The grain cargo has arrived at Dunkirk. The original bills of lading, however, are still passing between two banks under a documentary credit. The receiver is incurring demurrage every day, and it offers the carrier a letter of indemnity so as to take delivery at once.
Why the original matters
A bill of lading is not a mere receipt: it represents the goods and entitles the holder to demand their delivery. The carrier must deliver to the lawful holder, against presentation of an original. If it delivers to someone else and a regular holder later comes forward, it is liable to that holder for the loss of the goods. The limits of liability applicable to carriage by sea do not always protect it in this situation, which does not arise from loss or damage in transit.
The letter of indemnity, a solution born of practice
To avoid the ship being held up, practice accepts delivery against a letter of indemnity: the receiver, often counter-guaranteed by its bank, undertakes to indemnify the carrier against all consequences of the delivery and to hand over the original as soon as it has it. The International Group of P&I Clubs circulates standard forms of letter for this situation.
The letter is binding only between its signatories. It does not deprive the lawful holder of its claim against the carrier; it merely gives the carrier recourse against the signatory. Its value therefore depends on the solvency of the signatory and on whether a bank counter-guarantee is in place.
The risks for each party
The carrier delivers at its own risk. P&I clubs generally exclude from cover delivery without production of the bill of lading: the shipowner bears the risk alone, unless its club has agreed in advance.
The receiver who signs the letter commits itself beyond the value of the goods: defence costs, possible arrest of the ship by the holder, an adverse judgment. It must make sure that it is indeed the final consignee and that the seller has been paid or that payment is secured.
An unpaid seller who still holds the originals may see its goods delivered to a buyer who has not paid for them. It then brings its claim against the carrier, originals in hand.
What the firm checks first
- The chain of originals: who holds them, and why they have not arrived.
- The signatory of the letter and the bank counter-guarantee.
- The agreement of the shipowner’s P&I club.
- Payment of the price between seller and buyer.
- The wording of the letter: scope of the indemnity, undertaking to surrender the originals.
For the firm’s services, see Bills of lading.
Further reading
- Clean bill of lading against a letter of indemnity: what the shipper and the carrier risk
- Sea waybill or bill of lading: who can sue the carrier?
- 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
Can the carrier refuse to deliver without an original?
Yes, and it is even prudent for it to do so unless it holds a sound letter of indemnity, since it is liable to the lawful holder.
Does the letter of indemnity protect against the holder of the bill of lading?
No, it is binding only between its signatories. It gives the carrier a right of recourse, not a defence against the holder.
Does the P&I club cover delivery without a bill of lading?
As a general rule, no, unless it has agreed in advance.