Shipping cargo – the process of getting goods from a manufacturer’s warehouse to a receiver’s warehouse by sea – is fraught with logistical unpredictability. This is true, even in today’s hyper-connected commercial world. It’s one reason why shipowners, carriers and freight companies go to great lengths to insure against all foreseeable liabilities they may face in the course of a cargo voyage. Letters of indemnity (LOI) are used when one party is asked to do something that may not be covered by insurance. We’ll discuss LOIs below, and highlight the factors that need to be considered before agreeing to accept one. We’ll also mention a recent English case involving a complex chain of LOIs and what a party within such a chain needs to be aware of.
At ParrisWhittaker in the Bahamas we provide specialist contractual advice, including advice on LOIs and related issues. We aim to minimise the chances of legal disputes. Our specialist shipping and maritime litigation lawyers however can robustly protect your position if legal action does becomes necessary as a result of a dispute over an LOI or other contractual matter.
What Is An LOI Used For?
Essentially LOIs are a practical way to ensure a transaction, such as the delivery of cargo, can proceed smoothly. They prevent bottlenecks at busy ports around the world. Shipowners or carriers asked to agree to an LOI should always proceed with caution because they are being asked to assume a risk that they will not be insured against.
LOIs are most commonly used when cargo reaches its destination before the original bill of lading. (A still surprisingly frequent occurrence despite the increased use of electronic bills of lading). In such circumstances – to reduce delay and cost – the carrier of the goods will be asked to deliver the goods without seeing the bills of lading (which would be the normal practice).
Use of an LOI may also be suggested where there’s a need to deliver cargo to a different port than the one listed on the bill of lading.
The main risk here is that the cargo is delivered to a party or location that does not appear on the original bill of lading. If a party subsequently produces a bill of lading naming them as the owner of the cargo or a bill of lading specifies the goods should have been delivered elsewhere the carrier may be required to compensate that party for any loss.
Clearly there is a balancing exercise to be carried out by the party being asked to accept an LOI. Does the risk of mis delivery outweigh the benefits of discharging the cargo and avoiding the delays and extra costs of delivery that would otherwise be incurred?
What Do I Need To Check Before Accepting An LOI?
Many LOIs use a standard form of wording, usually from a recognised industry body like the UKP&I Club . But it’s always advisable, where possible, to have a specialist shipping lawyer read the terms of the LOI before you make any commitment to ensure they meet your specific requirements.
It’s also essential to carry out a check on the party offering the LOI. Are they financially secure enough to cover any claim you might ultimately face for mis delivery of cargo or other uninsured act? It’s usual for a bank to back up the person giving the indemnity and to have a bank representative sign the LOI.
What Are LOI Chains?
Particular care should be taken where there is a chain of LOIs – that is to say where the indemnity is passed up a line of intermediate parties or sub charterers. Here, all parties in the chain must ensure that the wording of the indemnity is clear and that back-to-back wording is used.
The 2020 UK Commercial Court case case involving the ship Miracle Hope – which has highly persuasive authority in the Bahamas – provides useful guidance on the position of intermediate parties in an LOI chain.
The Miracle Hope was carrying 1 million barrels of oil from Brazil to China and was subject to several sub-charters. There was a chain of LOIs. These fell to be examined by the Commercial Court when the Miracle Hope was arrested by the receiver party’s bank (who then claimed $76million damages for mis delivery).
The case was a complex one, involving several parties, hearings and appeals. The salient points to emerge as far as parties to LOIs are concerned are:
Obligations under each separate LOI in a chain operate independently of one another
A shipowner or carrier that finds itself in the middle of an LOI chain must ensure that the indemnities it gives and receives are identical, using back to back wording so that liability passes without problem further down the chain
Courts will always strictly interpret LOIs – they are commercial contracts made at arm’s length. If a party wishes to agree tailor-made terms separate form any standard wording used great care should be taken to ensure these terms are reflected in the LOI
In many ways LOIs are essential for the prevention of delays at port and for the cost-effective transfer and delivery of goods around the globe. But the parties to an LOI are making a commercial decision to assume risk that will not be covered by their standard insurance. LOIs may be a day-to-day reality in the shipping sector. But that does not mean they should be entered into lightly or without due
diligence being carried out on the party granting an indemnity.
Contact Us
To discuss how we might be able to advise you on LOIs and related issues please schedule a meeting with a lawyer at ParrisWhittaker today.
