Specifically, the bills of lading are very important to trade, as the holder in due course is entitled to delivery of the cargo as described by the negotiable bill of lading. This right goes to title as well as quantity and description of the goods.

Mr Brown informs that an International Group circular from 2001 states that "Members are strongly advised not to accept such clauses...". However, although in the shipping industry such terms are required by Charters, the commercial rythm and pressures make it difficult for one to follow this agreement.

Often, when the bills of lading are not followed the explanation is that in short sea voyages or where there are multiple sales and sub-sales, the bill of lading is unlikely to be available on the vessel’s arrival due to delays in the banking chain.

Although the incidents where an agreement on such terms leading to claims of mis-delivery is a rare phenomenon, Mr Brown recommends members to always be aware of the potential risks that may follow, if these terms are agreed, and steps are taken to reduce any potential risk.

  • From the perspective of Club cover:

Unless the Directors exercise their discretion in a member’s favour, claims for delivery of cargo without production of the relevant bill of lading are not covered. This is based on the English Law, which states that in the occasion of a mid-delivery an owner is responsible in conversion to the holder of the Bill of Lading, a claim to which there would ordinarily be no defence. 

In light of the above, in consideration of an owner agreeing to deliver cargo without production of the relevant bills of lading, the charterer or the receiver of a cargo can provide a LOI, indemnifying the owner against the consequences of doing so.

Mis-delivery occurs when after a cargo is delivered, it becomes known that a party other to which delivery was made is 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. Therefore, the LOI safeguards that in case of mis-delivery, the party submitting the LOI will not only insure 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.

It is important to note that when such a LOI is provided, this does not have the effect of reinstating Club cover. Instead the LOI is a substitute for the non-availability of cover.

Moreover, although the LOI provides some protection, the interested parties should always accept security in return for not requiring presentation of original bills on delivery they are assuming the credit risk of the LOI provider.

Mr Brown proposes additional steps for a party to be protected when such a charter party term is proposed:

  1. Credit check on the party issuing the LOI;
  2. 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;
  3. Where a party other than the charterer is intended to provide the LOI, it has agreed to do so;
  4. 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; and
  5. 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.

Consequently, if all fails, Steamship Mutual suggests:

  • claim materialises which cannot be successfully defended
  • recovery under the LOI proves impossible: then a discretionary claim may be submitted to the Directors. It is 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.