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

1. General – What Are The Problems? and Counter Measures to be Taken in Advance

(1) What are the Problems?

Ship Owners frequently receive from charterers, cargo interests and others requests under the charter parties and the bills of lading.
While the Owners may have no obligation to comply with the request, they frequently do so in exchange for a letter of Indemnity (LOI). However, since complying may expose Owners to significant legal and practical risks, they should not agree to such requests lightly.

A bill of lading is a very important document/instrument. It is a document of title to valuable commodities, it provides evidence of the terms of the contract of carriage of goods and it states the quantity, condition and amount of the goods. False statements made in the bill could lead to criminal penalties, for example for a breach of the Criminal Law of Japan. Ship Owners should therefore be very cautious in deciding whether to agree to an LOI request.

As mentioned below, Ship Owners could sustain signifi cant losses, damages and inconvenience as a result of making incorrect statements in the bill of lading. Many of these damages and losses would be outside the coverage of P&I and other insurances. Even where such loss or damage may usually be within such coverage, if the activities of the Member are anti-social, contrary to public policy or in violation of criminal and/or other laws, there will be no coverage under P&I or other insurances. In such a case Owners would have to satisfy any claims from out of their own pockets and therefore should take particular caution when in receipt of an LOI request from charterers and other interests.

Aside from requesting changes to statements on the face of the bill of lading, shippers, charterers and others frequently make other LOIrelated demands, such as for the issuance of new bills of lading. Such demands may be made in connection with the terms of the Letter of Credit, the quantity, quality and conditions of the cargoes, and for other various reasons, particularly in respect of the description of the cargoes.

A Ship Owner will accept reasonable LOI-related requests from customers and contractual parties in order to ensure the smooth performance of current commercial contracts and to try to gain future business.

However, many requests could cause problems for the ship owner and/or inconvenience for the vessel if the owner accepts them without thought. Thus if the Owners accept such requests lightly as they are made by important customers, inconvenience and loss/damages could be sustained by other parties concerned and the Vessel/the Owners themselves. Not only civil claims could arise but administrative problems and criminal sanctions could arise also. In fact in the past there occurred many such cases, and Owners should take maximum precautions before agreeing an LOI request.

Moreover, damages of many sorts cannot be sufficiently covered by an LOI and in some cases the LOI itself might be found to be invalid. In particular the Owners should take precautions as once problems occur, significant damages and losses may arise.

(2) Counter Measures to be Taken in Advance – “Tell Me Why”

For the above reasons, the following steps should be taken without fail when the Owners receive an LOI-related request from customers, shippers or other parties in respect of statements/entries in the B/L and provisions of the charter party.

(A) To put to the requestor inquiries about the reasons, background and circumstances of the request and let the requestor explain.

Where Owners receive from the Charterers and others certain requests, please recall a good song of the Beatles, “Tell Me Why (you cried, and why you lied to me)”. It is important to ask “Why ?” about a request. The answer to such a question should reveal the presence or absence of the risks and degree thereof for Owners if they comply with the request.

(B) To examine and inspect the explanation and to consider whether any further questions or doubts arise from the explanation, whether the explanation is well understandable, or whether there are any factors which are unclear, unreasonable, illegal or contrary to public policy.

If the explanation is unclear or Owners still cannot decide whether it would be safe to accept the LOI request, they should consult with their legal department and/or outside lawyers. If Owners do not receive a satisfactory or understandable explanation from the requestor on your inquiries, Owners should treat this as a “suspicious” case.

An LOI-related request or the explanation thereof may be normal in practice and the reason for the request and/or explanation may be well understandable and have been frequently accepted by Owners and their competitors in practice. For example, where the cargo quantity differs between the shore figure and the ship figure or the requestor wishes the cargo entries/statements in the B/L to tally with those in the L/C.

On the other hand there are cases where the reasons or the circumstances explained cannot be well understood, where there is a possibility of inconvenience and damage being caused to Owners’ company and the parties concerned if the request is complied with, and/or where there is a possibility of falsely representing the facts to the parties and/or authorities concerned or of defrauding those. Examples of such requests include changing the name of the load or discharge port to one which is different from the actual one, making false statements in the bill of lading as to cargo quantity, description, quality and/or condition, and post-dating or back-dating the B/L date instead of using the actual date of completion of loading. If Owners accept such requests, their conduct may be in violation of the laws and regulations of relevant authorities at the load port, discharge port or elsewhere. If the LOI request relates to bankers, compliance may violate relevant export/import laws and regulations and other applicable laws. Even if on such a request, Owners obtain an LOI from a first class company, the rights and interests of Vessel/ Owners may not be protected. Owners should thus be very cautious about accepting such requests and be sure to know in advance the system of consulting with the legal department or outside lawyers in case of need.

The above can be excessively cautions and the probability that actual problems may occur may be very small but please do note that once a problem has occurred, the result could be very serious indeed, possibly significant enough to include the danger of shaking the foundation of Owners’ company.

2. Specific Cases – Examples of Requests and Counter Measures to be Taken

The Writer hereunder discusses several examples which he has encountered in his long experience.

(1) Requests Concerning Bills of Lading

Examples:

The actual quantity and condition of the cargo cannot be accurately checked and details may be entered in the B/L only with a declaration of the figures by the charterers/shippers and others. Besides where there is a case of a dispute over the contents of the items to be entered/stated in the B/L, the statement of a certain item, and/or entry or non-entry of a certain remark which differs from the contents which one party thinks to be accurate may be requested.

1. Cargo Quantity: Where checking of the cargo quantity accurately is difficult or impossible (for example number of logs, quantity of oils). Where the figure as declared by the charterers/shippers is requested by them to be stated in the B/L.
2. Cargo Condition: Where there is a dispute over the condition of the cargo and Owners are persuaded or forced to issue a Clean B/L because of time constraint for the ship. (If a claused bill of lading is issued, the bankers would not accept such in light of the terms of the L/C requiring a Clean B/L).
3. B/L Date, Destination and Others: Where entry/statement of changed B/L date, loading port, destination and/or stowage position in the B/L or a request is made for a new B/L to be issued, to include such changed entries/statements as requested.
4. Cargo Specification, Commingling and Others: Where the entry/statement of transshipment before or after the discharge of the cargo, inland transport, specification or quality of the cargo, IMO name, SCAC Code, contents of the L/C,special court jurisdiction or special place of arbitration, commingling of the cargo, mixture of additives or waters, “Clean on Board” bills may be requested.
5. Freight: Where the issue of a freight prepaid B/L is requested, whereas the C/P states that freight is payable, say within five days of completion of loading. Where the entry of the freight rate is requested.
6. Split B/L, Switch B/L and Others: Where a change of Consignees and/or the Notify Party, issuance of split B/L or switch B/L, or the B/L being carried onboard the Vessel are requested. Where issuance of the B/L by way of sending it to the place other than the loading place, or re-issuance of the B/L due to it becoming missing or lost is requested.
7. Cargo Delivery Without B/L: Where cargo delivery is requested without production of the original B/L, or cargo delivery with production of a non-endorsed B/L.

With regard to the above, other than issuance of the original B/L with stating the changed items, production of a Xerox copy of the B/L with the entry/statement of the changed item, a Non-Negotiable B/L (original or its copy) may be requested or amendments of simple typos or mistaken entries may be requested. You should take similar precautions about those.

(2) Requests Concerning Charter Parties

Examples:

Where the following matters and others are requested. The Vessels navigating in dangerous zones (war, piracy, icebound, sanction area, excluded area, unsafe ports and others), calling in prohibited ports, slow steaming or full steaming, carrying shipments of excluded cargo/dangerous cargo, there has been commingling of fuel oils, addition of fuel additives, boarding the Vessel of charterers’ persons, loading onboard of charterers’ machinery etc., deviation due to charterers’ convenience, stowage of special cargo and method of custody thereof, 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 Bills of Lading for segments outside the Owners’ control, issuance of (Non-Objection) Certificate concerning the shipment and the loading etc., issuance of Sea Waybill instead of B/L .

(3) Risks

Basically the entered/stated items in the B/L, if these differ from the actual facts, may not be valid or cannot be enforced against a bona fide B/L holder, namely the fact of non-payment of freight, the actual cargo quantity or condition, or loss of or damage to the cargo or shortage cannot be invoked to the bona fide Consignees.

There are risks of double issuance of the B/L and of the collected B/L being invalid.

There is a risk of non-coverage by P&I insurance.

False statements in the B/L: There is a risk of violating criminal laws, administrative laws and the local laws of each country – Particular caution is required in cases of developing countries/areas – There is a risk of long detention or confiscation of the Vessel.

Postdating/Backdating of B/L Date: Example, In relation to the sale and purchase price of cargo shipped, or for the purpose of the Consignees’ attempt to evade tax at the loading or discharge place. There is a risk of arrest of the Vessel.

Change of Loading Place/Destination: Example: For the purpose of concealing export to or export from enemy countries. On some occasions the false statement may violate local laws and there is a risk of arrest of the cargo and Vessel.

Complying with charterers’ requests may risk inconvenience and damage to the Vessel, crew, Owners, parties interested in the Vessel, cargo onboard and others and risks violating relevant laws, regulations and treaties.

3. Letter of Indemnity (LOI)

(1) Purpose of LOI and its Validity

It is necessary to obtain a suitable LOI in order to shift those risks to the charterers and other parties (by way of so called “Single LOI” or Bank Guarantee). The International Group of P&I Clubs has published recommended forms in cases of non-arrival of B/L and change of destination and those are helpful, provided that you should consider wordings suitable to each case. It should also be remembered that delivery of cargo without production of an original bill of lading is likely to prejudice a Member’s P&I cover. Such prejudice may occur even if Owners hold an LOI from charterers. Whether to deliver cargo without production of an original bill of lading is thus always a commercial decision for Ship Owners.

In cases where the provisions agreed in the LOI are illegal or contrary to public policy (Example, where false entries in the B/L defraud third parties), the LOI may be judged as unenforceable or invalid (the English case, Brown, Jenkinson v. Percy Dalton). An example is where the cargo is clearly damaged/defective, yet a Clean B/L is issued without any remark. However, there can be a difference of opinion on the cargo condition and it may be questionable whether such an LOI is always found to be illegal/unenforceable or whether it is likewise found to be invalid if law other than English law is applied. In any case the circumstances of each case should be examined. Where the Vessel’s Master and crewmembers assess that the cargo condition was not good, such assessment may be wrong and a Clean B/L may be issued with genuine intentions if the Master finds the allegations of the Shippers and other parties were persuasive. In such a case, it is a question whether or not the LOI should be treated as invalid. We should also see the “reality” of sale and purchase agreements on commodities where cargo buyers and sellers may seek to make Owners responsible for certain matters under the Letter of Credit contract. The L/C sale contract is a completely separate to the contract of carriage contained in or evidenced by the Bill of Lading, and Ship Owners should be cautious about any attempt to make them liable for L/C matters.

(2) Non-Arrival of B/L and LOI

Nowadays, particularly in carriage of oil/liquid cargo it is common and normal practice to effect delivery of cargo without production of the original B/L. However, there is a risk that the B/L holders will file claims against the Vessel/the Owners/the Carrier for damages due to the non-delivery of the cargo. This may happen where cargo receivers become insolvent, the purchase price has not been paid and bankers holding the B/L as the security come to claim against the Vessel/the Owners/the Carrier. The Owners/the Carrier do not basically need to deliver the cargo without production of the B/L but in light of the commercial necessity or in order to avoid the Vessel’s delay, cargo delivery without production of the B/L is very frequently done, even if this may prejudice P&I cover. Besides the C/P may stipulate for an agreement on the obligation to deliver the cargo by way of the charterers’ LOI rather than the B/L (to conduct in such manners itself is not normally illegal under each law. For example, see the English cases the“Sagano” ,The “Nemea”, The “Sormovskiy 3086”).

The International Group of P&I Clubs publishes recommended forms for the cargo delivery by obtaining the LOI from the receivers/charterers. Nowadays it is recommended that caution should be also taken about confirmation of the identity of the party to whom the cargo is delivered and also about how the Ship Owners should approach the issuer of the LOI where the claim is filed to the Owners.

Recently a simple method of “LOI issuance” by way of e-mail invoking the LOI provisions of the C/P is being adopted but there may occur disputes over whether the proper issuance of LOI can be found to have been in fact made. It is recommended that Owners obtain the signed LOI by way of scan or fax. Moreover the LOI provisions of the C/P should be properly worded. Also there is a problem of how far the addressees of LOI and the parties to be covered by LOI should be included and how the higher title holder should be required for the signer of the LOI. (The English case the “Bremen Max” concerning cargo delivery without the B/L deals with various issues on the LOI and is helpful.)

On the other hand if Ship Owners do deliver cargo without an original bill of lading, the claim amount where the B/L holders actually file a claim could become very high and, since the risks are not covered by P&I insurance, an LOI should only be obtained from parties able to satisfy the LOI’s terms in the proper form.

(3) Cargo Delivery Without Production of the B/L and Time Bar

There is an issue of whether the one year time limit of the Hague (Visby) Rules is applicable to claims from the B/L Holders. There is a court case where the validity of the provision of the one year time limit on the reverse of the B/L was disputed. Also there is a court case where applicability of the exemption provisions to incidents which occurred prior to the shipment or after the discharge (Japan COGSA Article 15) was disputed (For example the judgment of the Supreme Court of Japan, the highest Court in Japan-1997.10.14 [Maritime Law Research Magazine 1998-8 No. 145]). This issue is also concerned with the issue of until when the LOI should be kept and should not be returned or cancelled to the charterers.

(4) B/L Carried On Board the Vessel

Basically, all Bs/L (normally issued in three originals in total as one set) will be invalid if one original has been surrendered and collected. The other two originals will be invalid and the claim for the delivery of the cargo by the holders of the other B/Ls will be invalid. However on some occasions the shippers/charterers’ request that one B/L original should be retained and carried on board the Vessel and for the cargo delivery to be made against such B/L. (As the change of the above pattern, there are other patterns of the request for “surrender/collection” of the B/L at the loading place and the request for signing and issuance of the B/L at the discharge place.) However, this method deviates from the method of issuing, endorsement, surrender and collection of the B/L normally planned, and if to simply collect the one original of the B/L retained and carried on board the Vessel, such delivery may not be found to be proper one and/or the other original B/Ls may not be found to be invalid. Thus Owners would be better off refusing such a request or if compelled for commercial reasons Owners should comply but only on condition of obtaining a suitable LOI and of putting the remark at the front leaf of the B/L in respect of one original B/L being detained on board the Vessel. (The International Group of P&I Clubs published the recommended wordings thereof.)

(Tsurusaki: Last but not least, I wish to mention with many thanks that my English translation of the original article written in Japanese has been excellently proof-read and brushed up thanks to the excellent assistance and suggestions of Mr. Tetsu Morita and Mr. Royston Deitch of Japan P&I Club, It has indeed transformed the article much better than the original Japanese version!)