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Letter of indemnity (LOI) is a written undertaking by one party to compensate another for losses arising from a specific risk. In shipping, LOIs are used in two main situations: when a shipper asks the carrier to issue a clean bill of lading despite reservations about the cargo, and when a receiver asks the carrier to release cargo without presentation of the original bill of lading. Both situations expose the carrier to serious legal risk — and in both cases, the enforceability of the LOI is far from certain.
LOI for a Clean Bill of Lading
At loading, the carrier is required to describe the apparent order and condition of the cargo — its external state as visible upon ordinary inspection (Hague-Visby Rules, Art. III r.3). If the master observes damage — torn bags, leaking drums, rust — he is entitled to insert a clause, making the bill of lading “unclean” (claused / foul bill of lading). For a seller under a CIF contract, this is disastrous: the bank financing the transaction under a letter of credit will only accept clean transport documents (UCP 600, Art. 27), and a claused bill of lading means refusal to pay.
To avoid this, the shipper offers the carrier an LOI: a written undertaking to indemnify the carrier against all losses arising from the discrepancy between the actual condition of the cargo and what the bill of lading states. For more on what makes a bill of lading clean and why it matters for documentary credit transactions, see my separate article.
Fraud vs. genuine doubt: the enforceability boundary
The enforceability of an LOI for a clean bill of lading depends entirely on one circumstance: did the carrier know the cargo was not in proper condition?
If it is obvious at loading that the goods are damaged and the carrier still signs a clean bill of lading, he knowingly misleads the future holder of the bill. This constitutes fraud — tort of deceit. And a contract designed to protect a party from the consequences of its own fraud will be held illegal and unenforceable by an English court.
This is what happened in Brown Jenkinson & Co. Ltd v Percy Dalton (London) Ltd. [1957] 2 Q.B. 621. Barrels of orange juice were visibly leaking at loading — the defect was obvious. The shipper persuaded the master to sign clean bills of lading in exchange for an LOI. When the receiver sued the carrier, the carrier attempted to recover from the shipper under the LOI. The court refused: by issuing a clean bill of lading for knowingly defective cargo, the carrier had committed the tort of deceit, and the LOI — a contract designed to shield him from the consequences of that fraud — was held to be illegal.
The situation changes when the carrier has a genuine doubt. For example, steel coils show a light surface rust — is this a defect or the normal condition for this type of cargo? Bags show traces of moisture — condensation or water damage? If the carrier cannot definitively state that the cargo is defective, issuing a clean bill of lading does not amount to fraud, and the LOI is a lawful, enforceable contract. The standard is not that of a surveyor, but that of a “reasonably careful master,” as Colman J. noted in The David Agmashenebeli [2002] EWHC 104 (Admlty).
LOI for Delivery Without the Original Bill of Lading
This is the second — and in practice more common — use of LOIs in shipping.
Why the bill of lading is needed to collect cargo
A bill of lading is not merely a receipt and evidence of the contract of carriage — it is also a document of title. This means the carrier is obliged to deliver the cargo only to the person who presents the original bill of lading. Delivering cargo without presentation of the original is misdelivery, and the carrier’s liability for it is strict: neither good faith nor absence of fault constitutes a defence.
This principle was definitively established in Sze Hai Tong Bank Ltd v Rambler Cycle Co. Ltd [1959] AC 576 (Privy Council). Bicycle parts were shipped from England to Singapore under a bill of lading “unto order or assigns.” After discharge, the carrier’s agent released the cargo to the consignee without presentation of the original bill of lading — in exchange for a bank guarantee (LOI). The consignee failed to pay for the goods. The Privy Council held that the carrier had breached its fundamental obligation under the contract of carriage — to deliver only upon presentation of the bill of lading. An exemption clause in the bill of lading purporting to terminate liability after discharge did not save the carrier: the court held that such a clause cannot absolve a party from liability for a fundamental breach — a breach going to the very root of the contract.
The strictness of this standard was confirmed in Motis Exports Ltd v Dampskibsselskabet AF 1912 [2000] 1 Lloyd’s Rep. 211 (CA): the carrier delivered cargo against forged bills of lading, unaware of the forgery. The court upheld liability — even an honest mistake is no defence when cargo is delivered to the wrong person. And in The Sormovskiy 3068 [1994] 2 Lloyd’s Rep. 266, the court held that a local port practice of discharging and releasing cargo without a bill of lading does not relieve the carrier of liability — such practice does not constitute a custom in the strict legal sense.
How the need for an LOI arises
A typical situation: an FOB contract, the vessel arrives at the discharge port, but the buyer does not have the original bills of lading. The reasons may vary — documents are still in transit through banks, payment is in progress, or a dispute has arisen between seller and buyer. Meanwhile, the vessel is on demurrage, and every day of delay costs money. The buyer approaches the shipowner requesting delivery against an LOI — a guarantee letter under which the buyer (or their bank, or the charterer) undertakes to indemnify the shipowner against all losses if delivering without the bill of lading leads to claims.
Another common scenario involves a chain of CFR/CIF contracts (string sale), where documents pass from one link to the next. The vessel moves faster than the paperwork: by the time it arrives at the discharge port, the original bills of lading are still “stuck” in one of the intermediate links. The end buyer cannot present the original, and without an LOI the cargo remains on board.
The shipowner’s dilemma
For the shipowner, this is a no-win situation. If he delivers against an LOI and a third party (for example, the seller who still holds the original bills of lading) brings a claim — the shipowner bears strict liability for misdelivery. The LOI is his only protection, but its value depends on the solvency of the party that issued it.
If the shipowner refuses to deliver — the vessel continues to accumulate demurrage, the charterer applies pressure, and commercial relationships are at risk.
Can the seller sue the shipowner?
Yes. If the seller has retained the original bills of lading (for example, because the buyer failed to pay), the shipowner who delivered the cargo without presentation of the original has breached his obligation to the holder of the bill of lading.
Under Carriage of Goods by Sea Act 1992, section 2(1)(a), the lawful holder of a bill of lading acquires rights under the contract of carriage as if he had been a party to that contract. A seller retaining an order bill of lading as security for payment is a lawful holder — and has a contractual claim against the carrier for misdelivery.
In addition to a contractual claim, the seller may bring a tortious claim in conversion — provided that he retained title to the goods at the time of the wrongful delivery. The question of when exactly property in the goods passes is often disputed — Incoterms do not govern the transfer of property, and it is determined by the applicable law and the terms of the specific contract. However, the parties may expressly provide for a retention of title clause — stipulating that property passes only upon full payment. If such a clause is in effect, the seller retains both property and possession of the bill of lading — and can claim against the carrier in both contract and tort.
This is precisely why delivering cargo without the original bill of lading is such a serious risk for the shipowner: he may find himself a defendant in a claim brought by a party whose existence he was not even aware of.
The Role of P&I Clubs
P&I clubs (Protection & Indemnity clubs — mutual insurance associations of shipowners) publish standard LOI forms — both for issuing clean bills of lading and for delivering cargo without the original B/L. Using a standard form creates uniformity and formalises the undertaking, but does not make an LOI automatically enforceable — that depends on the circumstances of each case.
The P&I clubs’ position differs between the two types of LOI. Regarding LOIs for clean bills of lading, UK P&I Club expressly states that the club will not assist a member who accepts an LOI in exchange for participation in a fraudulent act — and issuing a knowingly inaccurate bill of lading is classified as exactly that. Skuld also emphasises that accepting an LOI for a clean B/L when there are obvious cargo defects means the shipowner is operating outside standard P&I cover.
Regarding LOIs for delivery without the original B/L, the situation is different, but cover is still at risk. UK P&I Club notes that liability for delivering cargo without presentation of the bill of lading is not covered by standard P&I insurance (Rule 2, Section 17 proviso c), although the Members’ Committee may exercise discretion to provide cover in a specific case. The International Group of P&I Clubs publishes standard LOI forms (latest edition — September 2023), which contain an express warning that accepting an LOI jeopardises the member’s P&I cover. The clubs strongly recommend obtaining an LOI backed by a first class bank guarantee. Without a bank guarantee, an LOI is merely the undertaking of a company whose solvency may come into question at the very moment the guarantee is most needed.
Enforceability of LOIs for Delivery Without the Original B/L
Unlike an LOI for a clean bill of lading, an LOI for delivery without B/L does not involve fraud in the same sense: the carrier is not making a false representation, but is delivering cargo to a person who may well be the rightful receiver but cannot prove it documentarily.
The key question of enforceability of such an LOI is to whom exactly the carrier delivered the cargo. In The Bremen Max [2008] EWHC 2755 (Comm), the court held that the obligations under the LOI were conditional upon delivery to the person named in the LOI. If the shipowner has doubts about the identity of the receiver, he is entitled to request confirmation from the charterer — and if the charterer confirms, he will be estopped from subsequently denying that delivery was made to the proper person.
However, an LOI will not protect the carrier if he delivered the cargo to a person other than the one named in the guarantee letter, or if the wording of the LOI does not cover the specific circumstances of delivery. The LOI is construed literally, and the court will not give an expansive interpretation to the guarantor’s obligation.
Conclusion
The LOI is an instrument without which modern shipping cannot function, yet its legal nature remains complex. An LOI for a clean bill of lading may prove unenforceable if the master knew of defects at loading (Brown Jenkinson). An LOI for delivery without the original B/L is enforceable when properly drafted, but does not relieve the carrier of strict liability to the holder of the bill of lading for misdelivery (Sze Hai Tong Bank, Motis Exports). For the shipowner, the key question in both cases is how reliable the party standing behind the LOI is, and how well the LOI covers the specific circumstances of delivery.
If you have questions about bills of lading, LOIs, or shipping, or need assistance with an arbitration or court dispute, get in touch:
