Coronavirus and documentary delays
The tragic human cost of Coronavirus Covid-19 has been widely reported. In addition, the impact on shipping and trading is now becoming clear.
A number of vessels calling at Chinese ports have experienced delays in discharging because original bills of lading have not reached the discharge port on time due to difficulties with local courier services.
When vessels are voyage chartered, delays may result in large demurrage liabilities. Whether these costs can be passed on to CFR/CIF buyers will depend on the terms of any sale contract, particularly provisions relating to NOR and laytime. In light of these complexities, the industry will be keen to find a solution to prolonged document delays.
The use of letters of indemnity (LOIs) is a well-established solution to the problem of discharging a vessel without production of an original bill of lading. In light of recent events, it would be sensible for charterers to review charterparties and ensure that they include clauses requiring shipowners to discharge against an LOI. Such clauses are standard in BPVOY and SHELLVOY charterparties, but do not appear in BIMCO's COAL-OREVOY or GENCON forms.
The use of LOIs carries a number of risks for shipowners and charterers, which should be carefully considered.
Considerations for shipowners when accepting LOIs
- If a shipowner delivers cargo otherwise than against presentation of an original bill of lading, it may face claims for misdelivery from the lawful holder of the bill of lading. Such claims can be substantial and may expose shipowners to its vessel being arrested to obtain security.
- Generally, there is no P&I Club cover where cargo has been discharged against an LOI (even where the parties have used the LOI wording recommended by the International Group of Protection & Indemnity Clubs, which provides liability coverage for 90% of the world's ocean-going tonnage). The shipowner's only recourse will be to call on the LOI issuing party to indemnify them against any claims. The LOI will only provide comfort where the indemnifying party is financially sound. Therefore, thorough due diligence is essential before accepting such documents.
- Shipowners must also exercise particular caution when the party to whom the cargo is discharged appears to be different from the originally named consignee. The International Group recommended LOI wording refers to discharge to the consignee or to "such party as you believe to represent the [the consignee] or be acting on behalf of [the consignee]". Even when this broader wording is used, it is recommended that shipowners carry out appropriate checks to ensure that the party to whom discharge is made is in fact acting on behalf of the consignee.
Considerations for traders and charterers when providing LOIs
- If the wording of the LOI given can be negotiated, charterers and traders should seek to limit risk by incorporating a financial cap on liability and a time limit on the applicability of the LOI. In the present circumstances, where bills of lading are expected to reach the discharge port eventually, the parties may agree that the LOI ceases to have effect upon receipt of the original bills of lading.
- Where applicable, charterers and traders should always request a corresponding LOI on back-to-back terms from their counterparty in the contractual chain and crucially, carry out due diligence on the creditworthiness of that counterparty.
Coronavirus Covid-19 is expected to continue to have disruptive effects on international trade and shipping. HFW is well placed to advise on any disputes that may arise. HFW's article on coronavirus and force majeure can be found here.
For further information, please contact:
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We are working with clients across our international network to help them minimise the impact of COVID-19 on their business and to prepare for what's next. To find out more, visit our dedicated Covid-19 hub.