During loading at Rouen, the chief officer notices that some bags of sugar are wet and wants to clause the bill of lading. The shipper, bound by a documentary credit that requires a clean bill of lading, offers a letter of indemnity: it will hold the carrier harmless against any claim. The arrangement is common. It is also one of the riskiest in maritime transport.
Why the shipper wants a clean bill of lading
As a rule, the bank accepts only “clean” transport documents, bearing no clause expressly declaring a defective condition of the goods or their packaging (UCP 600, Article 27). A claused bill of lading blocks payment under the documentary credit. The shipper is therefore tempted to “buy back” the clause with a letter of indemnity.
What the law says
The Transport Code deals with the matter precisely. Such letters are void and of no effect as against third parties, although third parties may rely on them against the shipper (Article L. 5422-5 of the French Transport Code). A consignee who receives damaged goods therefore sues the carrier, which cannot set up against it the actual condition of the goods at loading: the clean bill of lading is conclusive evidence against a third party acting in good faith (Article L. 5422-3).
The provision goes further. Where the deliberately omitted clause concerns a defect of which the carrier knew or ought to have known when signing, the carrier cannot rely on that defect to escape liability and loses the benefit of the limitation of liability (Article L. 5422-5). The carrier then pays without any cap.
Between shipper and carrier
Between the two of them, the letter may take effect, unless it forms part of a fraud against the consignee or the bank. The shipper also remains the guarantor of the accuracy of the particulars it has declared (Article L. 5422-4). A carrier that has paid the consignee can claim over against the shipper, provided the shipper is solvent.
For the bank and the buyer
A clean bill of lading issued against a letter of indemnity misleads the bank and the buyer. They have a claim against the carrier on the basis of the bill of lading and, depending on the circumstances, against the shipper.
What the firm checks first
- The actual condition at loading: tally reports, photographs, mate’s receipt.
- The carrier’s knowledge of the defect.
- The wording of the letter of indemnity and who signed it.
- The documentary credit and the documents presented.
- Whether the holder qualifies as a third party in good faith.
For the firm’s services, see Bills of lading and Carrier liability at sea.
Further reading
- Delivering cargo without the original bill of lading: the letter of indemnity and its risks
- Letter of credit: why the bank rejects your bill of lading
- Bill of lading: what the holder can claim, and against whom
This analysis is part of the firm’s work in maritime law.
Frequently asked questions
Is a letter of indemnity given in exchange for a clean bill of lading valid?
It is void as against third parties, who may nevertheless rely on it against the shipper (Transport Code, Article L. 5422-5).
Can the carrier rely on the actual condition of the goods against the consignee?
No, evidence contradicting the particulars of the bill of lading is not admissible against a third party in good faith (Transport Code, Article L. 5422-3).
Does the carrier keep its limitation of liability?
Not if the omitted clause concerns a defect of which it knew or ought to have known (Transport Code, Article L. 5422-5).