Letters of indemnity - the charterer’s perspective

Skuld Charterer

Published: 12 October 2022

Credit to: Tolikoff Photography / Shutterstock.com

Letters of indemnity, or "LOIs", are – whether one likes it or not – a fact of life in commercial shipping, and our charterer assureds will have been requested to provide one in a wide range of scenarios. Sometimes a LOI may offer the best commercial solution to a problem, but before giving one it is worth taking a step back and considering a few basic questions.

Do I really need to give a LOI?

The answer to this is normally found in the terms of the charterparty. Does the requested operation concern an order which charterers are entitled to give under the charter? If so, there should be no justification for a LOI. If not, owners may be contractually permitted to reject charterers' request, and to only consider agreeing to it if charterers provide additional assurances in the form of a LOI.

The classic example is the delivery of cargo without the owner or master being provided with the original bills of lading at the discharge port. The position here is straightforward: owners do not have to deliver the cargo to a person who cannot produce the bill of lading [1]. As such owners can refuse to do so and agree only upon provision of a LOI. In fact, owners are not required to deliver in these circumstances even if a LOI is offered by charterers, unless the charter clearly states that they must do so [2].

Other scenarios are less clear cut. Typical examples include: the issuance of a clean bill when the master has concerns about the apparent condition of the cargo; requests to commingle or blend (liquid) cargo on board; and discrepancies between the ship and shore figures with respect to the quantity of cargo loaded. Whether or not a LOI is appropriate in such cases is a question of degree and will have to be assessed on a case-by-case basis. Our claims handlers deal with these situations regularly and are on hand to provide guidance and assistance.

Is there a standard P&I club wording?

There are only three standard LOI wordings issued by the International Group of P&I Clubs (the "IG"), which address delivery of cargo without production of the original bill of lading and delivery at a different discharge port than that stated in the bill of lading. Read them on Skuld.com here.

There is no IG standard form dealing with other scenarios such as those referred to in section 1 above. If therefore the charter party provides that a LOI is to be provided "per owners' P&I club wording" for a particular operation (for example, a line flush) where there is no published club format, and no other wording has been provided to charterers before fixing, there is likely to be uncertainty as to the precise terms of the LOI and the potential for a dispute. To avoid this, if it is agreed that a LOI is necessary, it is prudent to agree the full wording and to include it in the charter, albeit this is more practical for specific operations, as one cannot realistically cater in advance for all possible scenarios where a LOI may be requested.

If I have to give a LOI, how can I reduce my exposure?

If a LOI has to be provided to owners, the first issue to consider is whether charterers can obtain a back-to-back LOI. This would typically be from a sub-charterer, or there may in limited circumstances be scope to request a LOI from a sale contract counterpart. However even if a back-to-back LOI can be obtained, charterers will still retain some risk, for example if the provider of the indemnity down the chain is not financially able to honour their obligations (this risk may be reduced by obtaining additional security, such as the counter-signature of a suitable international bank) or if there are other issues in relation to enforcing the LOI (for further discussion of the enforceability of LOIs please see our practical guide).

The second way to reduce exposure is by carefully considering the wording of the LOI. While there is, as mentioned above, a limited number of standard IG wordings, it is typical for parties to adopt the main provisions of the IG wordings even for non-standard LOIs, with logical amendments. Below are some brief (by no means exhaustive) tips in this regard:

  1. Ensure that the indemnities and connected obligations (such as the provision of security) are limited to issues arising from the owner's compliance with the request. Sometimes the wording goes beyond this and refers to liabilities arising from delivery of the cargo, even when the request itself (for example, commingling) does not directly relate to delivery.
  2. Try to avoid taking on responsibility for issues arising from owners' negligence. Under English law, an indemnity does not generally extend to losses arising from the beneficiary's (i.e. the owner's) negligence unless this is clearly provided for in the clause [3]. LOIs are sometimes amended to expressly state that the indemnity is triggered even when the loss or liability is caused by the negligence or fault of the owner or crew, which will obviously increase the charterer's exposure. An apparently modest amendment referring to liabilities "howsoever arising", or wording which is similarly wide, will have the same effect [4].
  3. Consider inserting a limit of liability, for example by reference to the cargo value.

Am I covered under P&I?

Even though there are IG standard wordings available, LOIs generally fall outside of standard charterers' P&I cover, as they involve onerous indemnities which are excluded under the club's terms and conditions. However, should you need assistance or advice in relation to a request for a LOI, your dedicated Skuld team can assist in reviewing the wording and considering tailor-made additional cover for the exposure under the LOI.

[1] See for example The Houda [1994] 2 Lloyd's Rep. 541, concerning negotiable or "to order" bills of lading. The position regarding non-negotiable or "straight" bills is slightly more complicated.
[2] See again The Houda as cited above.
[3] If there is no express reference to negligence, the question is whether the words used are wide enough in their ordinary meaning to cover negligence on the part of the party seeking to be indemnified: see R. v Canada S.S Co Ltd [1952] A.C. 192.
[4] The words "howsoever arising" are likely to be wide enough to extend an indemnity to cover losses arising from the indemnitee's negligence: see; Pyman S.S. Co v Hull & Barnsley Ry [1915] 2 K.B. 729; Swiss Bank Corp v Brink's Mat Ltd [1986] 2 Lloyd's Rep. 79; Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] 2 Lloyd's Rep. 251.