What is a Letter Of Indemnity in Shipping?
Letter Of Indemnity in Shipping
A letter of indemnity is used in shipping to reassure one party that they will not suffer financial loss if the other party cannot fulfil an agreement, or if the nature of that agreement changes.
‘Indemnity’ isn’t the sort of word most people use or encounter much in everyday life. It can be defined as: Protection or security against legal liability for the consequences of one’s actions.
The concept of indemnity is based on helping one party in a contract avoid losses if the other party:
- Makes a mistake
- Changes the terms of a contract or agreement
- Does not fulfil their obligations.
Who Is Affected By A Letter of Indemnity?
Usually, three parties are involved in the agreement laid out in a letter of indemnity:
- The party that is seeking or offered the indemnity.
- The granter of the indemnity, usually the person or business receiving the goods.
- The backer – typically, this is a bank or other financial institution that is backing the person or business granting the indemnity.
The Benefits of an Indemnification Letter in International Shipping
There are several shipping scenarios in which a letter of indemnity (LOI) is of value. For example, a carrier can offer an LOI to a customer who has reservations about accepting a shipment that arrived in port without its bill of lading.
The terms of the LOI can offer the customer assurances that they won’t suffer a loss if they accept the cargo without its bill of lading, but later find the shipment was delivered incomplete. That helps the shipping process, as the carrier gets to offload the cargo without having to wait for the bill of lading, which could delay their operations.
Here are some more of the most common scenarios in which such letters provide indemnity in shipping:
- When the cargo’s consignee requests the carrier to release the goods without producing the original bill of lading.
The speed of shipping has increased to such an extent that cargo vessels often arrive at their port of discharge before the paperwork has arrived by courier. In such cases, or when the original bill of lading has been lost, the consignee will offer the carrier a letter of indemnity in exchange for delivery of the freight without the bill of lading. The LOI will absolve the carrier of any blame or financial penalty if the shipment is later found to be substantially different to that recorded on the original bill of lading.
- When cargo is sold during transit as part of a high sea sale.
Cargo can be traded while in transit, sometimes several times. This often leads to complicated situations in which an LOI issued by the shipper is assumed to cover all parties involved in the chain of selling until the goods are released at the port of discharge.
Without a letter of indemnity, the carrier could be held liable for lack of documentary evidence of the transactions, including who is the owner of the cargo when it reaches the port of discharge.
While the availability and use of electronic Bills of Lading is certainly helping to overcome these problems, they still exist, as digital documentation has yet to be adopted in all areas of shipping.
- When cargo is delivered to a port that’s different to the one named on the original bill of lading.
Acts of God, political unrest, or human error can cause goods to be delivered to a port that isn’t the one stated on the bill of lading. In such circumstances, the carrier can request a letter of indemnity from the shipper or recipient.
- When a clean bill of lading is issued.
Here the shipper agrees to protect the shipping company against any possible consequences that may arise from issuing a clean bill of lading. Usually, a shipper needs a new bill of lading when the goods loaded onto the cargo vessel do not match those stated on the original bill of lading.
Who Usually Writes a Letter of Indemnity and What Should It Include?
Usually, a bank, insurance company, or other financial institution will prepare an indemnification-notice letter. They have experience of using the specific wording required to ensure the letter, which is essentially a contract, clearly states the liabilities and obligations of both parties.
All of the following should be included in an LOI:
- The title ‘Letter of Indemnity’
- The date the document was signed
- A statement explaining that the contents of the letter are governed by the laws of wherever the agreement would need to be produced in the event that court proceedings prove necessary
- The terms of the agreement already in place
- Possible events that could prevent one party from honoring the terms of the agreement, and details of what that party agrees to do to indemnify the other party
- The signatures of the parties involved
A Letter of Indemnity Sample
To gain a better understanding of the content in a letter of indemnity, it’s worth taking a look at an actual sample LOI for shipping. However, to give you an immediate idea of the content’s flavor, here is an extract of text from an LOI:
If a bill of lading does not arrive at the port of discharge in time, the carrier should release the consignment without requiring the presence of the original bills of lading. [THE GRANTER] hereby indemnifies the owners of the vessel against all consequences resulting from discharging the cargo without seeing the original bills of lading.
The Importance of a Letter of Indemnity
If one party needs to take the other to court to ensure they deliver on their promise outlined in an LOI, access to a written copy of the letter is vital. It will provide the court with evidence of the agreement into which the parties entered. No such evidence will be available if the agreement was verbal or sealed with a handshake.
It’s also important for both parties to sign the LOI. Furthermore, as the LOI relates to business matters, the signatories should use their business titles to make it clear they are signing on behalf of their company, not themselves. Ideally, the signatures should be witnessed by a notary, but this is not essential.
Is a Letter of Indemnity Legally Binding?
Not always. An LOI is usually legally enforceable only if the actions it offers indemnity against are legal. For example, a shipper might request an LOI to issue clean bills of lading for damaged goods. If the carrier accepts the LOI knowing that the goods were damaged, this could be considered as misrepresentation or even fraud. As a result, a court would most likely declare the LOI unenforceable if any claim went that far.
Who Accepts the Risk With an Indemnification Letter?
The most risk lies with whoever agrees to the LOI and its terms. For example, if a carrier accepts an LOI for whatever reason, they risk:
- Invalidating their insurance cover, especially if they deliver cargo to a different port or without a bill of lading
- Not knowing if the LOI is enforceable in a court of law
- The person or business who is granting the indemnity not being reliable or going into liquidation by the time any claim reaches court
It makes sense, then, for whoever agrees to accept the LOI to ensure the wording of the letter is as specific as possible. The terms of the agreement should offer them the highest possible levels of security and indemnity.
Carriers should beware of accepting LOIs that offer a level of indemnity that’s equal only to the value of the cargo. That’s because any claim made against the carrier could be for far more than just the value of the goods. For example, claims might include the cost of getting replacement items at short notice, or losses accrued by the business due to non-delivery of the original shipment.
Often, a carrier will be persuaded to accept an LOI due to commercial pressures. For example, the consignee needs the goods urgently, or the shipping company wants to unload cargo quickly. However, any business considering accepting the terms of an LOI should ensure the scope of the agreement and indemnity is broad enough to adequately cover their risk.
An LOI is Only as Good as the Person or Business Granting It
It’s vital that the person granting the indemnity is reliable. Given the long-term nature of claims, the carrier needs to be sure that the party offering the indemnity has sufficient financial resources to satisfy it. The carrier will also need to be reasonably confident that the indemnifying party will still be in business if claims against that indemnity are made. Such peace of mind is not alway easy to attain, since the need for an indemnity claim might not be apparent until several years after the event to which it relates.
How Long Does Indemnity Typically Last?
The duration of indemnity should be stipulated in the terms of the LOI. Usually, the indemnity lapses once the original bills of lading are handed to the carrier, often no more than a few days after the cargo is unloaded. However, that is not always the case. Bills of lading have been known to take years to reach the carrier. That’s why it’s important that an LOI details the date when the indemnity expires. Many LOIs stipulate that indemnity expires after 13 months. This is based on the terms of the Hague Visby Rules, which state that cargo claims must be made within 12 months of the loss or damage being reported.
The LOI: Reducing Risk for Shippers, Carriers, and Consignees International shipping is a fast-moving, ever-changing process. The letter of indemnity plays an important role in enabling carriers in particular to quickly react and agree to changes that would otherwise slow down the process—and to do so without taking on unwanted risk.
An LOI is ultimately a contract, so the wording used is vital. That’s why it’s always recommended that the letter is written and countersigned by a bank, insurer, or professional with experience of such matters. It’s also vital that whoever is seeking the indemnity gets the most comprehensive terms they can.