Cargo considerations - Protection given by letters of indemnity

When delivering cargo in the absence of original bills of lading owners should take care to ensure that the terms of the Letter of Indemnity are drafted carefully.

The commercial practice of ­delivering cargo to the receiver against charterers’ LOI ­without the production of bills of lading has long been commonplace in the ­shipping industry. Typically, the standard LOI wording will refer to delivery of cargo without production of the original bill of lading, without expressly ­referring to the discharge of cargo. Yet, the ­commercial purpose of the LOI is in fact to facilitate discharge, that is to get the cargo off the ship.

It is becoming increasingly common for ports, particularly in China, for the delivery process to be split into two stages, namely discharge and delivery. During discharge the cargo is physically removed “over the ship’s rail” and placed into the custody of a forwarding agent for storage in a bonded warehouse. Subsequently, the receiver requests delivery from the forwarding agent who will issue a delivery order, allowing the receiver to collect the cargo from the bonded warehouse.

This two stage process can cause a problem for owners who rely on ­standard LOI wording which refers only to delivery. Although on a correct legal and commercial analysis the LOI should cover both discharge as well delivery, owners risk being exposed to significant liability if arguments to the contrary can be successfully made.

Given this potential risk it may be worth owners following the practice of ensuring that discharge expressly ­covered in any LOIs issued in their favour. This precaution highlights the importance of being clear on the requirements which must be satisfied to trigger protection under the LOI.