Letters of Indemnity – Alert! - Are you being asked to break the law!?
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"A Member approached the Club asking for our help to pursue a claim under a Letter of Indemnity (LOI) issued by a charterer / shipper.
LOIs are used all the time – even when, perhaps, they shouldn’t be. Traditionally, there are two parts to an LOI: i) the promise to pay or cover the losses of (i.e., indemnify) the other party; and, ii) an event which, if it occurs, activates the indemnity. They help fill the gaps in the long and formal contracts. They are mini-contracts, if you like, which make business more ... fluid.
For example, where bills of lading are not available at the discharge port, charterers / shippers issue an LOI to owners, promising to indemnify him for any losses suffered from releasing cargo without presentation of the bills. Another example would be where charterers / shippers need clean bills of lading when they should be claused.
But are LOIs all what they are cracked up to be? It is worth bearing in mind that LOIs are not always enforceable, which means that your LOI may not even be worth the paper it is written on ...
Under English law, parties can do and contract to whatever takes their fancy, unless the substance of that contract is prohibited by law. The key bit of that sentence, however, is unless ... prohibited by law. For example, you cannot contractually agree to commit a crime. Any such contract would be ignored by any lawyer or judge – it would be entirely unenforceable, regardless of what payments had been made under it.
Some of the situations in which LOIs are commonly issued are actually an agreement to break the law and, therefore, entirely unenforceable. One of those situations is even given above – do you recognise it? Yes – it is the LOI issued in respect of issuing clean bills. Charterers promised an indemnity in exchange for issuing clean bills, despite knowing that there was damage to the cargo.
When signing the bills, the Master is representing to the receiver that the cargo corresponds with the description given. If the Master knows that description to be incorrect but still issues it, then he has knowingly made a misrepresentation to the receiver. Effectively, he has committed a fraud. Fraud is, of course, a crime. So that LOI cannot actually be enforced. The indemnity provider is free to walk away without any fear of a recourse action from owners.
So, unfortunately, because the master knew the cargo was not as described on the bill, that Member’s LOI was entirely unenforceable and their P&I cover was prejudiced. The Member was left holding the full claim from the defrauded receiver who unexpectedly received damaged cargo with no recourse. They had to rely on commercial pressures to persuade charterers to respond, and even that was not particularly successful.
Always think about what you are being asked to do ... and why. This issue can be buried in fancy wordings, heated debates or justifications of urgent action. If you have any doubts, then feel free to get in touch – that is what we are here for!"
You may also be interested in:
QCR Autumn 2018: LOIs issued for discharge of cargo absent the original bills of lading - Whether obligations and rights contained in the LOIs are subject to the limitation provisions of the voyage charter
Glencore Agriculture BV v Navig8 Chemicals Pool Inc  EWCA Civ 1901 on August 21st, 2018
QCR Summer 2020: HARMONY INNOVATION SHIPPING PTE LTD v CARAVEL SHIPPING INC (THE “UNIVERSAL BREMEN”)
HARMONY INNOVATION SHIPPING PTE LTD v CARAVEL SHIPPING INC (THE “UNIVERSAL BREMEN”) -  1 Lloyd's Rep. 206. Delivery of cargo without bills of lading - Back-to back chain of letters of indemnity on the International Group standard form - Court recognises importance of allowing vessels to continue trading.
On 21 February, the English High Court in an unreported judgment of HARMONY INNOVATION SHIPPING v CARAVEL SHIPPING  2 WLUK 370 ordered charterers to provide security for the release of a ship under an LOI given to enable cargo to be delivered without production of the original bills of lading.