Lyall Hickson, Senior Claims Executive at UK P&I Club, discusses the importance adhering to best practice when it comes to bills of lading:
“Delivery of cargo without presentation of an original bill of lading, although not recommended, is a reality of international trade. Delays in the documentary chain, and onward sales of the cargo while it is in transit, often mean that original bills are not available when the ship reaches the discharge port.”
“When this occurs, the carrier invariably agrees to deliver the cargo in consideration of receiving a Letter of Indemnity (LOI) from their charterer or receiver. In many cases, a delivery of cargo in this way will proceed without incident. However whilst the practice is familiar, there are inherent risks involved.
The risks
“Delivery of cargo without presentation of original bills of lading can result in a mis-delivery of cargo. A bill of lading acts as a ‘key’ at the discharge port, presented to the Master in order to release the cargo to the ‘bearer’ of the bill of lading. When it is not available at the discharge port, it must be remembered that an LOI will not absolve the carrier from liability if the cargo is delivered to the wrong party, which is commonly referred to as a “mis-delivery claim”.
“Liabilities arising as a consequence of mis-delivery are not covered under all P&I Club rules. The LOI is designed to try to alleviate such risk, so far as it can, but it must be understood that an LOI effectively substitutes an Owner’s P&I cover for mis-delivery claims. However, if there is no causal connection between delivery without an original bill and the subsequent claim, cover will remain in place: so, for instance, claims for loss or damage to cargo will still be covered.
“It is therefore absolutely essential to correctly word the LOI and ensure that proper procedures are in place to demonstrate compliance with the LOI. Also one should weigh up the counter party risk of accepting an LOI. An LOI is only as secure as the party providing it.
The Zagora
“The bulk carrier, Zagora, was recently involved in an English High Court case which highlights the issues arising from the non-production of an original bill of lading.
“The relevance of the LOI arose following a discharge which took place without production of an original bill of lading against the charterer’s LOI. More than eight months after discharge, the vessel returned to the same discharge port and was placed under arrest at the suit of the Bank of China, who asserted that they were holders of the original bill of lading, that they had not been paid, and that the cargo had been wrongfully discharged.
“Ultimately, the English High Court upheld the LOI, finding that the shipping agent did represent “Xiamen” as the party to whom Owners were instructed to discharge and release the cargo. However, this was not before an intensely factual investigation into the chain of charter parties and sales contracts, the evidence relating to the formation of the LOI up and down the contractual chains, as well as the circumstances of the discharge operations.
“The practice of delivery of cargo without presentation of original bills of lading is very familiar, and so far as paper bills of lading are concerned, is here to stay. However, mis-delivery claims do arise which must be dealt with without support of insurance as well as with the uncertainty of whether an LOI will effectively protect the shipowner in the event of claim. “It is therefore crucial that owners remain vigilant with their procedures for delivery of cargo as well as with regards to Charterparty clauses and LOI wording. “