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LOI Beware! The dangers of releasing cargo against an LOI

This web alert serves as a reminder of the dangers of releasing cargo against an LOI. The club would emphasise that members should have a full appreciation of the risks in order for these to be minimised.

The bill of lading is considered to be the ‘key to the warehouse’ and the carrier’s obligation, under a negotiable bill, is to give delivery to the holder of the bill of lading and not to any other party. If the carrier were to deliver the goods to a party not included on the bill of lading, and therefore not entitled to the goods, the carrier would be liable for the consequences. Often the original bill of lading has not arrived at the port of discharge and the charterer asks the owner to deliver the cargo without production of the original bill against a LOI. The club would advise members to proceed with real caution when accepting an LOI as a reliable form of security, as an LOI is not enforceable as of right according to English law. The best form of security would be to request a bank guarantee or cash deposit to provide the member with a full-proof form of security. .

As per the club rules, unless the board otherwise determines, there shall be no recovery from the club in respect of liabilities arising out of the delivery of cargo without production of the original bill. Therefore P&I cover does not apply as of right and each LOI-based incident will be judged according to the individual facts of the case.

LOI Background

  • An LOI is a promise made by one party (Party A) to another party, usually the Carrier (Party B) to hold Party B harmless against any liability, loss of damage that Party B may incur as a result of complying with a request made by Party A. An LOI can be included as an express LOI clause in the Charterparty as a way of providing in advance for a scenario where both parties foresee the need to deliver cargo without surrender of the bills of lading during the charter.
  • Alternatively, if not included in the Charterparty, an LOI will be considered an extra-contractual and therefore free-standing LOI to be used as and when needed. A free-standing LOI is a separate collateral contract.
  • The effectiveness or otherwise of an LOI depends upon:
  • (a) its legal enforceability;
  • (b) the legal capacity of the entity issuing the LOI;
  • (c) the creditworthiness of the entity issuing the LOI;
  • (d) the terms of the LOI; and
  • (e) the beneficiary of the LOI.
  • The jurisdiction of the LOI and the duration of the LOI should also be carefully negotiated by members.

The Risks

“[a] shipowner who delivers without production of a bill of lading does so at his peril.” Sze Hai Tong v Rambler Cycle [1959] 2 Lloyd’s Rep

  • In accepting an LOI, carriers accept the following risks:
  • The carrier is liable for the full value of the misdelivered cargo, if this should happen.
  • The carrier usually has no defence to a claim for misdelivery.The carrier may have no right to limit his liability if he acts recklessly.
  • P&I cover is unavailable should any liabilities arise as a result. As such, all losses, damages and liabilities shall be for member’s own account. This can, of course, be very expensive. Furthermore, the legal costs of defending such liabilities are also for member’s own account.

Conclusion

The club would advise members to proceed with real caution when entering into LOIs. We have seen an increase in LOI obligations being disregarded by charterers without assets. A water-tight LOI wording is irrelevant if the signatory is of dubious financial means. We understand that the decision to accept such indemnities is a commercial decision for members. The Club cannot provide cover in the event that an LOI is not honoured or be of any value should the party giving it become insolvent or cease trading. This is why it is essential that the party giving the LOI is in good financial standing and ideally the LOI would be guaranteed by a first class bank.

NB. Where P&I cover is prejudiced as a result of member’s decision to agree to release cargo against an LOI, FD&D cover is not applicable since the Defence rules exclude cover for any risk that would ordinarily be covered under P&I. The club is not willing to make any exceptions to this.​
Source: The Standard Club

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