Background
A review has recently been conducted of the widely used P&I standard Letter of Indemnity wordings by a committee of IG Clubs and BIMCO. These wordings cover delivery scenarios where the bills of lading are not available on the vessel’s arrival at the discharge port or situations where the cargo is discharged at a port different to that stated on the bill of lading. Copies of these revised wordings and related Explanatory Notes can be found attached as Annex 1.
Prompted by the English Commercial Court judgment of 2009, the “Bremen Max”, these proforma wordings were last reviewed in 2010 when additional precautions were needed to protect owners choosing to accept a Letter of Indemnity, in this specific case, for delivery of cargo without production of the original bill of lading. A Club Circular (shown attached as Annex 2) was issued at the time commenting on these changes.
The working group felt that subsequent decisions handed down by the English Courts dealing primarily with issues of enforcement warranted a further review. Interestingly, the various drafting committees involved in the review (which included the support of a former well known English Admiralty judge as well as input from major industry partners), arrived at the conclusion that, fundamentally, the existing wordings were effective and thus did not require a radical change.
The amendments
The Explanatory Notes consider the new changes which we paraphrase below:
- Vessel, Port, Cargo & Bill of Lading Details: The format of this section has been expanded and headings have been added for the insertion of additional information to make it absolutely clear which bill(s) of lading and cargo are covered by the LOI.
- The first paragraph of the old LOI wording (which consisted of one sentence) has been split into two paragraphs. The first deals with what has happened to the bill of lading. The second sets out the request being made.
- The previous reference to “but the bill of lading has not arrived” has been changed to “but the Bill(s) of lading is (are) not currently available to be presented”. This reference more accurately encompasses the many reasons why there is no bill of lading to be tendered for the cargo and the specific requirement which cannot be fulfilled by the receiver.
- Changes have been made to the wording which now makes up the second paragraph. The requirement to deliver the cargo to the person/company nominated by the requestor (or the person/company reasonably believed to be them) is retained. The carrier may wish to have a specific person identified and details of their identity recorded in the LOI so that they can be checked, but the proforma wording is left deliberately wide to give the greatest protection to the carrier.
- An additional representation/undertaking as to the status of the party to whom delivery is to be made has been added to strengthen the promises being given by the requestor, and to make the nature of what the requestor is saying clear to them.
- Paragraph 3 has been broken down into three sub-paragraphs to ease interpretation.
Further amendments have also been made. An express obligation has been added to provide security, etc., if a vessel or property belonging to or controlled by the recipient of the LOI has been arrested. This puts a charterer receiving an LOI as part of a chain of LOIs and whose own vessel (or a vessel chartered by them) has been arrested for claim security, in the same position as the owner of the vessel which carried the cargo whose vessel is arrested. The obligation to provide security has deliberately been left without limitation in sub paragraph (a). Where the recipient of the LOI has put up security to obtain release of the vessel, wording has been added to make it clear that the obligation under the LOI is to replace that security (or to provide counter security, etc) even if the security which has been put in place exceeds the value of the vessel arrested. This addresses the fact that a recipient of an LOI should not be prejudiced if, for example, it was appropriate for them to simply put up the security demanded to avoid further interference with their vessels and/or property, regardless of whether the security they have put up exceeds the value of the vessel which carried the cargo or which was subsequently arrested. - Paragraph 4 has been amended to make it clear that so far as the references to bulk facilities (whether for liquid or dry cargo) are concerned, (a) once discharge is made and the cargo becomes part of a larger mass of cargo so that it effectively becomes impossible to identify that cargo again, and where (b) even if delivery has not physically been made to the receiver themselves (because for example the cargo is physically delivered to the operator of a tank farm, silo, etc.), delivery to the required person is nevertheless deemed to have occurred.
- Paragraph 5 has been amended to make it clear that the LOI obligations only come to an end if the bills of lading have ultimately reached the party that took delivery of the cargo and are thus accomplished. This deals with indefinite exposure and allows the LoI undertakings to be extinguished.
- The proforma reference to English law and jurisdiction in Paragraph 7 has been preserved which makes sense for a variety of reasons as commented on in the notes.
- The proforma bank guarantee wording has been maintained though it is customary for the banks to insist on their own wording.
- The signature section contains minor changes aimed at identifying the person signing the LOI and the capacity in which his/she is signing (and binding the company).
The new wordings contain warnings that P&I cover is prejudiced by the provision or acceptance of an LOI. Both the provision and/or acceptance of an LOI for the scenarios contemplated will put an owner or charterer beyond the scope of P&I Cover and in particular recipients of an LOI are reminded of the importance of establishing the financial standing of any third parties that offer an LOI and their capacity to respond to potential claims including the provision of Security.
The working committee reinforced the view that the move to Electronic Bills of Lading should be encouraged which would remove this practise completely.
Conclusion
While clearly protecting owners/carriers’ interests, the changes that have been introduced are generally positive and will not significantly alter the position of Assureds offering or receiving an LOI on standard P&I wording. Assureds should however always bear in mind the potential cover implications associated with this risky commercial practice.
The Charterers P&I Club supports the use of electronic bills of lading through approved electronic trading platforms to minimise the Assureds’ uninsured multi-million-dollar exposure.
It is important to note that the decision to issue or accept an LOI (and its associated wording) is a commercial matter for the Assured, any assistance by the Club on these issues will be discretionary and assessed on a case-by-case basis.
