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Release of cargo against a Letter of Indemnity / Bank Guarantee:


Jagan - March 13, 2014 - 2 comments

  1. Bills of Lading are issued by the Carrier (Ocean Carrier, Shipping Line, Freight Forwarder, etc) on receipt of goods from the consignor / shipper and perform the following functions:
    • Receipt
    •  Evidence of contract of carriage
    • Negotiable document of title (Sea Way bills and straight bills are not negotiable – the only difference being that in a straight bill, the Carrier would still require a presentation of at least an original bill for delivery).
  2. The parties to the contract of sale could either deal directly or use facilities provided by banks/ financial institutions – say by funding by a letter of credit, etc. If the shipments are being funded, the bills would generally be routed via the banks/ financial institutions. In this case, the shipments frequently arrive at the destination before the bills are available with the consignee for delivery (this is frequently in the case of short sea shipments). It is in this case, the consignee’s approach the Carriers to release the cargo without insisting on the presentation of the original Bills of lading. Alternatively, the consignee’s / cargo interests make a case that the Bills are missing and request for the release of the cargo without submission of the original Bills.
  3. It is a common law duty of the Carrier to deliver the cargo to the holder of the original bill of lading. Failure of the Carrier to fulfill this duty may lead them to be in breach of the contract of carriage and / or to the tort of conversion. Release of cargo without the presentation of Original Bills may also dis-entitle the Carrier to the benefits of the exclusions and / or limitation of liability available in the contract of carriage. Further, Carriers should also note that release of cargo without original Bills of Lading may be in breach of their liability insurance contract such that if a claim is raised, their policy would not engage for this incident (unless this is considered an isolated error and submission of the claim could be made on the Errors & Omission extension, if available)
  4. Carriers should therefore carefully consider the requests made by their customers. While considering as to whether they should accept a Letter of Indemnity from a regular customer, they would need to consider as to whether their customer would be worth the amount shown in the Letter of Indemnity and further would make prompt payment on receipt of a claim. The other alternative is to seek a Letter of Indemnity counter signed by a Bank for at least 150% of the value of the cargo.
  5. Once the Original Bills of Lading have been received by the consignee, they would submit it to the Carrier in exchange the LOI earlier submitted. In the unfortunate event that some other party presents the Original Bill for delivery, the Carrier can enforce the LOI and make payment for the value of the cargo.
  6. With respect to the value of the LOI, the Carrier should seek evidence on the value of the cargo (invoice value) and should only accept a LOI which is for at least 150% of the value (so as to cater for any legal costs arising out of this incident). Further, the LOI should be valid for at least 6 years (Limitation period in Common Law countries).
  7. It would be prudent for the Carrier to also check with the Bank / Financial Institution signing the LOI that they had indeed signed the document. This would obviously go to prevent any fraud being committed against the Carrier.
  8. With respect to wordings of the Shipping Guarantee, the International Group has recommended various wordings and their INT GROUP AA wordings with suitable amendments should be considered.

We trust that our above note is of assistance. If you should require any further assistance on this or any other common topics, please feel free to contact us at Jagan@nau.com.sg

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2 comments

  1. […] to provide a Letter of Indemnity (“LOI”). We had earlier written on the issues related to release of cargo against a letter of indemnity/bank guarantee and also spoken on the same topic. We are revisiting this topic, but our intention is not to repeat […]

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