Letters of guarantee

Letters of guarantee and letters of indemnity distinguished

Letters of indemnity by a shipper to a carrier usually have a fraudulent intent and should be distinguished from the legitimate practice of giving letters of guarantee to the carrier for the release of cargo without presentation by the consignee of the original bill of lading.

Carriers who meet a shipper request to issue a clean bill of lading in spite of pre-shipment damage or to backdate a bill of lading to meet letter of credit terms sometimes require letters of indemnity. Such requests are fraudulent and there are plenty of cases under Hague and Hague-Visby Rules showing that carriers cannot enforce such indemnities against the fraudulent shipper and may be held liable for the innocent party's losses. Letters of indemnity may therefore be regarded as more of a carrier problem and are not further considered here.

Letters of guarantee, reasonably worded, are a perfectly legitimate device to protect the carrier from claims if cargo is released without production of the original bill of lading. They are requested because the Hague and Hague-Visby Rules may not adequately deal with misdelivery of cargo.

Typical bill of lading terms in relation to letters of guarantee

Some bill of lading terms are silent as to delivery without production of the original bill of lading as this is, on the face of it, improper. It has become a necessary evil in some cases for logistical reasons and a specific letter of guarantee is required prior to release.

Some rather lengthy and technical standard wordings have been devised by a number of organisations to deal with different types of situation. For example, a standard form letter of guarantee exists to be given in return for delivering cargo without production of the original bill of lading incorporating a bank's agreement to join in the letter of guarantee. Other examples additionally deal with release at a port other than that stipulated in the bill of lading at the request of the shipper and so forth. Confusingly these letters are often described as letters of indemnity.

Position under international conventions

The Hague and Hague-Visby Rules are thought not to cover misdelivery specifically so the subject matter of letters of guarantee is probably outside their scope. It is also thought that liberty clauses in bills of lading exonerating the carrier for any post shipment losses might not be interpreted as including the kind of misdelivery that could occur where goods are released without production of the original bill of lading. The situation is probably therefore subject to national laws, if any, or contract.

The Hamburg Rules make some provision for letters of guarantee, but rather confusingly these appear to be letters of indemnity concerning details about the cargo or its condition at the time of loading, rather than letters of guarantee concerning release of the cargo. The Hamburg Rules therefore do not seem to deal specifically with misdelivery any more than do the Hague Rules, so the position under both systems is broadly comparable.

Practical measures by shippers

Shippers should try to arrange delivery contracts in such a way that recourse to a letter of guarantee does not become necessary. If, for a variety of reasons, the original bill of lading is not available at destination and it becomes necessary to arrange release of the goods, the terms of any proposed letter of guarantee should be carefully considered and legal advice taken if in any doubt. Where a bank is involved in financing any part of the transaction, its approval may be necessary or prudent. The taking of back-to-back guarantees from the consignee/buyer should also be considered. As this situation is very likely to happen from time to time in practice, it would be prudent for shippers to consider all these issues in advance, decide on a company policy and have a system in place to deal with it.