Letters of Indemnity (Bills of Lading)

When goods are shipped by sea freight, A Bill of Lading is issued. A true Bill of Lading (there are a number of documents issued called Bills of Lading which are not Bills of Lading) is a receipt for goods, a contract to carry those goods (under the Hague or Hague-Visby Rules or more rarely, the Hamburg Rules) and a document of title subject to transfer and endorsement.

It is an important document. Charles Williams, of Thomas Cooper & Stibbard (London) describes it as “a thread linking a number of contracts, a sale contract, the shipping contract, the letter of credit and the pledge and other security arrangements.”

Under the International Group of P&I (Protection and Indemnity) Club rules (unless the Association’s Committee otherwise determines), Carriers cannot deliver cargo without production of the Original Bill of Lading and/or delivery at a port other than that stated in the Bill of Lading.

However, what happens if the voyage is not completed in accordance with the terms of the Bill of Lading (e.g. a change of discharge port) or the Bill of Lading is absent when the goods arrive at the designated port (due to loss, delay or hold up in the banking system when supplied against a Letter of Credit, for example)? Cargoes held in ports without clearance can be disruptive and expensive to both the Carrier and the recipient of the Cargo.

This has led to receivers/ultimate buyers presenting a written guarantee instead. This is normally known as a Letter of Indemnity, although Professor William Tetley (Professor of Law at McGill University) argues that “In respect to carriage of goods, a letter of indemnity is a written undertaking by a shipper to indemnify a carrier for any responsibility that the carrier may incur for having issued a clean bill of lading, when, in actual fact, the goods received were not as stated on the bill of lading.”

He states that “A letter of guarantee given at discharge and delivery by a consignee who is unable to surrender original bills of lading which have been issued but lost is not a letter of indemnity but rather a security or surety ship agreement. The letter of guarantee is commonly provided by a bank and declares that it will hold the carrier harmless for claims up to a certain sum that may arise from the delivery of goods to a particular person who is unable to surrender the original bills of lading in return for the goods.”

Whether this distinction about phraseology will ever cause a problem for Carriers is something for a legal Court, somewhere, to decide, but the P&I Clubs call this document a Letter of Indemnity (LOI) and they have recommended standard form Letters of Indemnity which are issued in two versions.

INT GROUP A (for delivery of cargo without production of the original Bill of Lading)
INT GROUP B (for delivery of cargo at a port other than that stated in the Bill of Lading against production of at least one original Bill of Lading) and
INT GROUP C (for delivery of cargo at a port other than that stated in the Bill of Lading and without production of the original Bill of Lading)

The above are to be used when the commercial party requesting delivery (known as the “Requestor”) will alone be signing the Letter of Indemnity. If a bank adds its guarantee to the Letter of Indemnity, then versions INT GROUP AA, INT GROUP BB and INT GROUP CC can be used.

Charles Williams points out that since P&I Clubs do not regard delivery of cargo without a Bill of Lading as a mutual risk, the Carrier is “off cover” in respect of mis-delivery if he accepts an LOI. Therefore, the LOI effectively takes the place of the Carrier’s P&I cover.

He also points out that if a Bank countersigns an LOI without qualification, the bank is probably signing as Indemnifiers (rather than as a verifier of their customer’s signature). Therefore, Carriers should ensure that any LOI is issued with the authority of the Indemnifier.

The LOI has a number of functions. It undertakes to indemnify the carrier for delivery, it undertakes to surrender the original Bill of Lading on receipt of the Bill of Lading and it will also include a choice of law jurisdiction clauses. Please note that under English law, a Master is not obliged to give delivery under an LOI (unless ordered by the Court).
Effectively the Receiver undertakes to indemnify the carrier for the consequences of delivery of the cargo without the production of the original Bill of Lading.

These consequences can be rather severe for the Carrier, since they would have little or no defence against a claim made by the rightful Bill of Lading holder if they did not hold an LOI.

However, although this might offer reassurance to the rightful Bill of Lading holder, the question is whether they will be fully compensated for the possible administration and legal costs, time delays, consequential losses and cash flow problems that might result, before obtaining financial reimbursement, if a Carrier does inadvertently pass the Cargo into the wrong hands on the acceptance of an LOI.

It would be better if the original Bills of Lading arrive in time, thereby bypassing the need for an LOI to be issued, and that agreements are reached beforehand with shipping companies, to ensure that they can deliver to the right ports. However, bad weather, strikes, wars and other factors could result in the Carrier having no option but to deliver to a different port (sometimes in a neighbouring country) and documents do go missing in transit, even if sent by the securest methods.

But by considering beforehand the strategies for ensuring the Original Bills of Lading are delivered as quickly as possible to the rightful importer and by communicating with the Freight Forwarder and/or Shipping company at the Contract stage, to ensure that the routes and ports of discharge required are the routes and ports of discharge available then it is possible to limit the delays and the need to issue Letters of Indemnity.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned below, please do contact us by e-mail on info@point-point.com or check out other international trade articles on the Point to Point Export Services website at www.point-point.com

International Group of P&I Clubs (Memorandum issued 31st January 2001)
Tetley, William (Professor of Law, McGill University) “Letters of Indemnity at Shipment and Letters of Guarantee at Discharge” Pub. 2004 ETL 287-344
Williams, Charles (Thomas Cooper & Stibbard) “Letters of Indemnity”
(All of the above can be found on the Internet).

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