Delivery of cargo without production of Bills of Lading: a recap

P&I Club Steamship Mutual has noted that a recent case in which cargo was delivered against fraudulent Bills of Lading illustrated the risks of agreeing charter party clauses that obliged an owner to discharge and deliver cargo without presentation of the bill of lading, against a charterer’s letter of indemnity (LOI).

Charles Brown, Head of Claims at Steamship, wrote that the problems involved had been highlighted by an International Group circular as long ago as 2001, which stated that members were “strongly advised not to accept such clauses…”.

However, Steamship conceded that such terms were commonly required by Charterers, and that commercial pressures might make it difficult to withhold agreement. Frequently the explanation given for such a requirement was that the bill of lading was unlikely to be available on the vessel’s arrival due to delays in the banking chain. The club said that cases where agreement to such terms had led to claims for misdelivery were few, but members needed to be aware of the potential risks that might be faced if such terms were agreed, and of the steps that could be taken to mitigate such risks.

The Club warned that, from the perspective of Club cover in such circumstances, the starting point was that claims for delivery of cargo without production of the relevant bill of lading were not covered, unless the Directors exercised their discretion in a member’s favour.

Under English law, in the event of misdelivery, an owner is liable in conversion to the holder of the Bill of Lading, a claim to which there would ordinarily be no defence.

In consequence, a commercial practice had evolved whereby, in consideration of an owner agreeing to deliver cargo without production of the relevant bills of lading, the charterer or another party such as the receiver of the cargo agrees to provide a LOI, indemnifying the owner against the consequences of doing so.

In a February 2001 circular the International Group provided a recommended wording for such LOIs and recommended that they be countersigned by a bank, although in practice this is rare. Misdelivery occurs when after delivery it emerges that a party other to that to which delivery was made was the holder of the original bills of lading, entitling it to delivery of the cargo, and that party brings a claim for the cargo value.

The LOI provides that, when it is alleged that cargo has been mis-delivered, the party issuing the LOI will not only indemnify the owner against any liability that it may incur to the bill of lading holder, but will in addition pay the legal costs incurred by the owner in defending that claim and, if necessary, provide security for it.

Steamship emphasized that, when such a LOI was provided, this did not have the effect of reinstating Club cover. Instead the LOI would be a substitute for the non-availability of cover.

Whilst the provision of a LOI potentially provided some protection, Steamship said that members should be aware that, by agreeing to accept such security in return for not requiring presentation of original bills on delivery, they assumed the credit risk of the LOI provider. While this might be less significant in cases where the providers were oil majors or large trading houses, an LOI from a party without adequate resources might ultimately leave the member bearing the loss.

Even in the case of a substantial provider there was no guarantee that the terms of the LOI would be honoured, and legal proceedings might be required to enforce the right of indemnity.

Additional steps a member can take to protect itself when such a charter party term is proposed include:

  • A credit check on the party issuing the LOI;
  • Ensuring both that the wordings of the charter party clause, and of the LOI to be given, are broad enough to cover the circumstances in which discharge and/or delivery is intended to be made, when these are known;
  • Where a party other than the charterer is intended to provide the LOI, it has agreed to do so;
  • In the case of voyage charters, requesting details prior to entering the fixture as to the proposed mechanics of delivery. Often this will be to a local agent at the discharge port acting on behalf of the charterer who will then hold the cargo pending the arrival of the original bills of lading against which it will be released. Some reassurance may be gained if that agent is a party of substance since, although acting on behalf of the charterer and not the member, it may be possible to bring a claim against the agent (in addition to a claim under the LOI) if the agent delivers against presentation of fraudulent bills;
  • Where delivery is into the custody of an agent, if non-negotiable copies of the original bills of lading are on board or received by owners prior to discharge, copies can be provided to such an agent, suitably endorsed,( for example “Specimen, non-negotiable ”) enabling that agent to check that the bills of lading ultimately presented correspond with the copies.

If all else fails and then a claim materializes which cannot be successfully defended, and recovery under the LOI proves impossible, then a discretionary claim can be submitted to the Club’s Directors.

Steamship noted that it was a requirement, prior to the exercise of their discretion, that “they are satisfied that the Member took such steps as appear to those Directors to be reasonable to avoid the event or circumstance giving rise to” the claim.

Steamship said that, bearing in mind that Club cover might be unavailable for the reasons given above, members might wish to consider obtaining separate insurance for misdelivery risks.