UK: Letters Of Indemnity Against Discharge Without Bills Of Lading – Seeking To Minimise The Trader's Risk

Last Updated: 9 August 2011
Article by Stuart Shepherd

It is common practice for traders, usually when they are the sellers of the goods and the charterers of a vessel, to instruct the carrier to discharge cargoes without production of the original bills of lading and to agree to indemnify the carrier against the consequences of doing so. This is done by providing a Letter of Indemnity ("LOI"). Sometimes, LOIs appear to be given by traders without a full appreciation of the risks involved or consideration as to how those risks might be minimised. In this Bulletin, we identify the risks involved in the use of LOIs from the trader's perspective and look at what steps might be taken to minimise those risks.

In what circumstances are LOIs used?

The bill of lading is of course the "key to the warehouse" and the carrier's obligation, under a negotiable bill, is to give delivery to the holder of the bill of lading and only the holder. No carrier in his right mind should give delivery of cargo without production of the bill of lading – unless he has an LOI from a party he believes is reliable. This is because if he delivers the cargo without production of the bills of lading, he may face a claim for the value of the cargo from the holder of the bills of lading (including possible future holders of the bills of lading) if the person to whom he gives delivery of the cargo is not one and the same. However, most carriers will agree (either at the time of entering into the charter or thereafter) to give delivery of cargo without bills of lading if they are provided with an LOI in the standard P&I Club form.

The bill of lading's progress through the payment chain is often slower than the vessel's progress to the discharge port and in those circumstances, if discharge had to wait for the bill of lading to catch up, large demurrage claims would arise.Therefore, in order to avoid demurrage liabilities, traders often instruct the carrier to discharge the cargo without bills of lading in return for an LOI. The risks of doing this are limited so long as the trader issuing the LOI is justifiability confident that (a) he will be paid for the cargo (if he is the seller) and (b) there will be no call under the LOI. Unfortunately, on occasions, confidence that payment will be made and that there will be no call under the LOI proves to be misplaced. We will discuss that further below.

Terms of the LOI

The vast majority of LOIs are issued in the standard wording recommended by shipowners' P&I Clubs. The key features of such wording are that the party giving the indemnity will:

  1. indemnify the indemnified party (usually the shipowner), their servants and agents and hold all of them harmless in respect of any liability, loss, damage or expense of whatsoever nature which they may sustain by reason of delivering the cargo in accordance with the request to do so;
  2. provide sufficient funds to defend any claim brought in connection with the delivery of cargo without bills of lading and
  3. provide security in respect of any third party claims brought against the indemnified party, their servants and agents for delivery without bills of lading should the vessel or any vessel or property in the same or associated ownership, management or control be arrested or threatened with arrest.

Therefore, if a third party comes along claiming to be the holder of the bill of lading following delivery of the cargo, and makes a claim against the carrier backed up with a threat to arrest his vessel, the trader who has issued an LOI will

  1. have to arrange security of that claim;
  2. be liable to indemnify the carrier in respect of that claim if the carrier is successful and
  3. have to provide the carrier with the funds to defend the claim. Since the third party's claim will almost invariably be for the full value of the cargo, the sums involved can be very significant indeed.

However, whilst the trader in such circumstances will have to pay the claim and finance the defence of the claim, he will have to rely upon the carrier to properly defend the claim in circumstances where he, the carrier, has no financial interest in the outcome of it - that financial interest of course now being with the trader who has issued the LOI. This is because the P & I Club standard form LOI wording does not give the party issuing the LOI any right to take over the handling of third party claims against the carrier, even after he has posted security in respect of that claim.

There is also no limit on the number of times which the indemnifying party is required to provide security. So if there are competing claims between different parties claiming to be the lawful holders of the bills of lading, it is quite possible that the trader issuing the LOI will have to provide security more than once. This can therefore prove to be an expensive business.

Risks to be assessed when issuing an LOI

The first, and obvious, risk of instructing a carrier to discharge cargo without bills of lading is that it renders the bills of lading valueless in the hands of the trader issuing the LOI in the sense that it is no longer gives him effective title to the goods. This is because if he were subsequently to bring a claim, as holder of the bills of lading, against the carrier for wrongful delivery of the cargo, that claim will boomerang back at him under the LOI – he would have to indemnify the carrier against his own claim. So any trader who issues an LOI should, before doing so, be sure that he is going to be paid. In our experience, the "security" of a letter of credit often provides traders with what they believe to be the requisite degree of comfort in this respect. However, we have seen cases where a seller, having issued an LOI, has been unable to obtain a payment under the letter of credit due to an unrectifiable discrepancy in the documents that must be presented under the letter of credit. In that situation, the "unsecured" seller will be left chasing his buyer for payment.

The second risk of issuing an LOI is the risk of that LOI being called upon. That can happen in circumstances where the bills of lading do not make their way through the chain to the receiver to whom delivery of the cargo has been facilitated by the LOI. We have seen this happen on a number of occasions where the bank, who has paid the seller under the letter of credit, does not have financial cover from its customer and thus retains the bills of lading. The bank then knocks on the carrier's door, holding the bills of lading, and asks for delivery of the cargo. The carrier will then inevitably make a call under the LOI which will result in the seller, who has issued the LOI, having, in effect, to pay back the value of the cargo delivered – which might be even greater than the price he has received for the cargo in the first place. Furthermore, in those circumstances, the seller may have no remedy at all against the buyer. The seller has, after all, been paid for the cargo under the letter of credit. His loss will result from having entered into a separate contract (the LOI) with a third party to facilitate the early discharge of the cargo from the ship to minimise his demurrage exposure and not from any contractual failure by the buyer. It is possible, depending on the facts of the case, that if the ultimate receiver had requested the seller to arrange discharge without bills of lading, that some form of implied indemnity may arise entitling the seller to an indemnity from the buyer. However, this is far from certain and is no sure route to recovery for the seller in such circumstances. And once again, such a claim would be unsecured.

Seeking to avoid the pitfalls of the use of LOIs

Bills of lading have been described as the "life blood of trade". Whilst LOIs do not quite justify the same epitaph, they are an instrument commonly deployed in international trade to remove bottlenecks in the supply chain. It would, therefore, be uncommercial to suggest that LOIs should be avoided at all costs. However, careful scrutiny of a trader's security for payment and of the risk of the bills of lading not making it through the financial/contractual chain to the receiver should be conducted before any LOI is issued.

As to the terms of LOIs issued, lawyers often say, quite rightly, that it is all in the wording and that anticipated pitfalls can be dealt with through careful drafting. However, unless you are able to negotiate a different wording at the time of chartering a vessel (which of itself would be difficult), carriers tend religiously to demand LOIs in the wording recommended by their P&I Club when asked to deliver without bills of lading and such wordings are of course very carrier-friendly. There is therefore little, if any, scope for seeking to negotiate on that wording by, for example, seeking the addition of a provision entitling the indemnifying party to take over the defence of any claim which is subject to the indemnity in the LOI.

However, one area where there is scope to reduce risk through drafting is in the wording of the sale contract or at the point of issuing the LOI at the request of a buyer. As we have said above, there may well be no right of recourse against a buyer in the event that the carrier makes a call under an LOI. Such a route can, however, be created by a provision in the sale contract providing for an indemnity in circumstances where the buyer asks the seller to issue an LOI to the carrier to hasten discharge. Alternatively, such an indemnity could be sought and obtained at the time that a buyer asks for the seller to issue an LOI to the carrier – that is, by getting a back-to-back LOI from the buyer in suitable terms – ideally counter-signed by a bank.


LOIs against delivery without bills of lading have been used for decades and are here to stay. However, there are very real risks in their use and it is important to have a full appreciation of those risks. Whilst the terms of LOIs are virtually non-negotiable, there are steps which can be taken to significantly improve a seller's position with a buyer in the event that LOIs are deployed, so that if calls are subsequently made on the LOI given to the carrier, there is a route of recovery as against the buyer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions