Yutaka Tsurusaki
Attorney-at-law, Tsurusaki & Kobayashi (T&K Partners)

In the previous edition, I wrote about the significance of Bills of Lading (B/L) and problems associated with the delivery of cargo without production of B/Ls and Letters of Indemnity (LOI) in general. In this edition, I would like to explain about the issues associated with LOIs by using case studies so that it is easier for practitioners to understand. Since LOIs are issued not only for a cargo delivery but also for various items under B/L and C/Ps, I will also touch on these points.

If you would like to understand in more detail, please refer to my article “the Letter of Indemnity (LOI) and its Legal and Practical Problems”.

1. Relevant Court Precedents

Firstly, let’s have an overview of the court precedents related to LOIs.

1.1. The likelihood of disputes and claims for indemnity under LOIs occurring is very low, and even if disputes occur, many of them are solved out of court, and therefore there are not many court precedents published in Japan and overseas. In the cases I have been directly or indirectly involved in the past, there were situations where claims amounting to several million US dollars were made against the delivery by LOI of chemicals of high quality and valuable refrigerated fishes, fruits and others. Also, there was a case where the B/L described the cargoes as brand new automobiles although they were actually used cars, and the Vessel was detained and subsequently, the order for confiscation of the Vessel was issued by the authorities in the Middle East.
Both cases were not covered by P&I Insurance, and in the first case, the issuer of LOIs had no or little financial capability, and in the second case, no LOI was issued.
Both Owners faced serious issues.

Nowadays, a simplified method of “issuing an LOI” is often applied such as by including LOI provisions of the C/ P in an e-mail instead of issuing a LOI with an authorized signature. This may result in disputes about whether the LOI was issued by a person that had the proper powers to do so, and therefore, it is safer to obtain an LOI signed by the authorised person in PDF format or by fax.

1.2. The court and arbitration cases in England and Japan are listed below as a reference. While the precedents are of course very helpful, the number of cases is limited and each case was decided on specific facts so please use them as a guide and do not to automatically apply the same judgement.

Case 1: The validity of an LOI where the provisions of the C/P about LOI Clause and actual LOI wordings issued are different. —a Double-tongued person

C/Ps often contains LOI clauses and the LOI is issued thereunder. In such cases, the difference between these two provisions often results in disputes. For example, there are provisions about the valid period of LOI in C/P, but no such provisions in the LOI. There are many cases where the LOI stipulates that the cargo delivery is the obligation of the Owners/Vessel in the Time Charter Party, but in all LOIs, it is recommended to stipulate in C/P the wording by the International Group of P&I Clubs (the IG), which is to have no provision about the valid period of LOI except for LOI for bank guarantee to minimise the Owners’ risks.

In practice, Owners are frequently requested by Charterers to state the shore figures of cargo quantity rather than the Ship’s figures on the B/L, and often there are cases of cargo shortage at the discharge port due to the nature of the cargo, such as defects of measurement at the discharge port, with no fault on the Vessel side. Therefore, in some cases, the C/P stipulates that Charterers shall indemnify Owners in respect of cargo shortage claims, while the LOI actually issued stipulates that Charterers shall cover all of the cargo claims.

In many cases, the effect of the LOI is construed according to the details of the case, the wordings used, and intentions of the parties, but it is necessary to pay attention to inconsistencies between the LOI issued and the C/P terms. For example, in the case of a discrepancy regarding the period of an LOI, it was judged not to be valid in accordance with LOI wordings, despite the validity period stipulated in C/P provisions. On the other hand, in a case involving cargo claim indemnification, although the LOI had no provision to limit, it was judged that claims will be limited to cargo shortage only, as per the C/P wording.

Case 2: The delivery to receiver of cargo with production of LOI but without production of B/L. —whether it is the person stated in LOI or not— A Third Person Resembling You More Than the Families

In cases involving cargo delivery without production of B/L there are often various parties involved such as agents claiming to take delivery of the cargo. This results in various issues, such as the issue of identifying who is the right person/entity for delivery, and the situation in which the person/entity to whom the cargo was delivered was not actually the party stated in the LOI.
For that reason, the IG’s recommended wordings were amended to stipulate “ X [name of the specific party] or to such party as you believe to be or to represent X or to be acting on behalf of X”, so that the Carrier may deliver the cargo to whom the Carrier believes as the person for delivery (although of course the Carrier needs to have a good reason to believe so)”. Please see the Japan P&I Club's circular No.10-016, "INTERNATIONAL GROUP STANDARD FORM LETTERS OF INDEMNITY Delivery of cargo without production of Bills of Lading" dated 12 October 2010.

This issue often occurs in developing countries. For example, if the cargo delivery is via the port authorities or the customs authorities, whether we can say that the validity of the delivery = whether it can be the delivery to the person/entity stated in LOI.
Complicated issues occur in practice, such as where the delivery is not treated as valid and/or a case where the cargo becomes “missing” during the custody of the bonded warehouses/tanks. In principle, cargo delivery is based on D/O (Delivery Order) issued by the local agents, but as each port of each country has various delivery practices and local regulations, and in some places, the regulations in question are not well documented. Therefore, you need to ensure to check with local agents about the local practices and regulations.

Case 3: Whether an LOI is issued by the Cargo Receiver addressed to the Charterers can be enforced by the Owners; To Play Tennis, Borrowing a Racket from Others

For example, in practice there are cases where the Cargo Receiver issued an LOI to the Charterers, but the Charterers did not issue its own LOI to the Owners on a back to back basis and the cargo delivery is made only with production of LOI of the Receiver. In such cases, there is occasionally an issue as to whether the Owners can enforce such an LOI against the Receiver. In England, in many cases, it is possible to do so under the relevant law (The Rights of Third Parties Act 1999), but it is necessary to be careful about who is the addressee of LOI.

Where there are multiple Charter Parties concerning the cargo, multiple LOIs are issued in the charter chain, but there are cases where an LOI is issued by the Cargo Receiver or the Sub-Charterers directly to the Owners skipping all of the Intermediate Charterers. In such cases, it is necessary for the Owners to examine whose LOI has is to be preferred. Normally, the Owners prefer an LOI issued by the Head Charterers who are the direct contractual counterparty with the Owners for the following reasons.

In case of the cargo delivery without production of the B/Ls and with LOI, it ends up in dispute with the B/ L holders (normally financial institutions) since in many cases, the Receiver has entered into bankruptcy and cannot make the payment to the financial institutions. In such cases, if the Charterers issue an LOI, it is still possible to collect payment, but if the Receiver issues an LOI, payment will not be recoverable Owners should be mindful of such a scenario.

In cases where many LOIs are issued on a back-to-back basis along a long Charter Chain (I experienced such a Charter Chain involving 13 Sub-Charterers just before the Lehman shock) , the Charterers which receive the indemnity claim from the Owners may not settle the payment until the Sub-Charterers pay the Charterers’ indemnity claim, and the Sub-Charterers may not do so unless and until the Sub-Sub-Charterers do so (and so on and so forth) , Therefore, although the Owners have obtained an LOI, there is a risk that it will take considerable time to finally receive the actual payment.

Case 4: Cargo delivery without production of B/L and the time limit for the B/L holder’s claim for damages against the Carrier; Locking the Barn Door after the Horse is has bolted

In general, the time limit of 1 year is applied from the delivery of the cargo under the Hague Rules, but it should be noted that discrepancies may occur according to the applicable laws and the jurisdiction/country in questions. Even if the application of the Hague Rules is stipulated in the B/L, it is worthwhile to specifically stipulate about one year time limit in the B/L. Due to this time limit period, the Owners are frequently requested by the Charterers and the Cargo Interests to agree to provide for the valid period of LOI for a short period, such as 1 year. However, as stated above, the valid period should not be stipulated in LOI if the valid period has to be stipulated due to the request from important customer a longer time limit should be stipulated such as 5 years (the time limit in Japan for commercial matters) or 6 years (the time limit in England), and a shorter period should be absolutely avoided.

Next I have listed below some of the typical LOI cases which I have directly or indirectly experienced.

2. Various Specific Cases; The devil is in the Details

The Owners are often asked to agree to the following requests from the Charterers and the Cargo Interests in return for the provision of an LOI.

(1) Matters to be Entered into B/L; You’ve Got Samurai Warriors’ Words on them.

Case A: Requests to state details of various matters to be entered into B/L that are different from the actual situation.

For example, the quantity and conditions of the cargo, the name of the loading port and discharge port, stowage place in the Vessel, the date of B/L, freight already paid, freight rates, the place of special jurisdiction and arbitration.

Case B: Requests for stating the matters that are not normally entered in B/L.

For example, details of the commodity names/brands, the quality, specification of the cargo, Clean Onboard Notation, Transshipment after the discharge, inland transport and place of delivery and others.

Case C: Requests for method of cargo operations that are not normally done.

For example, commingling of liquid cargoes, mixture of additives and water to the cargo

Case D: Requests for using of B/L Form/Terminal Form of the Charterers and the Cargo Interests instead of that of the Owners/Carrier.

Case E: Requests for change, deletion and addition of the matters entered in B/L already issued. These include requests for changing the Shipper, the Consignee and the Notify Party.

Case F: Requests for issuance or double issuance of new B/L (Split B/L, Switch B/L) with different contents, split B/L, in respect of B/L already issued, carriage of B/L by the Vessel, missing of B/L and reissuance of B/L.

Requests for issuance of copy, original or copy of NonNegotiable B/L of B/L stating the changed matters.
In general, if the reality of the situation is different from what is actually stated in the B/L, this may mislead a bona fide third party who is not aware that the contents of the B/L are inaccurate. Also false or incorrect statements may fall under criminal and administrative sanctions as mentioned below. In certain circumstances an LOI may be found by the courts to be invalid and besides, to enforce an LOI takes time and money. Most importantly, if the issuer of LOI faces financial difficulties or go into bankruptcy, the LOI will be merely a piece of paper. It is vital not to lightly rely on obtaining an LOI, thinking that everything will be alright if LOI is obtained, but to carefully judge and accept one only when it is appropriate to do so.

(2) As to Charter Parties; Those who Believe May not be Rescued

While there are many overlapped matters with B/L, acts of the Owners/Vessel which are not provided for in C/P or are contrary to the existing provisions of C/P are claimed.
Examples of requests vary but may include : Vessel’s navigating/calling in dangerous/prohibited zones/ports (war, piracy, icebound, sanction area, excluded areas, unsafe ports), slow steaming or full steaming, shipments of excluded cargo/dangerous cargo, addition of fuel additives, use of off spec. fuel, commingling of liquid cargo, boarding of Charterers’ persons, loading onboard of Charterers’ machinery, deviation due to charterers’ convenience, special stowage and management method of cargo, shipment without tank/hold cleaning, cargo operations during rainfall, special cargo operation by lighters, ship to ship and others, discharge at special places such as bonded warehouses/tanks, discharge of hold tank/hold cleaning waters, postponement of loading or discharge operations, issuance of Through B/L for segments outside the Owners’ control, issuance of (Non-Objection) Certificate concerning the shipment and the loading, issuance of Sea Waybill instead of B/L and issuance of Terminal B/L.

In case of Time C/P, the Owners may be protected/indemnified by the Employment & Indemnity Clause, but it is necessary to always carefully consider whether to comply with the requests and to obtain a suitable LOI if appropriate.

3. Points to pay attention to —commercial relationships are important, but if problems occur, it is eventually the owners who will suffer loss.

Where such various requests are made by the Charterers and the Cargo Interests, the Owners/Carrier should make inquiries about the circumstances and reasons for such changes of the statements and others of (The Rule of “Tell Me Why?”) If the requests are unreasonable or questionable/doubtful, (even if a proposal for issuance of LOI is made), it is important to make a wise decision to refuse such requests. Even if they are reputable or well funded once problems occur, the Owners will suffer considerable inconvenience and losses, and the ultimate solution will take labour, time and costs. Moreover, there are many cases where the P&I Club will not be able to cover.

Specifically, statements in B/L that differ from the actual facts may not only result in civil claims, but also may result in breach of the criminal law and administrative law of each country/local area. There are also risks of not only sanctions of fines and others, but also long detention, confiscation and other measures against the Vessel.
Besides, where to comply with such requests is contrary to the good moral and public order, even if the owners manage to obtain an LOI, it may be rendered invalid.

Where the Owners comply with the requests of the Charterers and the Cargo Interests for commercial reasons the above risks should be also considered and it is necessary to carefully consider the issuer, and the specific wordings of the LOI to be procured.

Since once disputes and indemnity claims occur, these have the potential to be of a very significant magnitude and to shake the fundamental base of shipping companies, the above-mentioned risks as well as the proverb introduced in the previous article that “Those who laugh at B/L cry by B/L.” should be always be borne in mind.