Letter of Indemnity (LOI) – With Various Formats

LETTER OF INDEMNITY(LOI) - VARIOUS FORMATS - MASCOTMARITIME

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What is a Letter of Indemnity (LOI) or a Counter letter?

The letter of Indemnity is a “written undertaking” by one party to compensate another party for any loss they may incur as a result of the first party’s act or default.

Formats of various Letter of Indemnity (LOI)

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  1. STANDARD FORM LETTER OF INDEMNITY TO BE GIVEN IN RETURN FOR DELIVERING CARGO WITHOUT PRODUCTION OF THE ORIGINAL BILL OF LADING.
  2. STANDARD FORM LETTER OF INDEMNITY TO BE GIVEN IN RETURN FOR DELIVERING CARGO WITHOUT PRODUCTION OF THE ORIGINAL BILL OF LADING INCORPORATING A BANK’S AGREEMENT TO JOIN IN THE LETTER OF INDEMNITY.
  3. STANDARD FORM LETTER OF INDEMNITY TO BE GIVEN IN RETURN FOR DELIVERING CARGO AT A PORT OTHER THAN THAT STATED IN THE BILL OF LADING
  4. STANDARD FORM LETTER OF INDEMNITY TO BE GIVEN IN RETURN FOR DELIVERING CARGO AT A PORT OTHER THAN THAT STATED IN THE BILL OF LADING INCORPORATING A BANK’S AGREEMENT TO JOIN IN THE LETTER OF INDEMNITY
  5. LOI for FREE PASSAGE AGREEMENT

The situations where a Letter of Indemnity (LOI) is offered?

There can be a situation where a shipper may offer a “letter of indemnity” to the master of a ship if the master signs a clean bill of lading that the shipper made, even if the master doesn’t know the condition of the goods. 

Another situation is when a ship comes at the port where the goods will be delivered, but the bills of lading have not yet arrived because of the credit system. The ship’s captain or agent may be asked to give the goods to a supposed consignee who shows a “letter of indemnity” that may or may not be backed by a bank.

The first indemnity letter is deceitful because it contains a material misrepresentation. 

The second may also be fraudulent, particularly if it is not guaranteed, thereby placing the Carrier under significant liability. If the letter of indemnity is guaranteed by a bank, the bank can also be held responsible for indemnifying the carrier’s liability.

Why the Letter of Indemnity (counter letter) is unenforceable?

In some cases, the letter of indemnity provided at the loading port is blatantly false and unenforceable as an illegal contract. That given at the discharging port should be guaranteed by a bank, and if it is genuinely not a document that aids a fraud, that is, the consignee is genuine and he is the only party entitled to the goods but the bills of lading have not yet arrived, the document should be referred to as a “letter of guarantee” to avoid confusion caused by the fraudulent nature of the letter of indemnity given at the loading port.

A letter of indemnity is frequently referred to as a “counter letter” in some regions.

Examples of misuse of Letter of Indemnity and a few court rulings.

In the 1957 landmark case B. Jenkinson v. P. Dalton, it was ruled that a letter of indemnity given at the cargo port is unenforceable due to its fraudulent nature. The orange juice contained in containers was leaking. The containers were outdated, and the defendant shippers were eager to obtain clean bills of lading and indemnify the plaintiff carrier. The bill of lading was not claused. Upon arrival at the delivery location, the consignees successfully sued the carrier. The carrier subsequently attempted to enforce the “indemnity” against the consignor. The shipper asserted that the indemnity letter was invalid because it was an illicit contract. The court concurred that the indemnity letter was unenforceable because the buyer had been defrauded.

 In Sze Hai Tong Bank v. Rambler Cycle Co., 1959, the products were delivered based on a “letter of indemnity” or “letter of guarantee” rather than the original bill of lading. The traditional principle dictates that the carrier is required to deliver Cargo only to the first individual with a valid bill of lading. Delivery without presentation may be such a severe breach of contract that the carrier may not be entitled to protection under the terms of the agreement. The delivery of goods without a bill of lading is referred to as “misdelivery,” and many shipowners’ Protecting and Indemnity Associations (P and I Clubs) refuse to indemnify their members for misdelivery.

In the Sze Hai Tong Bank case, the shippers shipped goods under a bill of lading that contained a protective “cesser clause” stipulating that the carrier’s responsibility would terminate in its entirety upon discharge of the goods from the vessel. On arrival in Singapore, the goods were discharged from the ship and delivered to the consignee without presenting a bill of lading, but only after obtaining a letter of guarantee from the bank. Despite the fact that such a practise was common in Singapore at the time, the court determined that the carrier had breached the contract of carriage and, by delivering the goods without presenting the bill of lading to a person who was not entitled to receive them, became liable for the tort of ‘conversion’. The carrier lost the protection of the cesser clause. 

In 1987, The Siam Venture case, it was confirmed that the shipowner is not required to deliver cargo in the absence of an original bill of lading or a guarantee from a first-rate bank. Because neither the bills of lading nor a solid guarantee from a reputable bank were available, the captain refused to discharge cargo at the agreed-upon destination. The charterers’ and consignees’ undertaking were unacceptable. Delay occurred. The court determined that the master’s refusal was reasonable and awarded demurrage to the proprietors.

After it has been asserted that the first set of original bills of lading have been lost, a letter of indemnity may be offered in exchange for a new set of bills of lading. The first set of bills of lading may have been stolen due to the shipper’s carelessness, or the shipper may be fraudulent and intend to sell the goods to two distinct buyers, each of whom would receive a separate set. The carrier may become liable to the holder of one set of goods after the other set of goods has been delivered. 1978 (Nikiforos v. Sam Houston) In such a scenario, the second set should have been indorsed with an appropriate anti-fraud clause.

Some insights of Article 17 of Hamburg rule & Article III r.5 of Hague Visby rules pertaining to guarantees & indemnity by shipper.

In the Hamburg Rules, Art. 17 deals with guarantees by the shipper. Similarly, to Art. III, r. 5 of the Hague-Visby Rules, the shipper is deemed to have guaranteed to the carrier the accuracy of the amount of cargo and the identifying marks. The shipper “shall indemnify the carrier” if the latter becomes liable because of any inaccuracies. 

However, Art. 17, r. 1 of the Hamburg Rules also provides that the shipper guarantees the “general nature of the goods'”. This could mean that the apparent order and condition of the goods are also guaranteed. 

Article 17, r. 2 provides that a letter of guarantee from the shipper (presumably the same as a letter of indemnity’) for an unclaused or clean bill of lading is void against a third party. The effect of this is to restrict any action or defence by the carrier between the carrier and shipper. 

Article 17, r. 3 provides that the letter of indemnity is good against the shipper unless the carrier issued the unclaused bill of lading with intent to defraud a third party. This rule also stipulates that the indemnity by the shipper is not effective against him if the omitted clause or reservation relates to particulars furnished by the shipper. 

According to Article 17, r. 4, the carrier will not be able to enjoy any package restriction for liability if the clean bills of lading were issued fraudulently. It would be unlikely for the carrier to deliberate fraud against a third party when issuing a bill of lading, clean or not.

What is the advice of P&I clubs pertaining to Letter of Indemnity or Letter of guarantee?

Even in liner trades, the passage of the vessel between the loading port and discharging port may be shorter than the time required for the transaction and delivery of documents, including bills of lading. An alleged consignee or indorsee may approach the master or ship’s agent at the port of discharge and request the cargo, alleging that although the bills of lading have not yet arrived, he is entitled to the cargo.

The P and I Clubs advise their shipowner members that cargo should not be delivered without the original bill of lading due to the lack of liability protection for misdelivery. However, commercial constraints are acknowledged, and the Associations advise their members that delivery may be made upon presentation of a “letter of indemnity” (more accurately referred to as a “letter of guarantee”). The guarantee should come from a first-rate bank and cover between 150 and 200 percent of the CIF‘s value, with no upper limit. The reason for this high guarantee is that the shipowner’s liability to a holder of an original bill of lading can considerably exceed the invoice value of the goods in the event of a misdelivery. Commercially, it is doubtful that a bank would provide an unlimited guarantee.

The greater issue, though, is that obtaining such a guarantee would come at a cost and after formalities were performed. Such expenditures may be too expensive for recipients. As a result, they may give a so-called letter of indemnity guaranteed either by themselves or on the owner’s behalf by certain persons acceptable to the ship-owner or master. In any instance, this practise cannot be imposed on the master or shipowner, who may still require the original bill of lading before authorising the discharge of the commodities. 

What are the warnings of P&I Clubs and BIMCO to their members, pertaining to delivery of cargo without surrender of original bill of lading?

P and I Clubs, as well as BIMCO, caution their members against caving into pressure to deliver cargo without surrender of the original bill of lading.

In the case of BIMCO, it was understood early on that so-called “letters of indemnity” may not provide the protection provided. For example, in a 1986 article warning against delivering cargo without surrender of the original bills of lading, BIMCO stated: 

Another dangerous solution is that of proposal of a letter of indemnity by the party claiming delivery. The concept of letter of indemnity sounds familiar and reassuring. The reality is different. Someone else may turn up with the original bill of lading and the ‘giver’ of the letter may be unable or unwilling to indemnify owners for all losses arising out of delivery of valuable cargo to the wrong party. The existence of satisfactory, guarantees is not excluded. 

Whenever a proposal for a bank guarantee is made, owners are strongly recommended to consult their P. and I. Cub. Legal experts from the Club will be able to advise whether the proposed guarantee is indeed satisfactory, or whether it must be formulated differently.

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