This year, many of our clients have faced claims arising out of
the delivery of cargo without production of the original bills of
lading and against letters of indemnity ("LOIs").
This scenario has become increasingly common in the PRC,
particularly in the iron ore trade where banks are looking to
enforce their rights in view of the deteriorating financial health
of local steel mills and traders. In many cases, the original bills
of lading have not passed through the banking chain to the ultimate
receivers and cargo is discharged against an LOI and released to a
party who has not paid for the goods. This results in a claim
against the carrier by the bank for mis-delivery and, ultimately, a
claim under the LOI by the carrier.
The delivery of cargo without production of the original bills
of lading and against an LOI has become widespread and accepted.
However, parties often issue LOIs without a full appreciation of
the risks involved.
If a party is considering providing an LOI, careful scrutiny of
the security for payment under the sale contract and of the risk of
the bills of lading being stuck in the chain should be conducted
If a party issues an LOI then it should always obtain an LOI
from its charterer/buyer down the chain. The indemnity should be on
materially identical terms to the LOI provided. Parties should
remember that security is only as sound as the solvency of the
party providing it and so, ideally, the indemnity should be
backed by a guarantee from a first class international bank or, at
the very least, a parent company of substance.
In the PRC, the importance of the delivery order and the lack of
physical control of the cargo are leading to significant exposures.
Parties should try to insert provisions into their contracts which
ensure that delivery orders are only exchanged in return for
original bills of lading and find ways of asserting greater control
over local agents.
Another option which should be explored is increasing the usage
of independently owned or leased warehouses or bonded warehouses
into which cargo can be discharged. Whether this is viable would
largely depend on the facilities at the relevant port and the point
at which import duty will become payable.
This article is part 4 of a quarterly issue covering transport and shipping cases from Australia and around the world.
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