Letters of Indemnity – Best Practice

Letters of Indemnity – Best Practice | BDM Blog | BDM Law

There are a surprising number of pitfalls to avoid when asked to discharge cargo without receiving an original bill of lading. Many clients think that the panacea is the Letter of Indemnity (LOI). Indeed, many contracts require clients to accept an LOI in place of an original bill.  The LOI effectively stands in place of the clients’ P&I Club cover as none of the International Group P&I Clubs will cover a member against liability for delivering cargo otherwise than against an original bill.

As we live in world where LOI’s are common, the starting point for all clients is to ensure that they use the standard approved form of wording. This is generally available on most P&I Club websites. By way of example, readers can look at Gard’s recommended wording here.

Leaving aside the wording however, there are also other pitfalls to avoid.

The first thing to watch out for is the identity of the party giving the LOI. We often find clients approach seeking to recover under LOI’s only to find that the party giving the LOI is a trading company based in the Marshall Islands or in Liberia. Many of those companies are no more than brass plate’s and it is not unsurprising that some of them refuse to comply with the terms of the LOI leaving the client in the lurch and facing huge potential exposure to a party who turns up holding an original bill. The answer to these problems is to ask for the LOI to be countersigned by a bank or an insurance company as a primary obligor.

Secondly, we often see LOI’s that require the giver to submit to the jurisdiction of the English High Court but they refuse to do so. The best practice is for the giver of the LOI to have a nominated agent for service of process in England set out in the LOI. Failing that, at least have a provision that the giver of the LOI must nominate an agent to accept service upon being asked to do so. This practice can lead to problems when it comes to enforcing the LOI terms and seeking mandatory injunctions from the English Court which is the area where we are most asked to assist.

Thirdly, there are cases where clients accept an LOI but then fail to properly comply with their side of the bargain. An LOI is an agreement where, in exchange for delivering the cargo to a named person or entity or its agent, the LOI giver agrees to indemnify the ship owner or the charterer and, to put up security when called upon to do so. It follows that if the ship owner or charterer allows the cargo to be delivered to someone not named in the LOI or someone who is plainly not an agent of that party then the LOI cannot be enforced against the party giving the LOI. It is advisable for the ship owner or charterer to take great care to verify that the recipient of the cargo is in fact the party named in the LOI or, if they are an agent, that steps are taken to verify that before the cargo is released. This will avoid being faced with arguments later such as the argument recently put forward by a Hong Kong based trader (1) to try to avoid being bound by the terms of an LOI. It is possible to fall back on an argument that the Master acted honestly and reasonably believed that the cargo was being delivered to the right party but the best practice is to leave a paper trail where the party giving the LOI confirms in writing that the cargo can be discharged to X.

(1) Harmony Innovation Shipping Pte Ltd v Caravel Shipping Inc [2019] EWHC 1037 (Comm)

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