LETTER OF INDEMNITY V. BILL OF LADING

A Bill of Lading (“BL”) is a document issued by a carrier of goods to the shipper/consignor confirming that the specified goods were received in the required contractual conditions and are ready to be shipped and delivered by the carrier to a receiver/consignee. A BL operates as a tripartite contract among the shipper (who supplies the goods), receiver (who receives the goods from the shipper) and carrier (who transports and delivers the goods of the shipper to the receiver) stating the terms and conditions of carriage. A Letter of Indemnity (“LOI”) is a document through which a carrier is typically indemnified by the receiver of the goods against claims that may arise due to issues in the BL. 

LOI against discharge without BL

Usually, a BL is required for the discharge and release of the cargo to the receiver and it is the obligation of the receiver to produce the same. No delivery of cargo should be given by a carrier without a BL. The process of BLs through the payment chain is slower in comparison to the vessel’s progress to the discharge port. If the original BL is not available with the receiver, the shipper and/or receiver would be liable for large demurrage claims by the carrier. Thus, receivers may request carriers to discharge the cargo without actual production of the original BL, in return for an LOI issued by the receiver to the carrier. 

The receiver agrees to compensate the carrier against the consequences, if any, by providing a LOI. An LOI is necessary in lieu of the BL to indemnify the carrier against risk of loss to the cargo particularly due to misdelivery or wrong delivery. The carrier may have to face the consequences of discharge without a BL in terms of a claim equivalent to the value of the cargo from the holder of the original BL (who may be different from the receiver). The liabilities or risks of losses to the carrier in such cases are limited, as the issuer of the LOI is confident that there will be no call under the LOI. However there are certain risks associated with receiving the goods under the LOI instead of the original BL.

What are the typical risks while issuing a LOI?

The first and most apparent risk is of title. A Bill of Lading is a document affirming the title of the holder of the original Bill of Lading. The issuance of an LOI renders the value of the BL negligible. In other words, the BL no longer gives the receiver effective title over the goods. 

The other major risk of issuing an LOI is of it being called upon. This normally happens in cases where the BL does not make its ultimate way into the hands of the receiver of the cargo to whom delivery was facilitated by the LOI. This is evident in cases where a bank retains the bills of lading as security for a loan issued to the receiver for purchase of the goods. Where the bank remains unable to recover the financial assistance extended to the buyer/receiver, the bank may knock on the door of the carrier and request for the goods to be delivered to its custody. Where the carrier does not have the goods, due to them being delivered under an LOI to the receiver, the carrier could be liable for wrongful delivery. Resultantly, the carrier could invoke the LOI against the receiver. 

What can a receiver do to avoid claims under LOIs?

The receiver can exercise the following cautions while drafting the Letter of Indemnity in favour of the carrier. The receiver can narrow the scope of the LOI by avoiding words such as “such party as you believe to be to represent the receiver” or “acting on behalf of the receiver”. The wider the words, the bigger the liability. Receivers must also address the LOI only to the direct counterpart, that is, the carrier. It is always safe to create a time limit on the validity of the LOI, limit the extent of liability and put conditions for enforcement of the liability by the carrier.

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