Letters of Indemnity are commonly used in the Shipping Industry for discharge and delivery of cargo without Bills of Lading (“Bs/L”), change of discharge port and/or cargo details and for payment without shipping documents. Kennedys Singapore recently conducted a seminar on Letters of Indemnity (“LOI”) in Shipping and International Trade in which both Karnan Thirupathyi and Charlene Simii spoke on this evergreen topic. This topic was also discussed in one of the panel discussions at the recently concluded conference conducted by Singapore Chamber of Maritime Arbitrationiii. In our below article, we will focus solely on delivery of cargo without presentation of original Bs/L.
- One of the functions of a Bs/L is that it acts as a document of titleiv such that Carriers require the surrender of one originalv Bs/L to effect delivery. Failure to collect the original Bs/L would result in the Carriers being held liable to the lawful holder of the Bs/L for at least the value of the cargo. However, if there are delays in receiving the Bs/L, and to avoid demurrage / detention charges, cargo interests would request for delivery in exchange for a LOI (which may in some instances be coupled with a Bank Guarantee – this would depend on the requirement of the Carrier and whether they are comfortable with the party providing the LOI). While this is a commercial practice between the Carriers and the Consignee, if there is a financial institution (“FI”) involved in funding the transaction, their (FI’s) security changes from the cargo (which in our opinion is the best security), to a potential claim against the Carriers for mis-delivery.
- If a competing claim later arises for the cargo i.e., some other party/FI comes forth with the original Bs/L, the Carrier will try to enforce the LOI to satisfy the claim for mis-delivery. The problem which generally arises is, that if the party providing the LOI becomes or is impecunious, the Carrier may then have to deal with the claim by themselves. In some instances, the claimed amounts may indeed exceed the valuevi of the Carrier such that the security of the Bs/L in the hands of the FI would have diminished to the paying capacity of the Carrier.
- The liability insurance cover provided to Carriers (Owners / Charterers P&Ivii, Transport Liability Insurance) excludes any cover for liabilities arising from the release of cargo without original Bs/L. This being the case, the exposure to the mis-delivery claim remains solely of the Carrier. However, if the Carrier is insured for FD&D risksviii, they (Insurers) may assist in defending the claim for the mis-delivery, with the element of cover being for the costs of defence and attack/pursuit and not the actual claim.
- The excuse, often provided by the Consignees, is that they are facing delays in receiving the documents through the banking/FI chain. However, if the trade transaction is accomplished by electronic/digital form (electronic Bs/L coupled with digital trade finance solutions)ix, these delays could be avoided such that this excuse no longer exists.Additionally, going digital would also lead to reduction of fraud given that all of the documents can be verified with the source, say by using blockchain technology. The FI’s should also make it a condition of their contract with their counterparty (borrower) that they will contract with Carriers who will only release the cargo against the surrender of original Bs/L.
- We do admit that in some trades, Carriers, as a matter of course, allow for cargoes to be released against a LOI. This has an indirect effect on the security of the FI, particularly, when they (FI) lend on the security of the Bs/L as the Title document. We believe that if the intention is to promote business efficacy, then it would be best to delink the Bs/L role as “Title” documents for the cargo and this way avoid issues / litigation arising later.
- In conclusion,
- the use of technology, as suggested in 4 above, may also lead to more funds/new FI being available to the trading community at large.
- FI’s should provide competitive lending rates focusing on borrowers willing to embrace digital solutions and which in turn would lead to better security management.
- Carriers should embrace digital solutions to reduce the mis-delivery risks arising from the delivery of cargo without original Bs/L and against a LOI.
i. Karnan Thirupathy (kennedyslaw.com)
ii. Charlene Sim (kennedyslaw.com)
iv. See article of Gard which discusses on the “document of title” function and which can be viewed by clicking this hyperlink.
v. The attestation clause which is generally found on a Bs/L would state “… whereof one (1) original Bill of Lading has been signed if not otherwise stated hereafter, the same being accomplished, the other(s), if any to be void….
vi. By value, we mean the value of Carrier as a going concern or their assets to satisfy the claim for the value of the cargo.
vii. See Clause 5.1i of the Gard Rule book 2023 which states “Delivery of cargo without production of Bill of Lading
The Insurer shall not cover liabilities, losses, costs and expenses arising out of delivery of Cargo under a negotiable Bill of Lading without production of that Bill of Lading by the person to whom delivery is made”.