Namely, a cargo of coal from Indonesia was discharged at an Indian port under a Letter of indemnity (LOI) as the original bills of lading were not available. Nine months later, a Dubai bank claimed to be the lawful holder of the bills of lading and demanded more than US$5 million from the ship’s owner as security for a misdelivery claim.

The owner then sought an order from the English Court that the charterers provide security as promised under the LOI.

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The LOIs provided that the cargo was to be delivered to an agent or to such party as was believed to be or to represent or be acting for the agent. The sub-charterers claimed that delivery had not been made to the agent and therefore the LOI did not engage. A number of agents, sub-agents and representatives had been appointed by various parties in the charterparty chain and the party attending on board at the time of discharge did not make it clear that they were representing the agent. Nonetheless, it was the Master’s evidence that he understood that person attending on board represented the agent.

The Court then ordered the charterers to provide security. The court was satisfied that delivery had been made to the correct party named in the LOIs and that the master had reasonably and honestly believed that the cargo was being delivered to the agent or to someone acting on its behalf within the terms of the LOIs.

The Court also thought that clause 3 of the IG standard LOI should provide a swift remedy in the case of arrest for alleged misdelivery and that a failure to perform this promise could not properly be met by damages.

Providing its comment on the decision, the UK Club stated that:

It is clearly a positive development that the Court interpreted clause 3 of the IG standard LOI favourably for shipowners and required the charterers to provide security as promised. However, it is still troubling that there continues to be disputes under LOIs which illustrates the inherent risks with such operations

In addition, the UK Club reminded operators that P&I cover for misdelivery claims is prejudiced if cargo is delivered against an LOI instead of production of original bills of lading. The LOI can be considered a substitute for such cover and care must be taken to make sure that it provides the necessary protections and remedies for the receiver of an LOI in case of an unfortunate event of a misdelivery claim.