Article: Letters of Indemnity (LOIs) and delivery of cargo without presentation of original bills of lading

News & Insights 4 June 2021

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An LOI is an agreement whereby the issuer requests the recipient to do (or refrain from doing) something in exchange for an indemnity for any losses that result from complying with the request.

Man standing in front of containers

In shipping, in the interest of expedience, a shipper or charterer might request a shipowner to undertake additional risks in exchange for an LOI issued by the charterer or the shipper. One of the most common situations in which an LOI might be used is for the delivery of cargo without presentation of original bills of lading (OBLs), because the bills are not available at the discharge port.

Delivery of cargo without presentation of original bills of lading

The International Group of P&I Clubs (IG) has created a series of standard form LOIs, including the ‘Group A’ LOI form, which concerns delivery absent OBLs. It provides as follows:

‘The above cargo was shipped on the above ship by [insert name of shipper] and consigned to [insert name of consignee or party to whose order the bill of lading is made out, as appropriate] for delivery at the port of [insert name of discharge port stated in the bill of lading] but the bill of lading has not arrived and we, [insert name of party requesting delivery], hereby request you to deliver the said cargo to "X [name of the specific party] or to such party as you believe to be or to represent X or to be acting on behalf of X"  at [insert place where delivery is to be made] without production of the original bill of lading.’

Pursuant to this wording the indemnity is triggered when the LOI recipient:

  • delivers the cargo to Party X or a party representing or acting on behalf of Party X
  • delivers the cargo to such party he believes to be Party X
  • delivers the cargo to such party as he believes to represent or be acting on behalf of Party X

Potential issues with LOI usage

While LOIs are operationally useful, their use often exposes the recipient to additional risks as follows:

1. Increased risk of claims

When delivering cargo without the presentation of OBLs, the shipowner exposes itself to an increased risk of delivering the cargo to a party who may well not have title to the goods (ie the actual holder of the original bills). If such a misdelivery occurs, the party with rightful title to the goods may assert a claim against the owner for the whole value of the misdelivered cargo including by arrest of the ship.

2. Potential prejudicial effect on P&I cover

Where cargo is delivered without presentation of a negotiable document of title such as the OBL, club cover is likely to be compromised and no longer automatically available [1], regardless of whether the member has obtained an LOI or bank guarantee.

The reality underlying much use of LOIs is that they are effectively used as a plug to fill the hole in P&I cover that is created when an owner or operator wishes (or feels commercially compelled) to deliver cargo without presentation of OBLs.

3. Enforcement

There are at least four reasons why a shipowner might face difficulties when seeking to enforce an LOI:

  • The LOI issuer does not have the financial means to ’make good’ on the LOI or has since become insolvent.
  • The shipowner has not effected delivery of the cargo in a manner strictly compliant with the wording set out in the LOI.
  • The claims under the LOI have become time-barred.
  • A court refuses to enforce the LOI on grounds of illegality/public policy considerations.

Although it is important to be aware of these risks, there is a helpful line of recent caselaw which suggests that LOIs will be enforceable if the terms are strictly complied with:

The Bremen Max [2009] - A standard form LOI will be engaged if the owner does in fact deliver the cargo to the named party, or to a party that does in fact represent the named party in the LOI. The courts will also order specific performance of the guarantors promise to place security to secure the release of the vessel.

The Zagora [2017] - If actual delivery to the named party is not satisfied, the LOI will be engaged if the owner believed the party to whom delivery was made was or was representing the named party (even if, in the end, the owner was wrong). Members should note though that this is the English court’s position for delivery against a LOI on current IG wording as opposed to standard delivery against OBLs.

The Songa Winds [2018] - An LOI is an independent contract, to be construed on its own terms and not (without express agreement to this effect) by reference to a preceding charterparty between the same parties. 

The Miracle Hope [2020] - The requirement to put up security 'on demand' found in the club LOI wording was established to mean in the shortest practicable time and may include asking the arresting court to determine what is sufficient security and/or making payment into court if guarantee wording cannot be agreed.

Conclusion

The use of LOIs is an important feature in the conduct of international trade. Used properly, they protect a shipowner being asked to perform operations which will potentially prejudice its P&I cover.

However, members would do well to remember that the use of LOIs potentially exposes the recipient to substantial additional risks and can raise complex issues of law. Due consideration and diligence must be given to the precise wording and scope of the LOI that is being negotiated.  An owner who fails to do this runs the risk that the LOI may fail to be legally or practically enforceable when most needed.

Additionally, as each situation is different, care should be taken to comply with the precise wording of the request made by the LOI issuer in an individual LOI.

Categories: Bills of Lading

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