material will usually respond faster to an LOI with a complete specification than to a general enquiry, because it can tell immediately whether it has the grade. There is no rule requiring one document before the other.
Related terms
A buyer’s purchase order, issued on company letterhead and described as irrevocable. Despite the name it binds nobody until a seller accepts it, and in physical commodity trading it functions as a more formal-looking letter of intent.
A seller’s complete offer to sell a stated cargo on stated terms, valid for a stated period. Unlike a soft offer it is meant to be firm within its validity, and it is the document a buyer can reasonably act on.
The contract itself — the first document in the sequence that actually binds the parties. Everything exchanged beforehand is superseded by it, and any term not carried into it has no effect.
Know Your Customer and Know Your Business: verification of identity, ownership and sanctions status of a counterparty before contracting. A cargo can be frozen mid-voyage over a party that should never have entered the chain.
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