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Letter of Indemnity – A Friend or Enemy?

We frequently hear about “LOI” during our day-to-day work, in connection with “Bills of Lading“ and rightful delivery of cargo. Hopefully we are all fortunate enough not to have come across the severe consequences of accepting an LOI.

Gone are the days when the cargo owner or his authorised representative used to accompany his cargo up to the discharge port to ensure rightful delivery of the cargo to the real consignee.

As the volume of the international trade increased, this practice became impractical; thereby placing the burden of rightful delivery on to the carrier. Today Bills of Lading are evolved from the simple receipt to the ‘document of title’. The document must now be presented in the original, by the legitimate owner of cargo at the discharge port, to claim his cargo.

Since the most advanced ships have started plying on our routes today, transit time is reduced considerably. Therefore, there is not the remotest chance of any original Bills of Lading being available to present to the carrier on arrival. Here an LOI has become the most acceptable cure, which amply indemnifies the carrier against a range of potential claims associated with wrongful delivery of cargo.

Sadly an LOI is not a legally binding document, but is rather a commercial document which is recognised and accepted at the sole discretion of the carrier. Moreover the status and validity of an LOI at law seems at best doubtful and its acceptance by the carrier brings with it certain risks of all possible loss of P&I cover. Considering the present demand of the trade, the carrier can’t rule out acceptance of an LOI if they want to prosper in the trade. Many of the carriers, have already burnt their fingers by accepting an LOI, but still the carriers are forced to approve these LOIs on a daily basis.

Today many of the carriers have started exercising more due diligence prior to accepting an LOI, by asking the shippers to complete a mini questionnaire that ask questions such as:

  • Where are your original Bills of Lading?
  • Why are they not been available?
  • Who are your bankers?
  • When will the original Bills of Lading be submitted to the carrier?
  • Who will be signing the LOI and whether he is your authorized person?

Needless to say, such a questionnaire will definitely reduce the risk, but can’t rule out the grave consequences that the carrier still has to take against acceptance of an LOI.

Probably the best way today is to eliminate the risk of accepting an LOI by using “Electronic Bills of Lading” which many of the carriers have already implemented in selected trades. The key advantage of using electronic Bills of Lading as compared to traditional paper bills is threefold – it saves time, reduces administrative burdens and in many cases, does away with the need for a carrier to have to decide whether to deliver cargo without the original Bills of Lading against a letter of indemnity.

The chance of an e-Bill not being available at the discharge port is very remote. Endorsement and transfer of title under an e-Bill is instantaneous and the e-Bill will always be available when the ship reaches the discharge port. The cargo receiver surrenders the e-Bill electronically to the Master who can then be certain that the delivery is made against an original e-Bill.

Many of us must be wondering how these e-Bills of Lading work?

e-Bills of Lading work by way of the carrier receiving a notification from the system by email that an e-Bill has been surrendered. This prompts the carrier to log in to the system and confirm this. In addition to receiving this confirmation, the carrier receives the electronic log of the activity with the e-Bill and a confirmation of the party who surrendered the e-Bill. The carrier communicates with the discharge port agent and the discharge port agent confirms with the party who has surrendered the e-bill, (what form of document or proof of identity is required) in order to take delivery.

Today while e-Bills are negotiable similar to the physical Bills of Lading and the International group of P&I Clubs have approved e-Bills, many of the International cargo conventions are yet to apply to e-Bills, to make them freely usable.

Probably the e-Bill could be a future document of commercial shipping.

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