letters

1









LETTERS OF INDEMNITY AND LETTERS OF GUARANTEE IN



THE INTERNATIONAL SHIPPING TRADE:



A MULTI-JURISDICTIONAL ANALYSIS









Vanessa Rochester

Student # 9731257









Six Credit Senior Essay

For: Professor W. Tetley

Due: December 15, 2003

2



LETTERS OF INDEMNITY AND LETTERS OF GUARANTEE IN THE



INTERNATIONAL SHIPPING TRADE: A MULTI-JURISDICTIONAL ANALYSIS



INDEX



i CASE LIST………………………………………………………………………………4



ii LIST OF AUTHORITIES……………………………………………………………….6



iii LIST OF STATUTES AND INTERNATIONAL CONVENTIONS……………….…9







I. INTRODUCTION………………………………………………………………………11



II. LETTERS OF INDEMNITY: A DEFINITION………………………………………..11



1) Letters of Indemnity at Shipment……………………………………………...12



2) Letters of Indemnity at Discharge: Letters of Guarantee ………………...14



III. FRAUD AND GOOD FAITH IN THE COMMON LAW AND THE CIVIL LAW…15



1) Introduction………………………………………………………………………15



2) The Civil Law……………………………………………………………………..16



3) The Common Law………………………………………………………………..19



IV. COUNTER-LETTERS…………………………………………………………………23



1) Introduction………………………………………………………………………..23



2) Definition…………………………………………………………………………..23



3) Are Counter-Letters Always Fraudulent? …………………………………...24



4) Effect Between the Parties to the Counter-Letter…………………………..25



5) Effect of the Counter-Letter on Third Parties……………………………….26



V. LETTERS OF INDEMNITY AT SHIPMENT………………………………………..27



1) Introduction……………………………………………………………………….27



2) Letters of Indemnity, the Banking System and Financing



Requirements……………………………………………………………………..29



3) Suit against the Carrier…………………………………………………………31

3



a) The Carrier as a Party to the Fraud……………………………………31



b) Estoppel……………………………………………………………………34



c) Sanctions for Issuing a Clean Bill of Lading in Exchange for a



Letter of Indemnity………………………………………………………..…39



4) Validity with Regard to Third Parties…………………………………………40



5) Validity between the Carrier and the Shipper………………………………41



6) Liability of the Charterer………………………………………………………..45



7) Cases Where a Carrier May Accept a Letter of Indemnity……………..…47



8) Letters of Indemnity and International Conventions………………………48



a) The Hague and Hague/Visby Rules…………………………………...48



b) The Hamburg Rules……………………………………………………..49



9) UNIDROIT Principles of International Commercial Contracts…………..51



10) Antedated Bills of Lading and Letters of Indemnity………………………52



11) Letters of Indemnity and P & I Clubs.…………………………………….…54



12) Conclusion: Letters of Indemnity at Shipment…………………………….57



VI. LETTERS OF INDEMNITY AT DISCHARGE: LETTERS OF GUARANTEE….58



1) Introduction………………………………………………………………………..58



2) The Traditional Position: At the Carrier’s Own Risk………………………..60



a) Introduction………………………………………………………………..60



b) Current Law…………………………………………………………..……60



c) Exclusion or Permission Clauses………………………………..……64



d) Policy Arguments……………………………………………………...…65



3) The Erosion of the “At the Carrier’s Own Risk” Argument………………..66



a) Knowledge…………………………………………………………..…….66



b) Custom……………………………………………………………………..66



c) Charterer………………………………………………………………...…69

4



d) Consent from the Shipper………………………………………………70



4) The Carrier’s Right to Refuse to Deliver………………………………………72



5) The Responsibility of the Issuer of a Letter of Guarantee………………...74



a) Responsibility of the Issuer to the Shipper………………………….74



b) Responsibility of the Issuer to the Carrier……………………..…....75



6) Letters of Guarantee, Prescription and Time Bars……………………….…78



7) Letters of Guarantee and P & I Clubs……………………………………….…82



8) Waybills: A Solution to the Letter of Guarantee dilemma?………………..89



9) Conclusion: Letters of Indemnity at Discharge, Letters of Guarantee….91



VII. GENERAL CONCLUSION...…………………………………………………………91



1) Letters of Indemnity and Letters of Guarantee Are Fundamentally



Different and Should Be Distinguished………………………………………..91



2) Letters of Indemnity: A Problem of Good Faith and Uniformity………….92



3) Letters of Guarantee: A Problem of Documentation……………………….94



VIII. APPENDIX A: New Standard Form Letter of Guarantee………………………96



IX. APPENDIX B: New Standard Form Letter of Guarantee with the Bank’s



Agreement to Join In………………………………………………………………...98



X. APPENDIX C: Previous Standard Form Letter of Guarantee……………….102

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CASE LIST



Table of North American (including Quebec), British and Commonwealth Cases



Alimport v. Soubert Shipping Co. Ltd. [2000] 2 Lloyd‘s Rep. 448 (Q.B. Com. Ct.)

Amann Aviation Pty Ltd. v. Commonwealth of Australia (1991) 66 ALJR 123 (H.C. Aust.)

American Indus. Corp. v. M.V. Margarite, 556 F.Supp. 206 (S.D.N.Y. 1981)

Banque Canadienne National v. Soucisse [1981] 2 SCR 339 (S.C.C)

Barclay‘s Bank Ltd. v. Customs and Excise [1963] 1 Lloyd‘s Rep. 81 (Q.B. Com. Ct.)

Berisford Metals Corp. v. S/S Salvador 1986 AMC 874 (2 Cir. 1985)

Brown Jenkinson v. Percy Dalton [1957] 2 Q.B. 621(C.A.)

Bolduc v. Decelles [1996] R.J.Q. 805 (Quebec Sup. Ct.)

Canastrand Industries Ltd. v. The Lara S (1993) 60 F.T.R. 1 (Can Fed Ct.)

Cargill Ferrous Int‘l v. M/V Sukarawan Naree, 1998 AMC 566 (E.D. Lou. 1998)

Collern & Co. Ltd v. China Ocean Shipping Company [1993] P & I International 16 ( Sup.

Ct N.S.W.)

Compania Naviera Vascongada v. Churchill [1906] 1 K.B. 237 (K.B. Div.)

Demsey & Associates v. S.S. Sea Star, 1970 AMC 1088 (S.D.N.Y. 1970)

Derry v. Peek (1889) 14 A.C. 337 (H.L.)

Donahue v. Stevenson [1932] AC 562 (H.L.)

East West Corp. v. DKBS 1912 [2003] 2 All ER 700 (C.A.)

Encyclopedia Britannica v. SS Hong Kong Producer 1969 AMC 1741(2 Cir. 1969)

Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1963] 1 Lloyd‘s Rep. 485 (H.L.)

Hellenic Lines, Ltd. v. Chemoleum Corp. 1971 AMC 2605 (N.Y. Sup. Ct. App. Div 1971)

Houle v. Banque Canadienne Nationale [1990] 3 SCR 122 (S.C.C.)

Hunter Grain v. Hyundai, (1993) 117 ALR 507 (Fed Ct, Aust.)

Giorgio Morandi, Inc. v. Texport Corp. 761 F.Supp 12 (S.D.N.Y. 1991)

International Harvester Co v. TFL Jefferson, 695 F.Supp 735 (S.D.N.Y. 1988)

International Knitwear Company Ltd v. M/V Zim Canada, 1997 AMC 1290 (S.D.N.Y.

1997)

Interstate Steel Corp. v. S.S. Crystal Gem, 1970 AMC 617 (S.D.N.Y. 1970)

Jenkins v. Livesey [1985] AC 424 (H.L)

Kanematsu GMBH v. Acadia Shipbrokers Limited, 1999 AMC 1533 (Can. Fed. Ct. T.D.

1999)

Kanematsu GMBH v. Acadia Shipbrokers Limited (2000) 259 N.R. 201; 2000 Fed. Ct.

Appeal LEXIS 193 (Can. Fed. C.A.)

Kwel Tek Choa v. British Traders and Shippers Ltd [1954] 1 Lloyd‘s Rep. 16 (Q.B. Com

Ct.)

Leather‘s Best Intl. v. Lloyd Sergipe 1991 AMC 929 (S.D.N.Y. 1991)

Louis Dreyfus v. Blystad 2001 AMC 1939 (2 Cir. 2001)

McKinley Motors v. Honda (1985) 55 Nfld & P.E.I.R. 170 (Nfld. S.C.)

Motis Exports Ltd. v. Dampkibsselskabet Af 1912 [1999] 1 Lloyd‘s Rep 837 (Q.B. Com.

Ct.)

Motis Exports Ltd. v. Dampkibsselskabet Af 1912 [2000] 1 Lloyd‘s Rep. 211 (C.A.)

Nebco International v. National Integrity 1991 AMC 1113 (S.D.N.Y. 1991)

Pacific Carriers Ltd. v. Banque Nationale de Paris, [2001] N.S.W.S.C. 900 (October 16

2001) (Unreported) (Sup. Ct. N.S.W.)

Parizeau v. Poulin De Courval, [2000] R.R.A. 67 (Quebec C.A.)

Peer Voss v. APL Co. Pte Limited [2002] 2 Lloyd‘s Rep. 707 (Singapore C.A.)

Pickard v. Spears (1837) 112 E.R. 179 (H.L.)

Portenier-Dahany v. Snyder, [1993] R.D.I (Receuil de droit immobillier) 130 (C.S.)

6



Provigo Distribution v. Supermarche A.R.G., [1998] R.J.Q. 47 (Quebec C.A.)

Regis d‘Assainissement des eaux du basin de la Prarie v. Janin Construction [1999]

R.J.Q 929 (Quebec C.A.)

Renard Constructions Pty v. Minister for Public Works (1992) 26 NSW LR 234 (NSW

C.A.)

St. Paul Fire and Marine Ins. Co. v. Thypin Steel Co. [1999] S.D.N.Y., 1999 WL 163562

(March 24 1999) (Westlaw) (S.D.N.Y. 1999)

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2)

[1998] 1 Lloyd‘s Rep. 684 (Q.B. Com. Ct.)

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2)

[2000] 1 Lloyd‘s Rep. 218 (C.A.)

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2)

[2003] 1 Lloyd‘s Rep. 227 (H.L.)

Sze Hai Tong Bank v. Rambler Cycle Co. [1959] A.C. 576 (P.C.)

The Aegean Sea [1998] 2 Lloyd‘s Rep 39 (Q.B. Com Ct.)

The Arctic Explorer, 1984 AMC 2413 (S.D. Tex. 1984)

The Captain Gregos No. 1 [1990] 1 Lloyd‘s Rep. 310 (C.A.)

The Delfini [1990] 1 Lloyd‘s Rep. 252 (C.A.)

The Georgian, 1935 AMC 556 (5th Cir. 1935)

The Houda [1994] 2 Lloyd‘s Rep. 541 (C.A.)

The Ines [1995] 2 Lloyd‘s Rep. 144 (Q.B. Com Ct.)

The Nea Tyhi [1982] 1 Lloyd‘s Rep. 607 (Q.B. Com. Ct.)

The New York Star [1980] 2 Lloyd‘s Rep. 217 (P.C)

The Rafaela S [2003] EWCA Civ 556,[2003] All E.R. (D) 289 (Apr.) (C.A.)

The Sagona [1984] 1 Lloyd‘s Rep. 194 (Q.B. Com. Ct.)

The Saudi Crown [1986] 1 Lloyd‘s Rep. 261 (Q.B. Adm. Ct.)

The Sormovskiy 3068 [1994] 2 Lloyd‘s Rep 266 (Q.B. Adm. Ct.)

The Stettin (1889) 14 P.D. 142. (P.D. and Adm. Div)

The Stone Gemini [1999] 2 Lloyd‘s Rep. 255 (Fed. Crt., Aust, NSW Adm.)

The Zhi Jiang Kou [1991] 1 Lloyd‘s Rep. 493 (C.A. N.S.W.)

Tolofson v. Jensen [1994] 3 S.C.R. 1022 (S.C.C.)

United Baltic Corp. v. Dundee Perth & London Shipping Co. (1928) 32 Ll. L. Rep. 272

Utaniko Ltd v. P & O Nedlloyd BV [2003] 2 All ER 700 (C.A.)

Velcro Enterprises Ltd. v. S.S. Zim Kingston, 858 F. Supp, 36 (S.D.N.Y. 1994)

Wigand v. Bachmann-Bechtel Brewing Co. (1918) 222 NY 272; 1918 N.Y. LEXIS 1455

(N.Y.C.A.)





Table of Continental European Cases



Cour de Cassation, June 17, 1997, (The Happy Buccaneer), DMF, 1997, 723

Cour de Cassation, February 23, 1983, DMF 1983, 478

Cour d‘Appel d‘Aix, September 6, 1984, DMF 1986, 157

Cour d‘Appel d‘Aix-en-Provence, April 28, 1976, DMF 1977, 27

Cour d‘Appel de Paris, November 7, 1988, DMF 1989, 655

Cour d‘Appel de Rouen. November 9, 1999, DMF 2000, 729

Cour d‘Appel de Versailles, November 18, 1994, DMF 1995, 558

Cour de Versailles, July 1, 1993, DMF 1994, 110

Hof Van Cassatie Van Belgie, January 31, 2003: [2003] ETL 197

Supreme Court of Finland, NMCases 1962.390 (Majfrid)

Tribunal de Commerce de Marseille, Decembre 11, 1979, Scapel 1980 (June), 29

7



Tribunal de Commerce de Rouen, February 23, 1962, DMF 1962, 294

Tribunal de Genes, Italie, December 28, 1959, DMF 1989, 662

Turku Court of Appeal, Finland, NMCases 1980.137 (Ranno)

Turku Court of Appeal, Finland, NMCases 1981.130 (Lohja)



Other Countries



A Hong Kong Co. v. A Zhuhai Co., summarized by Xia Chen, ―Chinese Law on Carriage

of Goods by Sea under Bills of Lading‖ (1999) 8 Currents Int‘l Trade L. J. 89, at

98-99

A Hong Kong Co. v. Xiamen Knitting Co. & Xiamen Foreign Vessel Agency, summarized

by Xia Chen, ―Chinese Law on Carriage of Goods by Sea under Bills of Lading‖

(1999) 8 Currents Int‘l Trade L. J. 89, at 98

Shanghai Ocean-going Shipping Co. v. Xiamen Foreign Trade Co., summary by Xia

Chen, ―Chinese Law on Carriage of Goods by Sea under Bills of Lading‖ (1999) 8

Currents Int‘l Trade L. J. 89, at 92

UCO Bank v. Ringler Pte Ltd. [1995] 1 S.LR. 713 (Singapore C.A.)

Xiamen Imports & Exports Co., Ltd. v. Guangzhou Ocean Co. summarized by Xia Chen,

―Chinese Law on Carriage of Goods by Sea under Bills of Lading‖ (1999) 8

Currents Int‘l Trade L. J. 89, at 93

Xiamen Special Zone Jijian Trade Co. v. Tianjing Ocean Shipping Co. summarized by

Xia Chen, ―Chinese Law on Carriage of Goods by Sea under Bills of Lading‖

(1999) 8 Currents Int‘l Trade L. J. 89, at 93







LIST OF AUTHORITIES



Anderson, C. ―Admiralty Law Institute: Symposium on Charter Parties: Time and Voyage

Charters: Proceeding to Loading Port, Loading, and Related Problems‖ (1975) 49 Tul. L.

Rev. 880



Beatson, J. Anson’s Law of Contract, Oxford University Press, Oxford, 1998



Beatson, J. ―Has the Common Law a Future‖ [1997] CLJ 291



Baudouin, J.L. Les Obligations, 5th Ed., Editions Yvon Blais, Montreal, 1998



Garner, B. Ed., Black’s Law Dictionary, 7th Ed., West Group, Minnesota, 1999



Bokalli, V. ―Crise et Avenir du Connaissement‖ DMF 1998, 115



Bonassies, P. ―Le droit positif français en 1995‖ DMF 1996, 245



Bonassies, P. ―Le droit positif français en 1998‖ DMF 1999 (H.S.) 57



Chan, F. ―A Plea for Certainty: Legal and Practical Problems in the Presentation of Non-

Negotiable Bills of Lading‖ (1999) 29 Hong Kong L. J. 44



Chen, X. ―Chinese Law on Carriage of Goods by Sea under Bills of Lading‖ (1999) 8

Currents Int‘l Trade L. J. 89

8







Derrington, S & White, W. ―Australian Maritime Law Update: 2001‖ (2002) 33 JMLC 275



Diesse, F. ―Le devoir de coopération commun principe directeur du contrat‖ (1990) 43

Arch. Phil. Droit, 259



Flour, J. Les Obligations, 9e Ed. Dalloz, Paris, 2000



Gaskell, N. et al., Bills of Lading: Law and Contracts, LLP, London, 2000



Gyselen, L. ―P&I Insurance: The European Commission‘s Decision Concerning the

Agreement of the International Group of P&I Clubs‖ in Marine Insurance at the Turn of

the Millennium. M. Huybrechts (Ed.) Intersentia, Antwerpen, 1999, 181



Hamblen, N. & Jones, S. ―Charter Party Symposium – Part II: Charterer‘s Orders: To

Obey or Not to Obey‖ (2001) 26 Mar. Law. 105



Hare, J. Shipping Law and Admiralty Jurisdiction in South Africa, Juta & Co, Cape Town,

1999



Hazelwood, S.J. P & I Clubs: Law and Practice, 3rd Ed. LLP, London, 2000



Herber, R. ―German Law on the Carriage of Goods by Sea‖ in New Carriage of Goods

by Sea. H. Honka (Ed.) Institute of Maritime and Commercial Law, Abo, 1997, 343-369



Honka, H. ―New Carriage of Goods by Sea – The Nordic Approach,‖ in New Carriage of

Goods by Sea. H. Honka (Ed.) Institute of Maritime and Commercial Law, Abo, 1997,

15-216



Howard, T. & Davenport, B. ―English Maritime Law Update 1994/95‖ (1996) 27 JMLC

427



Ibbetson, A Historical Introduction to the Law of Obligations, Oxford University Press,

Oxford, 1999



International Institute for the Unification of Private Law, UNIDROIT Principles of

International Commercial Contracts,1994. Online at:

http://www.unidroit.org/english/presentation/main.htm.



Keily, T. ―Good Faith and the Vienna Convention on Contracts for the International Sale

of Goods (CISG)‖ (1999) 3 Vindobona Journal of International Commercial Law and

Arbitration, 15



Kouri, R.P., et al, Eds. Private Law Dictionary, 2nd Ed. Quebec Research Center of

Private and Comparative Law, Editions Yvon Blais, Montreal, 1991



Law Commission Report No. 196, Rights of Suit in Respect of Carriage of Goods by

Sea, (Law Com No 196, Scot Law Com No 130) 1991



Le Dain, ―Security Upon Movable Property in the Province of Quebec‖ (1955-1956) 2

McGill L.J. 77

9







Luddenke, C. Marine Claims, LLP, London, 1993



Mocata, A.A., M.J. Musthill, & S.C. Boyd, Eds. Scrutton on Charterparties, 19th Ed.,

Sweet & Maxwell, London, 1984



Myburgh, P.A. ―Current Developments Concerning the Form of Bills of Lading – New

Zealand,‖ in Ocean Bills of Lading: Traditional Forms, Substitutes, and EDI Systems,

A.N. Yiannopoulos (Ed.), Kluwer Law International, The Hague, 1995, 237



Nicholas, B. ―The Obligation to Disclose Information‖ in Contract Law Today, D.R. Harris

and D. Tallon (Eds), Oxford University Press, Oxford, 1989, 169



Ontario Law Reform Commission, Report on Amendment of the Law of Contract.

Ministry of the Attourney General, Toronto, Ontario, 1997



Parker, B. ―Liability for Incorrectly Clausing Bills of Lading‖ [2003] LMCLQ 204



Pineau, J., Burman, D., et Gaudet, S. Theorie des Obligations, 4th Ed., Editions Themis,

Quebec, 2001



Remond-Gouilloud, M. Droit Maritime, 2e Ed. Editions A. Pedone, Paris,1993



Restatement of the Law of Contracts, Restatement of the Law, Second, Contracts (2d),

as adapted and promulgated by the American Law Institute at Washington, D.C.,

American Law Publishers, St. Paul, Minnesota, 1981



Rodière, R. Droit Maritime, 12 Ed., Dalloz, Paris, 1997



Rommen, H.A. The Natural Law, a Study in Legal and Social History and Philosophy, B.

Herder Book Co., St. Louise, 1947



Rumbold, I. ―Commercial Reality Meets Club Culture‖ (2003) 17 LawGram 1



Schoenbaum, T. Admiralty and Maritime Law, 3rd Ed., Volume 2. West Group, St. Paul,

Minnesota, 2001



Sharpe, D. ―Recent Developments in Maritime Law‖ (1995) 19 Mar. Law. 301



Sparks, A. Steel: Carriage by Sea, 3rd Ed., LLP, London, 1999



Tetley, W. International Conflict of Laws, Editions Yvon Blais, Montreal, 1994



Tetley, W. International Maritime and Admiralty Law, Editions Yvon Blais, Montreal, 2002



Tetley, W. ―Lack of Good Faith as a Hindrance to Effective Arbitration,‖ Paper presented

at the Multilaw Conference Quebec, August 13, 2003. Online at:

http://tetley.law.mcgill.ca/comparative/goodfaith.pdf



Tetley, W. Marine Cargo Claims, 3rd Ed., Editions Yvon Blais, Montreal, 1988

10



Tetley, W. Marine Cargo Claims, 4th Ed. Online at: http://tetley.law.mcgill.ca/maritime



Tetley, W. ―Mixed Jurisdictions: Common Law vs. Civil Law (Codified and Uncodified),‖

1999, Online at: http://www.unidroit.org/english/publications/review/articles/1999-4a.htm



Todd, P. Modern Bills of Lading, Blackwell law, Oxford, 1990



Uniform Customs and Practice for Documentary Credits, 1993 Revision, International

Chamber of Commerce Publication No. 500



Wilson, J.F. Carriage of Goods by Sea, 4th Ed. Longman, Harlow, England, 2001



Yiannopoulos, A.N. ―XIVth International Congress of Comparative Law: Current

Developments Concerning the Form of Bills of Lading‖ in Ocean Bills of Lading:

Traditional Forms, Substitutes, and EDI Systems. A.N. Yiannopoulos (Ed.), Kluwer Law

International, The Hague, 1995, 3







LIST OF STATUTES AND INTERNATIONAL CONVENTIONS



Algerian Civil Code, 1975



Belgium Civil Code, 1804



Bills of Lading Act (1855) 18 & 19 Vict., c. 111. (U.K.)



Bills of Lading Act. R.S.C. 1985, c. B-6. (Can.)



Carriage of Goods by Sea Act 1992, U.K. c. 50



Civil Code of Quebec, 1994, 10th Ed. Jean-Maurice Brisson and

Nicholas Kasirer (Eds.). Editions Yvon Blais, Montreal, 2002



Civil Code of Lower Canada, 1836



Federal Court Act, R.S.C. 1985, c. F-7 (Can.)



Finnish Maritime Code, 1994



French Civil Code, 1804



Law of June 18, 1966 (Law No. 66-420) (France)



Limitation Act 1980, U.K



Louisiana Civil Code, 1985, 2002 Ed., Ed. by A.N. Yiannopoulos, West Group



Misrepresentation Act 1967, U.K. c. 7



Norwegian Maritime Code, 1994

11







Pomerene Bills of Lading Act 1916, 49 U.S. Code 102



Protocol to Amend the International Convention for the Unification of Certain Rules of

Law Relating to Bills of Lading, Brussels, February 23, 1968



Rome Convention 1980 E.E.C. 80/934, signed at Rome, June 19, 1980



Swedish Maritime Code, 1994, 2nd Ed. Andrea Upplagan T.O.M. 30 June 2000,

Stockholm



Unfair Terms in Consumer Contracts Regulations 1994, U.K



Uniform Commercial Code, 1972 Official Text, by the American Law Institute and

National Conference of Commissioners on Uniform State Laws



United Nations Convention on the Carriage of Goods by Sea, Hamburg, March 31,1978



United Nations Convention on Contracts for the International Sale of Goods, Vienna,

April 11, 1980



U.S. Carriage of Goods by Sea Act (COGSA), April 16, 1936, ch. 229, Sec. 1, 49 Stat.

1207

12



LETTERS OF INDEMNITY AND LETTERS OF GUARANTEE IN THE



INTERNATIONAL SHIPPING TRADE: A MULTI-JURISDICTIONAL ANALYSIS







I. INTRODUCTION



Letters of indemnity are a common occurrence in international shipping and as



business increases, letters of indemnity are becoming all the more common in the



carriage of goods by sea. The law is changing to adapt, but there is still a pressing need



for uniformity in the context of this international industry. The purpose of this paper is to



provide a multi-jurisdictional analysis of the law regarding letters of indemnity, permitting



identification of current trends and of areas most in need of reform.







II. LETTERS OF INDEMNITY: A DEFINITION



Letters of indemnity have been used in shipping in several ways. There are,



nevertheless, two main circumstances in which letters of indemnity are employed: a)



letters of indemnity issued at shipment, and b) letters of indemnity issued at discharge,



otherwise known as letters of guarantee. Both of these instances will be addressed in



this paper.







It should be noted that the term ‗letter of indemnity‘ is something of a generic



term, and often the courts and authors do not make the distinction between the terms



‗letters of guarantee‘ and ‗letters of indemnity‘. In most cases, judgments and authors



use the term ‗letter of indemnity‘ to refer to all instances when a letter of indemnity or



letter of guarantee is used, at either shipment or discharge.1 The French judgments and





1

As exemplified by the British judgments that, on the whole, use only the term ‗letter of indemnity‘

to refer to both ‗letters of indemnity‘ issued at shipment and ‗letters of guarantee‘ issued at

discharge. For example see Brown Jenkinson v. Percy Dalton [1957] 2 Q.B. 612 (C.A.); Standard

Chartered Bank v. Pakistan Nation Shipping Corporation and Others (No. 2) [2000] 1 Lloyd‘s

13



doctrinal authors, however, have consistently used the term ‗letter of guarantee‘ to refer



to both letters of indemnity issued at shipment and letters of guarantee issued at



discharge,2 while the U.S. case law has been known to use both terms.3 Civilian codes



use a completely different general term: contre-lettres, or counter-letters.4 Contrary to



most sources, the Hamburg Rules use the term ‗letter of guarantee‘ to refer to letters of



indemnity issued at shipment.5







1) Letters of Indemnity at Shipment



A letter of indemnity at shipment is, ―a written undertaking by a shipper to



indemnify a carrier for any responsibility that the carrier may incur for having issued a



clean bill of lading when, in actual fact, the goods received were not as stated on the bill



of lading.‖ 6 This practice has been frowned upon by the courts, who often characterize



the practice as fraudulent. The courts have had harsh comments for such practices:



Antedated and false bills of lading are a cancer in the international trade. A bill of

lading is issued in international trade with the purpose that it should be relied

upon by those into whose hands it properly comes – consignees, bankers, and



Rep. 218 (C.A.); and The Sormovskiy 3068 [1994] 2 Lloyd‘s Rep 266 (Q.B. Adm. Ct.). Canadian

judgments also follow the English trend, as seen in Kanematsu GMBH v. Acadia Shipbrokers

Limited, 1999 AMC 1533 (Can. Fed. Ct. T.D. 1999).

2

For example see Rodière, R. Droit Maritime, 12 Ed., Dalloz, 1997, and Bokalli, V. ―Crise et

Avenir du Connaissement‖ DMF 1998, 115.

3

For example see Nebco International v. National Integrity 1991 AMC 1113 (S.D.N.Y. 1991),

stating, at 1115,: ―Letters of guarantee and indemnity issued by Trinidadian banks are accepted

in lieu of the original bills of lading…‖

4

For the definition and description of counter-letters see Article 2025 of the Louisiana Civil Code,

2002 Ed.; Article 1451 of the Quebec Civil Code, 1994; and Article 1321 of the French Civil Code,

1804. See section IV, infra, for further discussion on counter-letters.

5

United Nations Convention on the Carriage of Goods by Sea, Hamburg, March 31, 1978

[hereinafter the Hamburg Rules]. Article 17.2 : ―Any letter of guarantee or agreement by which the

shipper undertakes to indemnify the carrier against loss resulting from the issuance of the bill of

lading by the carrier…without entering a reservation.‖ With regard to the confusing use of the

term ‗letter of guarantee‘ at shipment, the author submits that it stems from the French tendency

to use the term ‗letter of guarantee‘ to refer to both letters of indemnity and letters of guarantee

(See Bokalli, supra note 2, at 115, for example). Rodière states that, ―Les régles de Hambourg

de 1978 se sont inspirées de la solution française.‖( Rodière, supra note 2, at 321). Since the

Hamburg Rules follow the French example, it would then seem logical that the terminology would

be similar.

6 rd

Tetley,W. Marine Cargo Claims, 3 Ed., Editions Yvon Blais, Montreal, 1988, at 821.

14



endorsees. A bank that receives a bill of lading signed by or on behalf of a

shipowner (as one of the documents presented under a letter of credit) relies

upon the veracity and authenticity of the bill. Honest commerce requires that

those who put the bills of lading into circulation do so only where the bill of lading,

as far as they know, represents the true facts.7







The jurisprudence on letters of indemnity is as of yet unsettled on the question of



whether such letters are valid and enforceable with regard to the issuer of the letter. As



well, there is a general uncertainty in the law and amongst legal scholars as to whether



situations exists where it would be permissible for a carrier to accept a letter of



indemnity.







A distinction should be made between clean bills of lading issued in exchange for



letters of indemnity, and antedated bills of lading, which have also been issued in



exchange for letters of indemnity. A bill of lading is antedated when the date listed on the



bill is earlier than the date of actual shipment. ―Shippers often put pressure upon



carriers, their masters and ship‘s agents to state on the bill of lading a date of shipment



not corresponding to the true loading or shipment date but instead to insert a date which



coincides with a documentary letter of credit or in order to bring the shipment within the



period of a subsidy or quota.‖8 When antedated bills of lading are issued, generally there



is nothing misleading about the description of the goods, it is only the date that is





7

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2) [1998]

1 Lloyd‘s Rep. 684 at 688 (Q.B. Com Ct.). Lord Justice Evans, commenting on Cresswell, J.‘s

statement in the Court of Appeal decision, whole-heartedly agreed with the statement and went

on to comment: ―This requirement of honest commerce is stringently enforced by the English

Courts. If a false bill of lading is knowingly issued by the master or agent of the shipowner, and if

the claimant was intended to rely on it and did rely upon it and as a result of doing so has

suffered loss, then the shipowner is liable in damages for the tort of deceit.‖ (Standard Chartered

Bank v. Pakistan National Shipping Corporation and Others (No. 2) (C.A.), supra note 1, at 221).

See also Howard, T. & Davenport, B. ―English Maritime Law Update 1994/95‖ (1996) 27 J. Mar.

L. & Com. 427.

8 rd

Hazelwood, S.J. P & I Clubs: Law and Practice, 3 Ed., LLP, London, 2000 at 179.

15



incorrect. A carrier who knowingly dates a bill of lading incorrectly is partaking in a



fraudulent practice.9 The courts have condemned both falsely clean bills of lading and



antedated bills of lading.10 Although the courts have reacted in a similar fashion to both



practices, there are differences. For example, the Hague/Visby Rules11 and the



Hamburg Rules12 both contain a provision on estoppel protecting an innocent third party



from a falsely clean bill of lading.13 While antedated bills of lading have little statutory



protection.14







2) Letters of Indemnity at Discharge: Letters of Guarantee



Letters of indemnity, otherwise know as letters of guarantee, are presented at



discharge by consignees who cannot provide the original bill of lading. The letter of



indemnity ―…is designed to provide a remedy for a shipowner, where the master



releases cargo at the request of a party, in respect of claims which may be brought as a



consequence of such release.‖15 This practice has become increasingly common over



the past several years, especially in short-haul shipping.







Letters of indemnity issued at discharge have been termed by some authors as



letters of guarantee.16 A letter of guarantee is defined as, ―a letter…given at discharge



and delivery by a consignee who is unable to surrender original bills of lading which



9

Ibid.

10

See Standard Chartered Bank v. Pakistan Nation Shipping Corporation and Others (No. 2)

(C.A.) supra note 1; Cour d’Appel d’Aix-en-Provence, April 28, 1976, DMF 1977, 27; Hunter Grain

v. Hyundai (1993) 117 ALR 507 (Fed. Crt, Aust.).

11

Art. 3(4) of the Protocol to Amend the International Convention for the Unification of Certain

Rules of Law Relating to Bills of Lading, Brussels, February 23, 1968 [hereinafter the

Hague/Visby Rules].

12

Art. 16(3)(b).

13

For further discussion on estoppel, see section V(3)(b) of this paper.

14

The United States Pomerene Bills of Lading Act, 1916, 49 U.S. Code 102, is one of the few

statutes, however, that does address the practice of antedating. Section 22, protects parties who

have relied on the date in the bill of lading to their detriment.

15

The Stone Gemini [1999] 2 Lloyd‘s Rep. 255, at 266 (Fed. Crt. N.S.W.).

16

Tetley, supra note 6, at 824.

16



have been issued but lost…[and is] a security or suretyship agreement.‖17 As discussed



above, the courts, especially the common law courts, usually fail to use specific



terminology when referring to a letter of indemnity given at discharge, and simply refer to



letters of indemnity generally. For the purposes of this paper, a letter of indemnity given



at discharge shall be referred to as a letter of guarantee.







III. FRAUD AND GOOD FAITH IN THE COMMON LAW AND THE CIVIL LAW



1) Introduction



The civil law and the common law have traditionally had very different



conceptions of the notions of fraud and good faith. These differences are exemplified in



the way that both systems deal with letters of indemnity. The common law systems, for



example, tend to deal with the collusion between a shipper and a carrier to exchange



clean bills of lading for a letter of indemnity, with liability to the consignee or endorsee in



the tort of deceit, the tort of negligence or fraudulent misrepresentation.18 The civil law,



on the other hand, will use the general principles of fraud and good faith.19



It is useful, therefore, to examine the development of the common and civil law through



the concepts of fraud, tort, and good faith in both systems generally, so that the different



approaches to letters of indemnity, when dealt with later on, may be better understood.









17

Ibid.

18

Parker, B. ―Liability for Incorrectly Clausing Bills of Lading‖ [2003] LMCLQ 201, at 205. For

example see Brown Jenkinson v Percy Dalton, supra note 1, discussing fraudulent

misrepresentation with regard to the issuance of clean bills of lading in exchange for letters of

indemnity. For cases dealing generally with the tort of negligence and the tort of deceit, see The

Saudi Crown [1986] 1 Lloyd‘s Rep. 261 (Q.B. Adm. Ct), Standard Chartered Bank v. Pakistan

National Shipping Corporation and Others (No. 2) (C.A), supra note 1, and Hedley Byrne & Co.

Ltd. v. Heller & Partners Ltd. [1963] 1 Lloyd‘s Rep. 485 (H.L.).

19

Tribunal de commerce de Rouen, February 23, 1962, DMF 1962, 294, describing the

deliverance of an unjustly clean bill of lading as ―une veritable fraude‖. See generally Rodière,

supra note 2.

17



2) The Civil Law



The civilian notion of good faith finds its origins in Roman law.20 All of the four



categories of contracts (verbal, written, consensual, and real) found in Justinian‘s



Institutes were circumscribed by a requirement of good faith.21 From early in its history,



the civil law has had a general principle of good faith. The prevalence of general



underlying principles in the civil law, such as good faith, results from the civil law‘s



textual basis; the code is the source of the law. The codes are organized and structured



around general themes and concepts, which is not surprising given that the civil law has



developed through scholarly pursuit.22 The focus of the civil law has always been on



general rights and obligations, such as the obligation to act in good faith.23







The principle of good faith was then incorporated into the French civil code of



180424, article 1134, which declares that contracts, ―doivent être articulées de bonne









20

Ibbetson, A Historical Introduction to the Law of Obligations, Oxford University Press, Oxford,

1999. ―Bona fides, or good faith, in Roman law was, ‗based on an ethical concept [that] was

applied in the form of specific rules, the most important of which were formulated in relation to the

basic rule – pacta sunt servanda.‘ In Roman society, good faith ‗was always associated with

trustworthiness, conscientiousness and honourable conduct.‘‖ Rommen, H.A. The Natural Law, a

Study in Legal and Social History and Philosophy, B. Herder Book Co., St. Louis, 1947, cited by

Tetley, W. ―Lack of Good Faith as a Hindrance to Effective Arbitration,‖ Paper presented at the

Multilaw Conference Quebec, August 13, 2003, at 7. Online at:

http://tetley.law.mcgill.ca/comparative/goodfaith.pdf.

21

Ibbetson, ibid., at 7-8.

22

In 533 AD, Justinian compiled the existing Roman law into the Corpus Juris Civilis, which was

the first codification and comprised the work of the jurisconsults, who were essentially the legal

th

experts of the time. After the Romans, the civil law fell into disuse until the 11 century when the

University of Bologna was created and revived Roman law. There, students studied the Roman

texts – explaining them, textually interpreting them, and adapting them to the current times. (Ibid.)

23

This is contrasted with the common law that, as a result of its commercial based development,

―is oriented towards the jurisdiction of particular courts to grant sought-after remedies.‖ (Tetley,

W. ―Mixed Jurisdictions: Common Law vs Civil Law (Codified and Uncodified)‖ 1999. Online at:

http://www.unidroit.org/english/publications/review/articles/1999-4a.htm.)

24

The French civil code forms the basis for many of the other civil codes of civilian nations,

including The Civil Code of Lower Canada (Quebec), The Belgium Civil Code, The Louisiana Civil

Code of 1870, and The Italian Civil Code, among others.

18



foi.‖25 Although good faith is not defined in the Napoleonic code, it has been defined over



the years in the doctrine, and can be described as follows:26



Une person agit de bonne foi si il adopte dans ses relations avec autrui une

attitude honnête, loyale et raisonnable, c‘est a dire le comportement qu‘aurait

adopte dans les circonstances le bon citoyen, l‘honnête homme.







The principle of good faith has also recently been described as, ―integrity, especially in



the formation and performance of contracts.‖27 This principle is found in the civil codes of



many different jurisdictions, including Quebec,28 Louisiana, Belgium,29 as well as in



international agreements inspired by the civilian tradition, such as the ―UNIDROIT



Principles of International Commercial Contracts, 1994.‖30 Other aspects of the duty of



good faith are the duty to inform, the duty to co-operate, and the duty to advise.31





25

Other codes have good faith provisions as well, including art. 1759 of the Louisiana Civil Code,

art. 242 of the German Civil Code, and art. 1337 of the Italian Civil Code. (Tetley, supra note 20

at 9). The history of Quebec is interesting in that the Civil Code of Lower Canada, adopted in

1836 and based on the Napoleonic Code, omitted article 1134 with its clear statement on good

faith, as Quebec at the time was heavily influenced by the notion of ‗autonomy of the will‘. It was

not until the recent re-codification in 1994 that Quebec has had an express provision on good

faith, found in articles 6,7, and 1375.

26 th

Pineau, J., Burman, D., et Gaudet, S. Theorie des Obligations, 4 Ed., Editions Themis,

th

Quebec, 2001, at 37. See also Baudouin, J.L. Les Obligations, 5 Ed., Blais, Montreal 1998,

where at 111 good faith is described as follows: ―[Bonne foi] suppose un comportement loyal et

nd

honnete.‖. Kouri, R.P., et al, Eds. Private Law Dictionary, 2 Ed. Quebec Research Center of

Private and Comparative Law, Editions Yvon Blais, 1991, at 181, quoting Rosenburg, (1960-61) 7

McGill L.J. 2, at 12: ―In the spirit of our law the general principle of good faith is of the essence,

and much in the same way as in criminal law, every person is deemed innocent until proven

guilty, so too in civil law, every person is considered to be in good faith until proven otherwise.‖.

Tetley, supra note 20, at 3 defines good faith in contact as, ―just and honest conduct, which

should be expected of the parties in their dealings, one with another and even with third parties,

who may be implicated or subsequently involved. Good faith requires that each party be fair and

honest in negotiations and, once the agreement has been reached, that the parties also perform

their respective obligations and enforce their rights honestly and fairly.‖

27

Private Law Dictionary, ibid., at 181.

28

The Quebec Civil Code, 1994, has many good faith provisions, including art. 1375, which

relates specifically to contracts: ―The parties shall conduct themselves in good faith both at the

time the obligation is created and at the time it is performed or extinguished.‖ See also articles 6,

7 and 1437.

29

Belgium Civil Code, 1804, art. 1134.

30

The International Institute for the Unification of Private Law, Article 1.7(1) stipulates that parties

must act in accordance with good faith and fair dealing in international trade. The UNIDROIT

Principles of International Commercial Contracts can be found online at:

http://www.unidroit.org/english/presentation/main.htm. See Section V(9) infra, for further

19









Fraud is a broad concept in the civil law, and is known in French as dol or fraude.



It can be defined generally as, ―[an] act accomplished with the intension of causing harm



to the interests of others or to avoid the application of a judicial rule,‖32 and can consist



of ―lies, concealment or fraudulent artifices.‖33 Fraud and good faith are interrelated,



especially in the contractual sphere. Baudouin states that ―l‘annulation [du contrat] pour



erreur provoquée par le dol vise aussi a sanctionner la malhonnêteté du









discussion of UNIDROIT. For further discussion on UNDROIT and good faith see Baudouin,

supra note 26. For information on UNIDROIT generally see http://www.unidroit.org.

31

Regis d’Assainissement des eaux du basin de la Prairie v. Janin Construction [1999] R.J.Q 929

(Quebec C.A.) where it was held that parties to a contract have an obligation to inform, based on

the general obligation of good faith, their co-contractors of all information regarding the entering

and performance of the contract. When one party is informationally vulnerable the other party will

have a duty to inform them. See also Bolduc v. Decelles [1996] R.J.Q. 805 (Quebec Sup. Crt).

For further discussion on the obligation to inform see also section V(3)(a) infra, discussing the

fact that the Nordic Maritime Codes impose a duty to inform on the carrier such that the carrier is

obliged to inform the consignee at his request whether a letter of indemnity had been issued by

the actual shipper in case it turned out that the goods did not correspond with the particulars in

the bill of lading (Honka, H. ―New Carriage of Goods by Sea – The Nordic Approach,‖ in New

Carriage of Goods by Sea. H. Honka (Ed.) Institute of Maritime and Commercial Law, Abo: 1997,

15-216 at 132). For the obligation to advise see Parizeau v. Poulin De Courval [2000] R.R.A. 67

(Quebec C.A.). For the obligation to co-operate see Diesse, F. ―Le devoir de coopération

commun principe directeur du contrat,‖ (1990) 43 Arch. Phil. Droit, 259, as well as, Provigo

Distribution v. Supermarche A.R.G., [1998] R.J.Q. 47 (Quebec C.A.), holding that co-contractants

had a duty to co-operate and work together in order to minimize the financial prejudice suffered

by one of the parties as a result of adhering to the terms of the contract.

32

Private Law Dictionary, supra note 26 at 170. Fraud is also specific to the contractual realm:

―Fraud, in provoking an error on the part of the victim, constitutes a source of relative nullity in

contract that is distinct from error; a contract can be annulled by reason of fraud even if the

resulting error does not fulfill the conditions required by art. 992 [Civil Code of Lower Canada] for

it to be a cause of nullity.‖ (Ibid.) We see that fraud is an overriding reason for nullity in civil law

contracts.

33

Ibid, at 171. Fraudulent artifices, or the French term manoeuvre dolosive, are defined, in the

Private Law Dictionary as ―play or scheme intended to deceive.‖ (Ibid.) This can also be seen in

Art. 933 of the Civil Code of Lower Canada which states that fraud is a cause of nullity, ―when the

artifices practiced by one party or with his knowledge are such that the other party would not have

contracted without them.‖ This statement characterizes perfectly the scenario in which a clean bill

of lading is issued in exchange for a letter of indemnity, as the carrier and the shipper are fully

aware that but for the scheme of the clean bill of lading, the consignee (through the requirements

of the letter of credit) would not have entered into the contract of sale.

20



cocontractant.‖34 Intentional dishonesty is one aspect of bad faith, the corollary of the



failure to act in good faith.35







3) The Common Law



The common law has grown organically over a thousand years, one case at a



time. Rather than having general underlying principles, as seen in the civil law, the



common law is compartmentalized with many rigid, specific rules.36 The common law



was primarily developed through commercial litigation and, therefore, the sophisticated



commercial parties desired crisp, clear rules with defined consequences, as opposed to



nebulous concepts such as good faith.37 It was not until late in the 20th century that the



common law began to accept limited notions of good faith. Ibbetson, commenting on the



influence of continental Europe on English law, states that:



[In the 20th century] there was still a degree of disharmony between [England

and] continental European systems, where the requirements of good faith and

fair dealing were far more deeply entrenched, but in 1994 these differences were

smoothed out, at least so far as consumer contracts were concerned, by

providing that all such contracts should be subject to a general requirement of

‗fairness‘.38









34

Baudouin, supra note 26, at 220.

35

For examples of the obligation to act in good faith and its corollary obligation, the obligation to

not abuse your rights or contractual rights, see The Supreme Court of Canada decisions in

Banque Canadienne National v. Soucisse [1981] 2 SCR 339 (S.C.C.), and Houle v. Banque

Canadienne Nationale [1990] 3 SCR 122 (S.C.C.).

36

A perfect example of the compartmentalized nature of the common law, is the development of

the law of torts. The common law developed many different separate torts, and it is only after the

seminal case of Donahue v. Stevenson [1932] AC 562 (H.L.), with the development of the tort of

negligence, that one can begin to see a general obligation not to harm another, duty of care,

crystallizing in the common law. See Ibbetson, supra note 20, Chapter 4: The Substantive Law of

Torts, and Chapter 9: The Law of Torts in the Nineteenth Century: The Rise of the Tort of

Negligence.

37

See Ibbetson, supra note 20.

38

Ibid., at 258. The 1994 regulations that required ‗fairness‘ were the Unfair Terms in Consumer

Contracts Regulations 1994 (U.K).

21



The common law has traditionally resisted an overarching obligation of good faith and



the duties that accompany it. Specifically, English law has not allowed the creation of a



general duty to inform, also known as the obligation to disclose.39 The House of Lords in



Jenkins v. Livesey40 strongly advocated the traditional view of English law, however,



―…academic writers [have] continued to press for some generalization of the



circumstances in which such duty [to inform or of disclosure] arose, moving towards



though not necessarily reaching, the principles of good faith in negotiations widely



recognized by continental legal systems.‖41







Fraud in the common law truly developed at the end of 19th century, as the courts



of Equity took the specific, infrequently used, contractual defense of fraud and redefined



it in terms of the unconscionability of the defendant‘s conduct. Eventually this defence



was expanded in the 20th century into a remedy for damages in fraudulent



misrepresentation, also known as deceit, and negligent misrepresentation.42 Fraud is





39

Ibid., at 252, citing Nicholas, B. ―The Obligation to Disclose Information‖ in D.R. Harris and D.

Tallon, Contract Law Today, Oxford, 1989, 166. The obligation to inform, or the obligation to

disclose, arises most commonly in English law in the context of the question of ―whether…a right

to rescind [a contract] should arise where a contracting party had failed to disclose information

that would have affected the other party‘s decision to enter the contract.‖ There are, however,

specific instances in English law where a duty to disclose does arise; see Beatson, Anson’s Law

of Contract, Oxford, 1998, at 257-269.

40

[1985] AC 424, at 439.

41

Ibbetson, supra at note 20, at 252, taking special note of Beatson, J. ―Has the Common Law a

Future‖[1997] CLJ 291, at 303-307.

42

Ibid. At this time in England there was also a statutory remedy under the Misrepresentation Act

1967, U.K. c. 7 at s. 2(1), under which, for example, a consignee could sue the carrier in

misrepresentation for permitting a statement as to the condition of the goods, or the date, into the

bill of lading while knowing that the statement is false. (Tetley, supra note 6, at 281). In the

United States fraudulent misrepresentation is defined as follows: ―A misrepresentation is

fraudulent if the maker intends his assertion to induce a party to manifest his assent and the

maker (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have

the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not

have the basis that he states or implies for the assertion.‖ (Restatement of the Law of Contracts,

Restatement of the Law, Second, Contracts (2d), as adapted and promulgated by the American

Law Institute at Washington, D.C., American Law Publishers, St. Paul, Minnesota, 1981 at s.

162(1)). This can be contrasted with the United States definition of negligent misrepresentation:

―A careless of inadvertent false statement in circumstances where care should have been

th

taken.‖(Black’s Law Dictionary, 7 Ed., B. Garner, Ed., West Group, Minnesota, 1999, at 1016).

22



now usually considered a tort,43 and can be described as follows: ―A tort arising from a



knowing misrepresentation, concealment of material fact, or reckless misrepresentation



made to induce another to act to his or her detriment.‖ 44 An individual, such as an



endorsee of a bill of lading, who is victim to a fraud by the carrier, may sue a carrier in



the specific common law torts of negligent misrepresentation, deceit/fraudulent



misrepresentation, or the tort of negligence, depending on the facts of the situation, and



the proof available.45







The common law approach of specific torts is, therefore, very different from the



expansive civil law approach of fraud and good faith. Although the approaches of the two



systems are quite dissimilar the end result, especially with regard to letters of indemnity



and guarantee, is often very similar if not identical.46







On a final point, it should be noted that although the historic common law position



has been and still is to an extent resistant to the notion of a general principle of good



faith, in the past few years there have been several significant changes. England has



remained somewhat true to its historical roots, however, other common law jurisdictions



have increasingly begun to recognize good faith. This suggests that a traditionally



civilian notion of an overarching duty of good faith may become somewhat of an



international standard as opposed to simply restricted to the civilian nations. In the



United States, good faith has found general acceptance through such vehicles as the



Uniform Commercial Code, which states, ―Every contract of duty within this Act imposes







43

Black’s Law Dictionary, ibid., at 670.

44

Ibid.

45

Tetley, supra note 6, at 281, and Parker, B. ―Liability for Incorrectly Clausing Bills of Lading‖

[2003] LMCLQ 204, at 205.

46

See infra, section V ‗Letters of Indemnity‘, and section VI ‗Letters of Guarantee‘.

23



an obligation of good faith in its performance and its enforcement.‖47 Furthermore, the



Restatement of Contracts (2nd) provides that ―every contract imposes on each party a



duty of good faith and fair dealing in its performance and its enforcement.‖48 Evidence of



a general acceptance of good faith has also been found in Australia. In Renard



Constructions Pty v. Minister for Public Works, the New South Wales Court of Appeal



commented that: 49



…people generally, including judges and other lawyers, from all strands of the

community, have grown used to the courts applying standards of fairness to

contract which are wholly consistent with the existence in all contracts of a duty

upon the parties of good faith and fair dealing in its performance. In my view this

is in these days the expected standard, and anything less is contrary to prevailing

community expectations.







The same trend of acceptance can be seen in Canadian jurisprudence,50 as well as in



other Canadian sources; for example, the Ontario Law Reform Commission has



advocated that rules on good faith should be incorporated into provincial law. 51 In the



Ontario Law Reform Commission‘s 1987 Report on Amendment of the Law of Contract it



is noted that, ―…while good faith is not yet an openly recognized contract law doctrine, it



is very much a factor in everyday contractual transactions. To the extent that the





47

Uniform Commercial Code, 1972 Official Text, by the American Law Institute and National

Conference of Commissioners on Uniform State Laws. Although it could be argued that the UCC

only formalized a concept that had been present in American law for quite some time. For

example, the better part of a century ago the Court of Appeals of New York in Wigand v.

Bachmann-Bechtel Brewing Co. (1918) 222 NY 272; 1918 N.Y. LEXIS 1455 (N.Y.C.A.), stated at

277: ―every contract implies good faith and fair dealing between the parties to it.‖

48

Section 205 of Restatement of the Law of Contracts, supra note 42.

49

Renard Constructions Pty v. Minister for Public Works (1992) 26 NSW LR 234 (C.A. N.S.W.), at

268. For other Australian jurisprudence supporting the notion of good faith see Amann Aviation

Pty Ltd. v. Commonwealth of Australia (1991) 66 ALJR 123 (H.C. Aust.), particularly the joint

reasons of Mason CJ and Dawson J at 135.

50

McKinley Motors v. Honda (1985) 55 Nfld & P.E.I.R. 170 (Nfld. S.C.), where the court held that

Honda had an implicit obligation of cooperation, and had to treat McKinley Motors, a franchised

dealer, in a fair manner consistent with good faith.

51

Ontario Law Reform Commission, Report on Amendment of the Law of Contract, Ministry of the

Attourney General, Toronto, Ontario, 1997.

24



common law of contracts, as interpreted and developed by our courts, reflects this



reality, it is accurate to state that good faith is part of our law of contracts.‖52 In



summary, this growing acceptance of a general principle of good faith in the common



law leads one to speculate that in the coming years good faith may very well become an



internationally recognized principle, bridging the historical divide between the common



law and civil law traditions with regard to good faith.53







IV. COUNTER-LETTERS



1) Introduction



Counter-letters, or contre-lettres, are a civil law creation, without parallel in the



common law jurisdictions. A discussion of counter-letters in the civil law is illuminating



because a letter of indemnity issued at shipment is considered by the civil law to be an



example of a counter-letter. Although letters of indemnity issued at shipment have been



specifically legislated on in certain instances,54 a general examination of counter-letters



provides a framework for understanding the civilian approach to letters of indemnity.







2) Definition



A counter-letter is also known as a simulation, depending on the source.



Nevertheless, counter-letters and simulations can be defined differently, although the



difference is usually minimal.55 A counter-letter is defined in the Quebec Civil Code as:







52

Ibid., at 166.

53

The beginnings of this process can also already be seen with the presence and proliferation of

good faith in uniform law, such as the UNIDROIT Principles of International Commercial

Contracts, supra note 30, and the United Nations Convention on Contracts for the International

Sale of Goods, Vienna, April 11, 1980, article 7.1. which explicitly invokes good faith.

54

Law of June 18, 1966 (Law No. 66-420), art. 20. See sections V(4) and V(5) in this paper for

further discussion.

55

The Private Law Dictionary, supra, note 26, defines counter-letters at 102 as an, ―act secretly

made by the parties which modifies or abrogates the effects of an apparent act entered into for

the purpose of concealing the true agreement.‖ While simulation is defined at 402 as an,

25



―Simulation exists where the parties agree to express their true intent, not in an apparent



contract, but in a secret contract, also called a counter-letter.‖56 In contrast, the



Louisiana Civil Code, makes a limited distinction between a counter-letter and a



simulation:57



A contract is a simulation when, by mutual agreement, it does not express the

true intent of the parties.

If the true intent of the parties is expressed in a separate writing, that writing is a

counter-letter.

Counter-letters have also been defined by doctrinal authors, including Baudouin, who



offers a more complete definition than the codes do:58



Il y a simulation toutes les fois que les contractants s‘entendent pour cacher aux

yeux des tiers leur volonté contractuelle réelle, derrière un acte apparent qui la

contredit, la modifie ou en change les effets. Toute operation de simulation

comprend donc deux actes distincts: d‘une part un acte apparent, qui représente

ce que les parties veulent faire croire aux tiers, et d‘autre part un acte secret ou

contre-lettre, qui reflète leur veritable intentioned qui doit avoir été conclu avant

ou en même temps que l‘acte apparent.





3) Are Counter-Letters Always Fraudulent?



At first glance, the counter-letter or simulation, may seem to be a transaction that



is inherently fraudulent in nature. This, however, is not always the case. Le Dain has



stated that, ―although a simulation is frequently prompted or accompanied by fraud, it



must not be equated with fraud and may exist in the absence of any fraudulent intent.‖59



Counter-letters, therefore, may be made with the object of defrauding the law or a third



party, or they may be a legitimate juridical act. An example of a simulation that forms the



―operation by which the parties conceal their true agreement, intending it to remain secret, behind

the façade of an ostensible act.‖

56

Article 1451(1), Civil Code of Quebec, 1994.

57

Article 2025, Louisiana Civil Code, 1984.

58

Baudouin, supra note 26, at 394.

59

Le Dain, ―Security Upon Movable Property in the Province of Quebec‖ (1955-1956) 2 McGill

L.J. 77, at 91, as quoted by The Private Law Dictionary, supra note 26, at 402.

26



basis for a legitimate act is where a donor wishes to maintain his anonymity and



therefore makes a donation through another individual.60







4) Effect between the Parties to the Counter-Letter



Counter-letters, barring circumstances discussed below, are considered to be



valid and have effect between the parties that have contracted to them. The Quebec



Civil Code stipulates that: ―Between the parties, a counter-letter prevails over an



apparent contract.‖61 The rationale is that a counter-letter is the result of the consent



between individuals to enter into a binding agreement, and thus based on civilian



principles of ―consensualism‖, ―l‘autonomie de la volonté‖ and ―la force obligatoire des



contrats‖, the parties are then bound by their agreement.62 The Louisiana Civil Code



distinguishes between two types of simulations: a relative simulation, which has effect



between the parties63 and an absolute simulation, which does not.64 A valid relative



simulation has been exemplified as: ―a simulated sale with right of redemption may be a



valid security contract.‖65 Finally, the French Civil code stipulates that, ―les contre-lettres



ne peuvent avoir leur effet qu‘entre les parties contractantes…‖.66







Counter-letters and simulations may not always have effect between the parties



to the contract. In the case of an ‗absolute simulation‘, it gives no effect whatsoever





60

Baudouin, supra note 26, at 394.

61

Article 1451(2), Quebec Civil Code.

62

Baudouin, supra note 26, at 396.

63

Article 2027 entitled ‗Relative simulation‘ stipulates, ―a simulation is relative when the parties

intend that their contract shall produce effects between them though different from those recited

in their contract. A relative simulation produces between the parties the effects they have

intended if all requirements for those effects have been met.‖

64

Article 2026 entitles ‗Absolute simulation‘ stipulates, ―a simulation is absolute when the parties

intended that their contract shall produce no effects between them. That simulation, therefore,

can have no effects between the parties.‖

65

Revision Comments 1984 found in the Louisiana Civil Code, 2002 ed. Ed. by A.N.

Yiannopolous, West Group, St. Paul, Minnesota, at 434.

66

Article 1321 of the French Civil Code.

27



between the parties.67 For example, a situation where two parties make what appears to



be a sale, but where in fact the parties actually intend the vendor to remain the owner.68



These types of transactions have also been called ―sham transactions.‖69 If fraud is



involved, the simulation or counter-letter will not have any effect between the parties. In



other words, when parties use a simulation to bypass the law or the requirements of



public order, it is considered fraud, and the apparent act, as well as the counter-letter,



are rendered null and void.70







5) Effect of the Counter-Letter on Third Parties



Generally, the civil law posits that counter-letters are not effective against third



parties acting in good faith.71 A third person who is acting in good faith is considered a



person who did not know of the existence of the counter-letter, generally, or at the time



when they contracted.72 There are situations, however, where a counter-letter may have



effects with regard to third parties. Article 1452 of the Quebec Civil Code stipulates



that:73



Third persons in good faith may, according to their interest, avail themselves of

the apparent contract or the counter letter; however, when conflicts arise

between them, preference is given to the person who avails himself of the

apparent contract.



67

For a definition of ‗absolute simulation‘ see footnote 64 supra.

68

Revision comments, supra note 65, at 433.

69

Ibid.

70

Baudouin, supra note 26, at 397. See also Portenier-Dahany v. Snyder, [1993] R.D.I. 130

(C.S.).

71

The French Civil Code stipulates in art. 1321 that, ―les contre-lettres ne peuvent avoir leur effet

qu‘entre les parties contractantes; elles n‘ont point d‘effet contre les tiers.‖ While the Louisiana

Civil Code, in article 2028, states that, ―Any simulation, either absolute or relative, may have

effects as to third parties. Counter-letters can have no effects against third persons in good faith.‖

The revision comments discuss the fact that under 2028, creditors and bona fide purchasers are

amoung the third persons who may avail themselves of a simulation. Other third parties, however,

may do so as well, on the condition that they are in good faith. (Revision Comments, supra note

65 at 434).

72

Baudouin, supra note 26, at 397; Revision Comments, ibid, at 434.

73

Art. 1452, Quebec Civil Code.

28









Essentially, the third party has the option to decide which of the two transactions - the



apparent transaction or the counter-letter - best suits their interests. The third party, for



example, can enforce the apparent transaction as if it has been the true agreement



between the parties all along.74 The situation is identical in France. The wording of art.



1321 ―n‘ont point d‘effet contre les tiers‖, has been interpreted to mean that the third



party may choose the favourable situation, either invoking the counter-letter or relying on



the apparent situation.75 A simulation may also be valid with regard to third parties under



Louisiana law:76 ―an act may not be attacked as a simulation against the interest of a



third person who has relied on the public records.‖77







In summary, the civil codes, provide protection for innocent individuals by either



negating the counter-letter‘s effect on them and, depending on the jurisdiction, allowing



them to use it to their advantage when it is in their interests, or would be unjust not to.







V. LETTERS OF INDEMNITY AT SHIPMENT



1) Introduction



Exchanging letters of indemnity for clean bills of lading at shipment is a



fraudulent practice, which can be characterized as undermining the integrity of bills of



lading:



Honesty and integrity in relation to the signing of receipts for goods the subject of

bills of lading is essential if persons engaged in international trade are to have

any confidence in documents which play such a vital role in relation to the

authorization of the payment of money. If receipts are signed dishonestly or in

74

Baudouin, supra note 26, at 397.

75

Flour, J. Les Obligations, 9e Ed. Dalloz: Paris, 2000, at 286.

76

See supra, footnote 71, for the text of art. 2028 and a description of third parties who may avail

themselves of a simulation.

77

Revision comments, supra note 65, at 434.

29



bad faith, the confidence of the international trading community is undermined

and a whole system that was designed to work for the benefit and protection of

both parties to a transaction such as this will be called into question.78







Although the courts have tended to look unfavorably on the practice,79 and



authors have spoken out against it,80 letters of indemnity are still being issued in return



for clean bills of lading. The carrier, despite the risk that he will be responsible to the



shipper should the shipper sue, will often bow to the intense pressure placed upon him



by the shipper who, in order to get paid, must have clean shipped bills of lading. The fact



that the carrier receives a letter of indemnity in return may not be much comfort since



many jurisdictions will refuse to enforce the letter of indemnity contract.81 The carrier



may nonetheless escape responsibility for his fraudulent actions; it has been suggested



that a ―particularly nefarious consequence of letters of indemnity‖ is that the carrier will



claim an exception such as insufficient packaging, and the consignee and his



underwriters will not learn about the letter of indemnity until after suit is taken, or often



they will even remain entirely ignorant of its existence.82 That consignees are often





78

Hunter Grain v. Hyundai, supra note 10, holding the carrier responsible for accepting a letter of

indemnity in exchange for a clean bill of lading.

79

Ibid. See also Brown Jenkinson v. Percy Dalton, supra note 1; Standard Chartered Bank v.

Pakistan Nation Shipping Corporation and Others (No. 2) (C.A.) supra note 1; United Baltic Corp.

v. Dundee Perth & London Shipping Co. (1928) 32 Ll. L. Rep. 272, where the practice of issuing

letters of indemnity was criticized by the court, with Wright J. using particularly strong language at

p. 272: ―The practice of issuing clean bills of lading when goods are damaged is very

reprehensible. It leads to trouble, and the people who do it ought to suffer.‖

80

See Tetley, supra note 6, ―Chapter 38: Letters of Indemnity and of Guarantee‖ at 821, who, at

p. 823, states that ―letters of indemnity should not be condoned, by the courts, or by commerce,

rather they should be discouraged.‖ See also Hazelwood, supra note 8, at 178.

81

See Brown Jenkinson v. Percy Dalton, supra note 1, where the Court of Appeal held that the

indemnity was unenforceable because it was an illegal contract, with the purpose of perpetrating

fraud on the buyer. See also the Hamburg Rules, which dictate in Article 17.3 that the carrier will

have no right of indemnity against the shipper if his intention in issuing the clean bill of lading was

to defraud a third party, including a consignee, who acts in reliance on the description of the

goods in the bill of lading.

82

Tetley, supra note 6, at 824. See also Bokalli, supra note 2 at 118, framing the problem from

the point of view of the insurance companies, who, once the good have arrived damaged, pay out

and then are subrogated into the rights of the consignees. These companies are often left without

recourse as the carrier claims that the damage falls into one of the exculpatory provisions.

30



unaware of the existence of a letter of indemnity, is compounded by the difficulty a



consignee might have in proving a suspected fraud.83







2) Letters of Indemnity, the Banking System and Financing Requirements



International trade, for the most part, is financed by the banking system.84 The



most common method of securing international payment is the use of documentary



credits.85 In a normal transaction, the buyer will request that his bank open a credit in



favor of the seller who, in order to draw on the credit, must ship the contract goods and



present the bank with the appropriate documents.86 The details of the documents may



depend on the specific contractual obligations, however, in a normal c.i.f. contract (cost,



insurance, freight) the seller would be required to submit i) the bill of lading, ii) an



insurance policy covering the goods while in transit, and iii) the original sales invoice.87



What is most pertinent to the discussion at hand, is the fact that built into most



documentary credits is the requirement that the documents, i.e. the bill of lading, must



be clean and unadulterated.88 Given this requirement, it is not surprising that carriers





83

In Xiamen Special Zone Jijian Trade Co. v. Tianjing Ocean Shipping Co. (reported by Xia

Chen, ―Chinese Law on Carriage of Goods by Sea under Bills of Lading‖ (1999) 8 Currents Int‘l

Trade L. J. 89, at 93.) the consignee suspected fraud in the form of antedated bills of lading,

however the evidence was not sufficient to unequivocally prove the fraud. The consignee then

obtained a court order that mandated that the vessel provide all information related to the loading,

and the Court itself also undertook its own investigation. Upon completion of the investigations,

the Court held that there was in fact fraud and the carrier was liable.

In commentary on the above decision, it has been noted that it is ―often not easy for a cargo

consignee to prove such fraud between the shipper and the carrier without having been present

at the time of loading. [In the above case] the petitioner obtained the court‘s order to preserve

evidence on board the vessel, in addition to interviewing the vessel‘s officials and other crew

members and inspecting the cargo by professionals. In the meantime the court also launched an

investigation of its own in accordance with Article 74 of the Law of Civil Procedure which provides

that when there exists a danger that evidence may disappear or when it is difficult to gather

evidence, the parties involved may petition the court for an order to preserve evidence and the

court may also initiate its own efforts in preserving the evidence.‖ (Ibid., at 93).

84

Hare, J. Shipping Law & Admiralty Jurisdiction in South Africa, Junta & Co., Cape Town, 1999,

at 459.

85

Ibid., In the United States, however, the documentary credit is normally called a ‗letter of credit‘.

86 th

Wilson, J. Carriage of Goods by Sea, 4 Ed. Longman, England, 2001, at 140.

87

Ibid., at 140-141.

88

Hare, supra note 84, at 459.

31



often come under intense pressure to issue clean bills of lading so that the seller/shipper



can submit a bill of lading that conforms to the documentary credit requirements in order



to get paid.







The standard format for documentary credit transactions in international trade is



‗The Uniform Customs and Practice for Documentary Credits‘, or UCP 500.89 The



requirement for a clean bill of lading is found in article 32, which covers ―clean transport



documents‖:90



(a) A clean transport document is one which bears no clause or notation which

expressly declares a defective condition of the goods and/or the packaging.

(b) Banks will not accept transport documents bearing such clauses or notations

unless the credit expressly stipulates the clauses or notations which may be

accepted.







In addition to the confirmation, through a clean bill of lading, that the goods were



shipped in good order and condition, the date on which the goods were shipped is also



of prime importance. Documentary credits will often have the requirement that the goods



be shipped no later than a certain date, or the bank will not accept the documents



tendered. As with the requirement of a clean bill of lading, the date of shipment



requirement has led shippers to persuade carriers to accept letters of indemnity in return



for antedating the bills of lading.91 The practice of antedating bills of lading, or falsely









89

Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber

of Commerce Publication No. 500. A text of UCP 500 can be found at http://www.iccwbo.org/.

In the United States, the Uniform Commercial Code, supra note 47, regulates documentary

credits similar to the UCP 500.

90

UCP 500, ibid., Art. 32.

91

See Standard Chartered Bank v. Pakistan Nation Shipping Corporation and Others (No. 2)

(C.A.), supra note 1.

32



dating bills of lading to represent that the cargo was shipped earlier than it actually was,



is as fraudulent as issuing clean bills of lading for damaged cargo.92







When a clean bill of lading is issued in exchange for a letter of indemnity, one



commonly thinks of the consignee as the innocent victim of the fraud perpetrated by the



carrier and the shipper. Due to the nature of the financing of international transactions,



the bank may also be a victim, and their interests must be protected as well. Aside from



the interest in the information contained in the submitted bills of lading, the bank also



requires its submission because the bill of lading is a negotiable document of title, which



is therefore capable of providing security for the money advanced by the bank to the



seller.93 Should the creditor default, the bank is then able to use the bill of lading to



claim the shipped goods, which it can then sell to recoup the loss.94 If damaged goods



are shipped under a clean bill of lading then the bank is in fact holding the title to goods



that are likely worth much less than the invoice value, and by consequence worth less



that the advanced payment to the seller.







3) Suit Against the Carrier



a) The Carrier as a Party to the Fraud



The practice of issuing letters of indemnity is particularly fraudulent, when the



goods to be shipped are delivered to the carrier in such a condition that the captain or



master of the vessel has no doubt that the bill of lading should be claused. It is in these





92

In Standard Chartered Bank v. Pakistan Nation Shipping Corporation and Others (No. 2) (C.A.),

supra, note 1, the carrier was held liable in the tort of deceit for antedating bills of lading in

exchange for a letter of indemnity. The Court held that the carrier would have no defence to the

bank‘s claim, who was the holder of the bill of lading, and that the carrier was held to the same

standard of commercial honesty that was required form the other parties to the letter of credit

transaction.

93

Wilson, supra note 86, at 141.

94

Ibid.

33



instances that the carrier becomes a party to the fraud, a practice that has also been



characterized as deceit on the receiver.95 In Hunter Grain v. Hyundai,96 the court



emphasized that it was the fraudulent conduct of the carrier that enabled the shipper to



represent to the plaintiff that the cargo had been shipped in good order and condition,



and made it possible for the shipper to obtain payment.97 The carrier was, therefore,



held liable to the endorsee.98 Cresswell, J. in Standard Chartered Bank v. Pakistan



National Shipping Corp., held that a carrier who had issued false bills of lading in return



for a letter of indemnity was, ―guilty of dishonest conduct.‖99 The French courts have also



chastised the carrier for being a party to the ―conaissement mensonger.‖100







It is important to distinguish these cases from ones in which a carrier is



responsible for damage to cargo by having caused it. Here the carrier, having neither



caused the damage, nor contributed to it, is being held responsible for the condition of



the cargo by virtue of having been a party to the fraud. In other words, the carrier is



responsible because he is a party to the letter of indemnity contract that has as its object



the perpetration of a fraud on the buyer or, ―its object [is] the commission of a tort.‖101







The fraud is characterized by the fact that the shipowner or master intended to



issue clean bills of lading when they were aware the goods did not warrant a clean bill of



lading. That they may have believed that they were making the transaction more



expedient, or that no one would be defrauded, does not detract from the carrier‘s liability.





95

Hazelwood, supra note 8, at 178.

96

Supra note 10.

97

Ibid., at 525.

98

Ibid., at 527.

99

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2), supra

note 7, at 710.

100

Tribunal de commerce de Rouen, supra note 19.

101

Brown Jenkinson v. Percy Dalton, supra note 1, at 627.

34



The conditions for the tort of deceit are as follows: ―…fraud is proved when it is shown



that a false representation has been made, i) knowingly, ii) without belief in its truth, or



iii) recklessly, careless whether it be true or false….‖102 It is irrelevant that the individual



may not have had malicious intentions: ―if the false statement was made knowingly and



that intention is proved then the basis for liability for the tort of deceit is established.‖103



In the case of a carrier issuing false bills of lading, Lord Justice Evans of the English



Court of Appeal held that: ―It is clear, in my judgment, that the shipowner would have no



defence to the bank‘s claim if the master or agent issued a false antedated bill of lading



in the genuine though careless belief that it would facilitate the particular transaction or



maritime trade generally…[or that he] believed he was justified in doing so or that no



harm would result.‖104







In an effort to protect the consignee from the carrier‘s fraudulent actions, Nordic



law has implemented a provision by which the consignee can learn if the carrier was



party to a letter of indemnity contract. Aside from the initiatives discussed below, Nordic



law recognized in the 1930‘s the need to combat the fraudulent practice and created,



through legislation, a duty to inform.105 The carrier is obliged to, ―inform the consignee at



his request whether a letter of indemnity had been issued by the actual shipper.‖106 This



obligation of information is now contained in the Norwegian and Finnish Maritime









102

Derry v. Peet (1889) 14 A.C. 337 (H.L.) at 374.

103

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2), supra

note 1,at 224. See also Gaskell, N. Bills of Lading: Law and Contracts, LLP, London, 2000 at 179:

―…the act of knowingly issuing a false bill of lading is an intentional deceit or fraud.‖

104

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2), ibid.,

at 221 and 224.

105

Honka, supra note 31, at 132.

106

Ibid.

35



Codes.107 Honka, however, has been critical of the rule, stating that, ―clearly this rule had



no essential importance as it did not specify what sanctions the consignee could use.‖108







b) Estoppel



Suit against the carrier who has falsely issued a clean bill of lading is made



significantly easier because a clean bill of lading is either treated as prima facie proof of



apparent good order and condition of the goods, or the carrier is estopped109 from



contradicting the clean bill of lading.110 Statements in the bill of lading concerning the



condition in which goods are shipped are prima facie evidence in favour of the shipper,



107

Ibid. Norwegian Maritime Code section 300.2. As well it is found in the Finnish Maritime Code

chapter 13, section 50.2: ―If the goods do not correspond to the particulars in the bill of lading, the

carrier is obliged to declare on the consignee‘s demand whether the actual shipper has agreed to

indemnify the carrier for inaccurate or incomplete particulars (letter of indemnity) and also to

impart such a letter of indemnity to the consignee.‖

108

Ibid.

109

The legal concept of estoppel has been present in the common law for several centuries.

th

Everest defines estoppel incorporating Coke‘s definition from the 17 century (citations omitted) :

― ‗Estoppe‘ says Lord Coke, ‗cometh of the French cord estoupe, from whence the English word

stopped; and it is called an estoppel or conclusion, because a man‘s own act or acceptance

stoppeth or closeth up his mouth to allege or plead the truth.‘ Estoppel may also be defined to be

a legal result or ‗conclusion‘ arising from an admission which has either been actually made, or

which the law presumes to have been made, and which is binding on all persons whom it affects.‖

rd

(Everest, L.F., Everest and Strode’s Law of Estoppel, 3 Ed. 1923, at 1). In the context of

estoppel, with regards to the carriage of goods by sea, we are concerned with estoppel by

representation (Tetley, supra note 6, at 273). Estoppel by representation has been defined as:

―An estoppel that arises when one makes a statement or admission that induces another person

to believe something and that results in that person‘s reasonable and detrimental reliance on the

belief.‖ (Black‘s, supra, note 42, at 571).

110

―In The Carso, Judge Augustus Hand discussed fully the doctrine of estoppel as applied by the

Second Circuit to false bills of lading. The relevant principles, as later summarized by this court,

are as follows: 1) Where the cargo is in fact damaged…but there is no proof that the damaged

condition was known to the carrier, the carrier is not liable for the loss where the bill of lading

recites that the cargo was received in ―apparent good order and condition.‖ 2) Where the

packaging is broken…, but there is no proof that the carrier knew of any damage to the contents,

and the mate‘s receipt is claused ―broken – not answerable for contents,‖ and a clean bill of

lading is issued, the carrier is estopped to show that the damage was caused for reasons

independent of the breakage. 3) Where the mate‘s receipt is claused ―cases stained by

contents‖…and the carrier after securing agreements of indemnity from the shipper, issues clean

bills of lading, the carrier will be estopped to show the cargo was not in actual good order and

condition. 4) The fact that some of the packings showed staining, indicative of the condition of the

contents, cannot be taken as evidence that other cargo – without apparent evidence of interior

damage – was likewise in a damaged condition. American Indus. Corp. v. M.V. Margarite, 556

F.Supp. 206, at 212 (S.D.N.Y. 1981) (citing The Carso, 53 F.2d at 374-377).‖ (St. Paul Fire and

Marine Ins. Co. v. Thypin Steel Co., Inc., S.D.N.Y. March 24, 1999, at 5-6, 1999 WL 163562

(Westlaw) unrep.)

36



but are conclusive evidence once the bill of lading comes into the hands of a third party



who has relied on it. Parker has commented on the effect of statements as to the



apparent order and condition of the cargo in the bill of lading: ―…in the hands of an



indorsee acting in good faith the bill of lading is conclusive, and the carrier is estopped



from alleging that a defect in the goods which would have been apparent on a



reasonable inspection was present on loading.‖111







The use of estoppel against the carrier in carriage of goods by sea is



longstanding. The United Kingdom Bills of Lading Act 1855 in s. 3 provides that, ―every



bill of lading in the hands of a consignee or endorsee for valuable consideration



representing goods to have been shipped aboard a vessel is conclusive evidence of



such shipment.‖112 Estoppel can arise at common law, under statute, or can be found in



the various international regimes that govern the carriage of goods by sea.







Estoppel arises at common law when there is: ―a) a representation as to a state



of facts; b) which is made with the intension of being relied on; and c) which is in fact



relied upon by the person raising estoppel; d) to his detriment.‖113 In Compania Naviera



Vascongada v. Churchill, the master issued a clean bill of lading covering a shipment of



damaged timber.114 Channell J., held that the carrier was estopped from contradicting



the bill of lading, because the assignee relied to his detriment.115 Although the third party





111

Parker, supra note 18, at 204.

112 th

Mocata, A.A., M.J. Musthill, & S.C. Boyd, Eds. Scrutton on Charterparties, 19 Ed., Sweet &

Maxwell, London, 1984, at 110.

113

Tetley, supra note 6, at 273, relying on Lord Denman‘s statement in Pickard v. Spears (1837)

112 E.R. 179, at 181: ―the rule of law is clear, that, where on by his words or conduct willfully

causes another to believe the existence of a certain state of things, and induces him to act on that

belief, so as to alter his own previous position, the former is concluded from averring against the

latter in a different state of things as existing at the same time.‖

114

[1906] 1 K.B. 237 (K.B. Div.).

115

Ibid., at 249: ―In order to make the statement in the bill of lading binding as an estoppel it is of

course necessary that it would have been acted on to the prejudice of the person so acting . The

37



invoking estoppel has the burden of proving that he relied on the description of the



goods to his detriment,116 such reliance will almost certainly be present as someone will



have obtained delivery or paid for the goods based on the clean bill of lading. The courts



have nevertheless rendered the burden of proof placed on the third party almost non-



existant. In Canastrand Industries Ltd. v. Ship Lara S., Reed J., relying on the English



Court of Appeal, held that a clean bill of lading created a presumption of reliance: 117



Counsel for the defendants argues that the plaintiff may not rely on the estoppel

created by clean bills of lading because there is no evidence that the plaintiff

relied upon them. In my view, the law seems clear that when a buyer of goods

takes up a clean bill of lading it is presumed, in the absence of evidence to the

contrary, that reliance was placed on it.







Nevertheless, the carrier may not be held liable for the damage if the defects or damage



was of a nature that it would not have been apparent to the carrier based on a



reasonable inspection.118







The Hague Rules do not contain a provision on estoppel.119 The Hague/Visby



Rules and the Hamburg Rules, however, have rectified the situation and now prevent the



defendants here allege that they are prejudiced because, on the faith of the statement that the

timber was in good condition when shipped, they accepted the bills of lading as a good tender

under a contract for clean timber, and paid their vendors the full contract price.‖

Anderson, indicates that the American position with regards to a third party consignee, is: ―it is

uniformly held that the carrier will not be permitted to assert that the goods were, in reality, other

than as the bill of lading indicates, unless it can be shown that the consignee placed no reliance

on the representations in the bill or knew the true condition of the goods.‖ (Anderson, C.

―Admiralty Law Institute: Symposium on Charter Parties: Time and Voyage Charters: Proceeding

to Loading Port, Loading, and Related Problems‖ (1975) Tul. L. Rev. 880 at 896).

116

Tetley, supra note 6, at 279.

117

Canastrand Industries Ltd. v. The Lara S (1993) 60 F.T.R. 1(Can. Fed. Ct.), at 15, relying on

Silver v. Ocean Steamship [1930] 1 K.B. 416 (C.A.) at 428 and 441.

118

Wilson, supra note 86, at 129. ―In Silver v. Ocean Steamship Co. the shipowners had issued

clean bills of lading covering a cargo of Chinese eggs shipped in 42-lb square tins which were not

covered with any cloth or packaging. When the goods arrived at their destination in a damaged

condition, the Court of Appeal held that, while the shipowners were estopped from contending

either that the cargo was insufficiently packed or that the tins were gashed on shipment, they

were not estopped form alleging that pin-hole perforations in the tins were present on shipment,

since the latter would not necessarily be apparent on a reasonable inspection.‖ (Ibid.).

38



carrier from contradicting a clean bill of lading in the hands of a third party.120 Unlike



estoppel in the common law, the Hague/Visby Rules do not require reliance by the third



party. ―A transferee who is acting in good faith would probably have relied, but [under the



Hague/Visby Rules] he need not have given value or have become a holder in due



course for the estoppel to arise…he need no longer prove that he ‗relied‘ on the



statement.‖121 The Hamburg Rules are similar to the common law position, as Art.



16(3)(b) requires the third party to rely on the description of the goods in order for the



carrier to be estopped.







The doctrine of estoppel has been integrated into several national statutes. The



United Kingdom‘s Carriage of Goods by Sea Act 1992,122 the Canadian Bills of Lading



Act,123 and the United States‘ Pomerene Bills of Lading Act,124 all contain provisions on







119

The Rules do contain a presumption that the cargo is as described in the bill of lading (Art.

3(4)). In practice the lack of an estoppel provision is somewhat inconsequential as Tetley

comments that the common law principle of estoppel would nevertheless apply. (Tetley, supra

note 6, at 274).

120

Art. 3(4) of the Hague/Visby Rules stipulates that: ―Such a bill of lading shall be prima facie

evidence of the receipt by the carrier of the goods as therin described in accordance with

paragraph 3(a), (b) and (c). However, proof to the contrary shall not be admissible when the Bill

of Lading has been transferred to a third party acting in good faith.‖ Article 16(3) of the Hamburg

Rules stipulates: ―(a) the bill of lading is prima facie evidence of the taking over or, where a

―shipper‖ bill of lading is issued, loading and by the carrier of the goods as described in the bill of

lading; and (b) proof to the contrary by the carrier is not admissible if the bill of lading has been

transferred to a third party, including a consignee, who in good faith has acted in reliance on the

description of the goods therein.‖

121

Tetley, supra note 6, at 278.

122

1992 Chapter c. 50. Section 4 states: ―A bill of lading which – (a) represents the goods to have

been shipped on board a vessel or to have been received for shipment on board a vessel; and (b)

has been signed by the master of the vessel or by a person who was not the master but had the

express, implied or apparent authority of the carrier to sign bills of lading, shall in favour of a

person who has become the lawful holder of the bill, be conclusive evidence against the carrier of

the shipment of the goods or, as the case may be, of their receipt for shipment.‖ This section

provides that the signer of the bill of lading is estopped from contradicting the statement that the

goods were shipped, or received for shipment. Note that as opposed to the Canadian provision,

in footnote 123 infra, the U.K. provision does not mention the need for valuable consideration.

123

R.S.C. 1985, c. B-6. Section 4 states: ―Every bill of lading in the hands of a consignee or

endorsee for valuable consideration, representing goods to have been shipped on board a vessel

or train, is conclusive evidence of the shipment as against the master or the other person signing

the bill of lading…‖. The estoppel in s.4 is only against the master or the person signing, with the

39



estoppel. The German Maritime Law is found in the 5th Book (s. 476 et seq.) of the



Commercial Code ―Handelsgesetzbuch‖ (HGB). ―According to s. 656 para. 2 HGB, the



bill of lading creates a presumption that the goods have been taken in charge by the



carrier in apparent good condition as described therein. This presumption is rebuttable



unless the bill of lading has been transferred to a third party in good faith.‖125 The Nordic



Maritime codes also stipulate that, once a third party in good faith has acquired the bill of



lading in reliance on the statements in the bill, proof to the contrary is inadmissible. 126







Although estoppel is a common law doctrine, some civilian countries have



incorporated it into their statutes, as evidenced by Germany. France, on the other hand,



has no specific doctrine of estoppel, but is a party to the Hague/Visby Rules. It has









requirement that the consignee or endorsee provide valuable consideration. As well, the estoppel

is only with regards to the quantity of goods shipped on board (Tetley, supra note 6, at 275).

124

49 U.S. Code 102. Section 22 states: ―If a bill of lading has been has been issued by a carrier

or on his behalf by an agent or an employee the scope of whose actual or apparent authority

includes the receiving of goods and issuing bills of lading therefore for transportation in

commerce among the several States and with foreign nations, the carrier shall be liable to (a) the

owner of goods covered by a straight bill subject to existing right of stoppage in transitu or (b) the

holder of an order bill who has given value in good faith, relying upon the description therein of

the goods, or upon the shipment being made upon the date therein shown, for damages caused

by the non-receipt by the carrier of all or part of the goods upon or prior to the date therein shown,

or their failure to correspond with the description thereof in the bill at the time of its issue.‖ This

provision has been considered far superior to the Canadian and U.K. statutes by Professor W.

Tetley, for the reason that the estoppel provision is much broader. It is against the carrier, for the

description in the bill of lading as well as the quantity, and the date. (Tetley, supra note 6, at 275).

125

Herber, R. ―German Law on the Carriage of Goods by Sea‖ in New Carriage of Goods by Sea.

H. Honka (Ed.) Institute of Maritime and Commercial Law, Abo,1997, 343-369, at 350. This

provision, like The Pomerene Act, deals with the condition of the goods, not only the quantity.

126

Honka, supra note 31, at 120 – 121. The stipulation is found in the Norwegian Maritime Code

at s. 299.3. In the Finnish Maritime Code, the provision is in Chapter 13, s. 49:

―The bill of lading is evidence of the taking over of the goods or, if a shipped bill of lading has

been issued, their loading as described in the bill of lading unless proof to the contrary is given or

a reservation has been made according to section 48. In the absence of a note on the bill of

lading of the apparent condition of the goods or their packing, it shall be considered to be noted

on the bill of lading that the goods were in good apparent condition, unless otherwise provided…

If a third part in good faith has acquired the bill of lading in reliance on the particulars therein

being accurate, proof to the contrary according to subparagraphs 1 and 2 is not admissible. If the

carrier realized or ought to have realized that a particular relating to the goods was inaccurate, he

may not invoke a reservation mentioned in section 48 unless the reservation expressly mentions

the inaccuracy of the particular.‖

40



however been noted that the French courts make it extremely difficult for a carrier to



contradict a clean bill of lading under the Hague/Visby Rules.127







c) Sanctions for Issuing a Clean Bill of Lading in Exchange for a Letter of



Indemnity



A carrier who issues a clean bill of lading in exchange for a letter of indemnity is



estopped from claiming that the damage or defects were present at loading. It has been



argued, however, that this sanction is not enough: ―[The courts] should hold that, as to



third parties, the letter of indemnity constitutes a fundamental breach of the contract,



depriving the carrier of its defenses under the contract and the law.‖128







Under French law the carrier loses the benefit of his limitations of liability: ―En



outre it perd le bénéfice de sa limitation de responsabilité ce qui revient à traiter sa faute



d‘inexcusable.‖129 In the United States, ―estoppel against the application of the COGSA



liability limitation is available if the bills of lading contain a material misrepresentation



that is correlated to the damage at outturn and is relied upon by the plaintiff.‖130 The



Finnish Maritime Code, Chapter 13, s. 50 states:



When a third party suffers loss by acquiring a bill of lading in reliance in the

particulars therein being accurate, the carrier is liable if he realized or ought to

have realized that the contents of the bill of lading were misleading to a third

party. In such a situation there is no right of limitation of liability under this

Chapter…





127

Tetley, supra note 6, at 274, relying on Cour de cassation de France, November 7, 1973,

[1974] ETL 414, and as well as other French decisions. See Tetley, Chapter 11 ―Loss While in the

th

Charge of the Carrier,‖ Marine Cargo Claims 4 ed. Online at:

http://tetley.law.mcgill.ca/maritime/ch11.pdf.

128

Tetley, supra note 6, at 827.

129

Remond-Gouilloud, M. Droit Maritime, 2e Ed., Editions A. Pedone, Paris,1993, at 354.

130

St. Paul Fire and Marine Ins. Co. v. Typhin Steel Co., supra note 110, at 5, relying on Atlantic

Mutual Ins. Co. v. M/V Pres. Tyler, 765 F.Supp. 815, at 818 (S.D.N.Y. 1990).

41



Aside from the contractual claims, where the carrier loses the limitations of



liability and is estopped from showing that the damage was present at the outset, the



carrier may alternatively be liable in the tort of deceit, negligence or fraud.131 If held liable



in fraud or the tort of deceit, the carrier would lose all his defences under the contract.







4) Validity with Regard to Third Parties



A third party is an individual, other than the shipper and the carrier, who became



involved with the bill of lading contract and who did not know, and should not have



known, about the incorrectness of the statements in the bill of lading or the letter of



indemnity.132 In other words the third party was not privy to the letter of indemnity



contract, and therefore it should have no effect with regards to the third party.







In the common law, letters of indemnity between the shipper and the carrier have



no effect on third parties acting in good faith.133 As discussed above, the common law,



as well as statutory law, ensures through the doctrine of estoppel that letters of



indemnity cannot be used as evidence to show that the goods were damaged prior to



loading in defense against a third party‘s claim. Letters of indemnity have been



considered illegal on several occasions, and thus unenforceable against anyone.134





131

See section V(3)(a), supra, for discussion on the carrier‘s responsibility in the tort of deceit.

See also Hunter Grain v. Hyundia, supra note 10, where the owner of the goods was successful

against the carrier in both his claims in fraud and in contract. See also The Saudi Crown, supra

note 18, where the carrier was held liable in the tort of deceit.

132

Third parties have also been defined with regards to counter-letters in the civil law: ―On doit,

tout d‘abord, préciser qui sont ces tiers. Ce ne sont pas ceux qui sont complètement étrangers

aux contractants qui sont les plus intéressés à l‘opération! Ce sont les acquéreurs de droits reel,

qui ont traité avec les parties parties postérieurement aux actes appatent et secret, ainsi que les

créanciers chirographaires: ce sont eux qui, en effet, risquent de souffrir de la simulation.‖

(Pineau, supra note 26, at 570).

133

See Hunter Grain v. Hyundai, supra note 10; Brown, Jenkinson & Co. v. Percy Dalton, supra

note 1; Standard Chartered Bank v. Pakistan National Shipping, supra note 7; St. Paul Fire and

Marine Ins v. Typin Steel, supra note 110.

134

See Brown, Jenkinson & Co., v. Percy Dalton, supra note 1, where the court held that a letter

of indemnity contract was illegal and unenforceable because the object of the contract was to

42









The civil law has adopted the position that letters of indemnity have no effect



against third parties acting in good faith. The general position in the civil law is drawn



from the provisions on counter-letters.135 France has adopted specific legislation with



regards to letters of indemnity issued at shipment in return for a clean bill of lading: The



Law of June 18, 1966, article 20. ―L‘article 20…commence par poser en règle que ces



lettres de guarantie sont nulls et de nul effect à l‘égard des tiers, qui en revanche



peuvent s‘en prévaloir à l‘encontre du chargeur.‖136 In essence, a letter of indemnity can



have no effect against a third party, but a third party may nonetheless use the letter



against the shipper. Article 20 has been interpreted to mean that third parties would



include not only the holder of the bill of lading, but also endorsees, consignees, banks,



underwriters, and almost any other individual not a party to the letter of indemnity.137 The



German courts have implemented much the same solution as the French. In Germany,



letters of indemnity have been held to be null and void if the carrier had knowledge of the



defects, and in that case would be ineffective against third parties.138







5) Validity between the Carrier and the Shipper









commit a tort. See also Hellenic Lines, Ltd. v. Chemoleum Corp. 1971 AMC 2605 (N.Y. Supr. Ct.

App. Div), where the majority of the court held that indemnity agreements were contrary to public

policy and therefore unenforceable.

135

Discussed in section IV, supra. The French Civil Code stipulates in art. 1321 that ―les contre-

lettres ne peuvent avoir leur effet qu‘entre les parties contractantes; elles n‘ont point d‘effet contre

les tiers.‖ While the Louisiana Civil Code, in article 2028, states ―Any simulation, either absolute

or relative, may have effects as to third parties. Counter-letters can have no effects against third

persons in good faith.‖

136

Rodière, supra note 2, at 320. Rodière specifically points out that in a letter of indemnity

situation, whoever is subrogated into the shipper‘s rights is not a third party: ―Ne peuvent etre

considérés comme tiers les subrogés du chargeur. Une lettre de guarantie opposable au

chargeur peut également l‘etre à l‘assureur subrogé dans ses droits (Montpellier, 30 Avril 1981,

DMF 1982, 35).‖

137

Tetley, supra note 6, at 835. Tetley draws this interpretation on the basis that the term ‗third

parties‘ is used as opposed to ‗third party holder of the bill of lading‘.

138

Herber, supra note 125, at 350.

43



A letter of indemnity is a prima facie binding contract. For all intents and



purposes, the carrier should be able to sue the shipper on it to recover any expenses



incurred as a result of the clean bill of lading. A problem arises, however, because the



carrier and the shipper are both party to the same fraud. In several jurisdictions this has



led the courts to find the letter of indemnity invalid as against the shipper.139 Other



jurisdictions, however, have allowed the carrier‘s claim against the shipper based on the



letter of indemnity.140







In Shanghai Ocean-going Shipping Co. v. Xiamen Foreign Trade Co., a carrier



accepted a letter of indemnity from the shipper in return for issuing a clean bill of lading



covering a cargo of damaged sugar.141 The shipper rejected the sugar based on the



discrepancy between the condition of the cargo and its description in the bill of lading.



The shipper then arrested the ship, which was eventually released once the carrier



settled with the shipper. The carrier then sued the shipper for damages arising from the



arrest. The Chinese court held that the letter of indemnity was valid between the shipper



and the carrier, and the shipper was ordered to indemnify the carrier for any damages



resulting from the incident.142







The seminal case in the U.K. is Brown, Jenkinson & Co. v. Percy Dalton.143 The



plaintiff carrier had agreed to issue a clean bill of lading covering a shipment of leaky



barrels of orange juice, in exchange for a letter of indemnity. The indorsee successfully





139

See Brown, Jenkinson & Co. v. Percy Dalton, supra note1, and Hellenic Lines, Ltd. v.

Chemoleum Corp., supra note 134.

140

See Shanghai Ocean-going Shipping Co. v. Xiamen Foreign Trade Co., summarized by Chen,

supra note 83, at 92.

141

Ibid.

142

Ibid.

143

Supra note 1. For discussion on this case see Wilson, supra note 86, at 131; Gaskell, supra

note 103, at 247; and Tetley, supra note 6, at 830.

44



sued, and the carrier sought indemnification from the shipper. The Court of Appeal held



that the letter of indemnity was unenforceable on the grounds that it was illegal and void



and thus constituted a fraudulent misrepresentation.144







The position in the United States, although similar to the U.K., is still unsettled. In



Hellenic Lines, Ltd. v. Chemoleum Corp., the court adopted the position that the



Carriage of Goods by Sea Act,145 art. 1303(8) barred letters of indemnity agreements



because they were contrary to public policy, and therefore should not be enforced.146



This decision has been criticized by Cromwell, who argues that ―the public policy that



COGSA expresses bears solely on preservation of the negotiability of bills of lading.



Since negotiability is in no way directly jeopardized by the enforcement of a shipper‘s



indemnity agreement, the result in Hellenic Lines would appear to be unwarranted.‖147



Nevertheless, several authors have argued that, for the most part, the courts will enforce



letters of indemnity against the shipper in favor of the carrier,148 a position that is



reflected in the case law.149







Under German law, the carrier cannot enforce the letter of indemnity against the



shipper; German courts have held that such letters of indemnity are null and void if the



carrier had knowledge of the defects.150 Nordic law is very similar. It is considered a





144

Ibid, at 627.

145

U.S. Carriage of Goods by Sea Act (COGSA), April 16, 1936, ch. 229, Sec. 1, 49 Stat. 1207.

146

Hellenic Lines, Ltd. v. Chemoleum Corp., supra note 134, at 2606. The court did however,

allow the carrier to plead negligence, using the letter of indemnity as an admission that the

shipper was negligent and the carrier had incurred expenses as a result.

147

Anderson, supra note 115, at 897.

148

Tetley, supra note 6, at 830; and Anderson, supra note 115, at 897: ―As a rule, the courts will

enforce such indemnity agreements against the shipper based on the rule that, as between the

immediate parties to the bill of lading, a carrier is free to assert the true condition of the goods

when they were received for shipment.‖

149 th

See The Georgian, 1935 AMC 556 (5 Cir. 1935); Demsey & Associates v. S.S. Sea Star,

1970 AMC 1088 (S.D.N.Y. 1970).

150

Herber, supra note 125, at 350.

45



general principle in Nordic law that a letter of indemnity is invalid due to fraud, barring



recovery against the shipper.151 This principle has been formalized in legislation, for



example in the Finnish Maritime Code:152



The actual shipper is liable to the carrier for the accuracy of the particulars

relating to the goods which have been inserted in the bill of lading at his request.

Where the actual shipper has undertaken to indemnify the carrier against loss

resulting from the issuance of a bill of lading with inaccurate particulars or without

reservations, he is nevertheless not liable if the indemnification has been given

with the intent to defraud any person acquiring the bill of lading. Nor is the actual

shipper liable in such a case according to paragraph 1.







Counter-letters in French law are considered valid between the parties.153 When



letters of indemnity are used to procure a clean bill of lading, the situation becomes less



clear. Article 20 of the Law of June 18, 1966, 1st paragraph, stipulates that, although the



letter of indemnity is invalid against third parties, the carrier may use it against the



shipper. It has been argued that this paragraph sets out a positive right of the carrier as



against the shipper.154 The second paragraph of art. 20, however, may remove that right.



Rodière describes the effect of the second paragraph:155



L‘alinéa 2 envisage plus particulièrement les cas où la réserve volontairement

omise concerne l‘état de la marchandise et où le capitaine avait connaissance ou

devait avoir connaissance du défaut qu‘il a omis de noter sur le connissement.

Lorsque ces deux conditions sont réunies, le transporteur ne pourra pas se

prévaloir de ce défaut pour eluder sa responsibilité et meme ne bénéficiera pas

de la limitation de responsibilité édictée par la loi.









151

Honka, supra note 31, at 133. Honka however, finds it surprising that the shipper would have

no liability towards the carrier, as the shipper did take part in defrauding a third party. (Ibid.)

152

Chapter 13, section 51(1) and (2). See also the Norwegian code s. 301(2).

153

See section IV(4) of this paper, for a discussion of the validity of counter-letters between the

parties.

154

Tetley, supra note 6, at 835.

155

Rodière, supra note 2, at 320.

46



This second paragraph has been used by the French courts to hold that letters of



indemnity have no effect between the shipper and the carrier. The Court of Appeal of



Paris has held that, ―une telle lettre est nulle dans les rapports entre les les parties,



lorsqu‘une vigilance normale du capitaine aurait permis de déceler des défauts



importants dès le début du chargement.‖156







The Italian jurisprudence is fairly similar to the French. The ‗Tribunal de Genes‘



has confirmed that letters of indemnity have no effect between the carrier and the



shipper, holding that such letters do not merit judicial protection.157







6) Liability of the Charterer



When a charterer assumes responsibility for issuing bills of lading, he should be



subject to the same responsibilities as the shipowner. A charterer who issues a clean bill



of lading in return for a letter of indemnity, is therefore liable to the injured party in the



same manner that the shipowner would be. When the shipowner is not privy to the



charterer‘s fraudulent act, he should not be held responsible.









156

Cour d’Appel de Paris, November 7, 1988, DMF 1989, 655, at 655. See also the Cour de

cassation de France, February 23, 1983, DMF 1983, 478: ―Losque le transporteur maritime avait

connaissance des défauts de la marchandise au moment de l‘embarquement et avait cependant

signé un connaissement sans reserves moyennant l‘engagement pris par le représentant du

chargeur de le dédommager éventuellement de toute indemnité et de tous frais que ce

transporteur serait amené à verser de ce fait, le transporteur maritime ne peut, en vertu de

l‘article 20, al. 2 de la loi du 18 juin 1966 se prévaloir de cet accord et obtenir la garantie du

chargeur.‖

157

―[letters of indemnity] remplit une fonction economico-soiale qui n mérite pas protection dans

l‘ordre juridique, parce que contraire à la confiance liée aux operation de crédit documentaire et

susceptible de graves abus préjudiciables aux tiers… L‘obligation assumée par le chargeur au

regard du transporteur est nulle et de nul effet pour la cause illicite… Cette illicéité de l‘obligation

résulte de ce qu‘elle est contraire, on seulement aux bons usages commerciaux, mais aussi à la

règle de l‘art. 469 cod. Vav. Imposant au transporteur de décrire au connaisement l‘état apparent

des merchandises et à laquelle, en raison de sa nature de titre de crédit représentatif des

merchandises qui y sont specifies, l‘on doit recinnaitre le caractère de règle imperative d‘ordre

public.‖ Tribunal de Genes, December 28, 1959, DMF 1989, 662.

47



In Cargill Ferrous Int’l v. M/V Sukarawan Naree, a charterer was granted



authority, by virtue of the charterparty, to issue bills of lading on behalf of the master in



strict conformity with the Mate‘s receipts.158 The charterer then issued a clean bill of



lading even though the mate‘s receipts noted rust and broken packaging. The court held



that:159



Only ‗carriers‘ are liable to cargo owners for damage under COGSA. A COGSA

‗carrier‘ is defined as ‗the owner or charterer who enters into a contract of

carriage with a shipper‘…Where, however, a charterer or an appropriate agent

signs a bill of lading without the authority of the master, or by signing not in

accordance with the master‘s instructions, exceeds the authority granted by the

master, ‗the owner does not become a party to the contract of carriage and does

not become liable as a ‗carrier‘ within the meaning of COGSA‘… By issuing clean

bills of lading not in accordance with the Mates‘ receipts as required, [the

charterer‘s] agent exceeded the authority granted by the master. As a result of

which, neither the owner nor [another involved party] became parties to the

contract of carriage and, consequently ‗carriers‘ under COGSA. (Citations

omitted).







A different approach was taken in Interstate Steel Corp. v. S.S. Crystal Gem,



where the charterer issued clean bills of lading in exchange for a letter of indemnity, and



the court held:160



Under these circumstances, it would be inequitable to impose primary liability on

the shipowner, and so I find the charterer primarily liable for the damage

sustained by excessive rusting, with the shipowner entitled to a decree over

against the charterer should it be required to answer for such damage.









158

Cargill Ferrous Int’l v. M/V Sukarawan Naree, 1998 AMC 566, at 568 (E.D. Lou. 1998).

159 th

Ibid., at 570. The court relied on the 5 circuit decision Thyssen Steel Co. v. M/V Kavo

Yerakas, 1995 AMC 2317 at 2319.

160

1970 AMC 617 at 626 (S.D.N.Y. 1970), cited by Tetley, supra note 6, at 829.

48



Although the two courts use different reasoning, the judgments illustrate the



unwillingness of the courts to impose liability on a shipowner who is innocent of



fraudulent behavior.







7) Cases Where a Carrier May Accept a Letter of Indemnity



There are some cases where a bona fide dispute arises as to whether the goods



to be shipped are actually damaged or not, or even with regard to the quantity loaded.



Such cases have been allowed, and the courts have held the letter of indemnity to be



valid as against the shipper.







The Supreme Court of Finland, in a non-fraudulent situation where there was a



disagreement about the tallying result, held that the letter of indemnity was valid and the



carrier was able to claim against the shipper.161







Article 20 (1) of the law of June 18, 1966, refers to proper letters of indemnity,



where the carrier may claim against the shipper.162 It has been speculated that this



refers to borderline cases where the carrier accepts goods that they cannot properly



judge.163 Nevertheless, given the French courts‘ interpretation of art. 20 (2),164 one



wonders about the effectiveness of art. 20(1). Rodière has argued that the practice of



issuing letters of indemnity should always be condemned, reasoning that, ―Fraude ou



pas fraude, faute ou pas faute, la lettre de garantie, relève-t-il, reste secrète jusqu‘au



moment où le capitaine l‘exhibe pour se retourner contre le chargeur.‖165 Bokalli, in



agreement, argues that the insurance companies who have to pay out once the goods



161

NMCases 1962.390 (Majfrid), cited in Honka, supra note 31, at 133.

162

Rodière, supra note 2, at 320; Tetley, supra note 6, at 835.

163

Tetley, ibid.

164

See section V(5) supra..

165

Bokalli, supra note 2, at 118.

49



have arrived damaged, are then often left without recourse as the carrier may claim that



the damage falls into one of the exculpatory provisions.166







In Brown, Jenkinson v. Percy Dalton, the English Court of Appeal noted that



letters of indemnity might be useful where there is a bona fide dispute concerning the



condition of the goods, or where the defect is trivial, in order to avoid having to rearrange



a letter of credit which may cause some difficulty if time is short.167 Some authors,



however, have been particularly critical of the practice of validating letters of indemnity



under any circumstances.168







In Chinese law, the validity of a letter of indemnity against the shipper, depends



on the absence of fraud.169 Chen notes that a letter of indemnity will be valid if, ―both the



shipper and the carrier…acted in good faith that the apparent bad condition of the goods



did not materially affect the nature of the goods to be delivered.‖170







8) Letters of Indemnity and International Conventions



a) The Hague and Hague/Visby Rules



The Hague and the Hague/Visby rules have no specific stipulation dealing with



the problems of carriers accepting letters of indemnity in exchange for issuing clean bills





166

Ibid., 118-119.

167

Supra, note 1 at 639. For further discussion see Gaskell, supra note 103 at 247-248; Wilson,

supra note 86, at 131; Tetley, supra note 6, at 832-833.

168

Tetley, supra note 6, at 833: ―…even in cases of trivial or bona fide disputes the clean bill of

lading which does not mention the dispute can cause the unsuspecting consignee considerable

difficulties and loss. In trivial matters and in bona fide disputes the carrier and shipper should

settle their disagreement by some means other than the issue of a bill of lading containing a

misrepresentation or omission.‖ Todd, on the other hand, argues that where there is no element

of fraud present, a letter of indemnity should be enforceable in situations where the carrier has a

genuine doubt whether the goods are in apparent good order and condition. (Todd, P. Modern

Bills of Lading, Blackwell law, Oxford, 1990, at 88).

169

Chen, supra note 83, at 92.

170

Ibid.

50



of lading. The estoppel provision, discussed above, however, has been invaluable to



claimants, to ensure that the carrier cannot use the letter of indemnity as evidence to



contradict the description of the goods in the bill of lading. In contrast, some courts have



used the public order provision, article 3(8) of the Hague and Hague/Visby Rules, to hold



that the letter of indemnity contract is invalid.171







b) The Hamburg Rules



Unlike the Hague and Hague/Visby Rules, the Hamburg Rules specifically



address letters of indemnity.172 Article 17, Hamburg Rules, is very similar to the French



legislation on letters of indemnity found in Article 20 of the Law of June 18, 1966.173



Rodière has stated that ―Les regles de Hambourg de 1978 se sont inspirées de la



solution française.‖174







Article 17.2 deals with letters of guarantee and third parties: ―Any letter of



guarantee or agreement by which the shipper undertakes to indemnify the carrier



against loss resulting from the issuance of the bill of lading…without entering a



reservation…is void and of no effect as against any third party…to whom the bill of



lading has been transferred.‖ In accordance with French law, letters of indemnity cannot



have effect against third parties. Although it is not stated in art. 17.2, the implication is



that like French law, a letter of indemnity may be used by the third party against the



shipper.









171

Hellenic Lines, Ltd. v. Chemoleum Corp., supra note 134, at 2606.

172

Article 17. Although the Hamburg Rules refer to a letter of indemnity as ―a letter of guarantee‖.

173

For further discussion on article 20 see section V(4): Validity with regard to third parties; and

section V(5): Validity between the carrier and the shipper, supra.

174

Rodière, supra note 2, at 321

51



Article 17.3 addresses the validity of letters of indemnity between the shipper and



the carrier: ―Such letter of guarantee or agreement is valid as against the shipper unless



the carrier…by omitting the reservation…intends to defraud a third party…who acts in



reliance on the description of the goods in the bill of lading…‖ It has been stated that



proof of fraud will be difficult because a carrier never ‗intends to defraud a third party‘,



rather, the carrier wishes simply to assist his client.175 In contrast, it could be argued that



fraud is characterized by the fact that the carrier intended to issue clean bills of lading



while aware that the goods did not warrant a clean bill of lading.176 The fact that the



carrier believed that they were assisting their client, does not alter the fact that the fraud



was intentional when the carrier intended to issue the bill of lading knowing that it was



false.177







Article 17.4 stipulates that: ―In the case of intended fraud…the carrier is liable,



without the benefit of the limitation of liability provided for in this Convention, for the loss



incurred by a third party…because he acted in reliance on the description of the goods in



the bill of lading.‖ The carrier, therefore, will not be able to invoke the provisions relating



to limitation of liability, such as the package limitation.







Article 17 of the Hamburg Rules is, in effect, fairly similar to both the common



law178 and civil law179 solutions to the problem of letters of indemnity. Hopefully in the







175

Tetley, supra note 6, at 834, stating that this is ‗very bad law‘ (referring to the ‗intent‘

requirement).

176

For further discussion on fraud and intention, see section V(3)(a), supra.

177

―…the act of knowingly issuing a false bill of lading is an intentional deceit or fraud‖ (Gaskell,

supra note 103, at 179); ―If a false statement is made knowingly and that intention is proved then

the basis for liability for the tort of deceit is established.‖ (Standard Chartered Bank v. Pakistan

National Shipping Corp., supra note 1 at 224).

178

As exemplified by Brown, Jenkinson v. Percy Dalton, supra note 1, holding that the letter of

indemnity was void as between the shipper and the carrier (and therefore void as against third

parties as well). For further discussion, see sections V(4) and V(5), supra.

52



future, the solutions found in national law and international conventions will become



increasingly similar as legislators draw from other jurisdictions, creating a growing



uniform body of law with respect to letters of indemnity issued at shipment.







9) UNIDROIT Principles of International Commercial Contracts



The fraudulent practice of issuing clean bills of lading in return for letters of



indemnity is irreconcilable with a general contractual principle of good faith. The



―UNIDROIT Principles of International Commercial Contracts‖ 1994180 imposes the



requirement that each party to a contract ―act in accordance with good faith and fair



dealing in international trade.‖181 This rule may not be contracted out of.182 The



UNIDROIT principles are still fairly recent, however, they have been adopted by



international commercial arbitrators.183







It will be interesting in the years to come to see the extent of the duty to act in



accordance with good faith. A ‗permissible of indemnity‘184 is still in essence a



misrepresentation. Such an act should be considered to be contrary to the principle of



good faith, and therefore a breach of the good faith obligation inherent in contracts



incorporating UNIDROIT. An important question to consider is whether such a breach of



the obligation of good faith can be used to provide an independent remedy, where



perhaps the law falls short.









179

As exemplified by Art. 20 of the Law of June 18, 1966, which renders letters of indemnity

ineffectual against third parties, as well as between the shipper and the carrier. For further

discussion see sections V(4) and V(5), supra.

180

International Institute for the Unification of Private Law, supra note 30.

181

Ibid., Article 1.7.1.

182

Article 1.7.2.

183

Tetley, supra note 23, at footnote 234.

184

As discussed in this paper, section V(7), supra.

53



10) Antedated Bills of Lading and Letters of Indemnity



A distinction was drawn in the introduction to this paper between clean bills of



lading issued in exchange for letters of indemnity and the practice of antedating bills of



lading.185 The problem of antedating arises primarily due to the documentary credit



requirements of the sales transaction. The documentary credits will stipulate that the bill



of lading must indicate that the cargo was shipped by a certain date in order for the bill of



lading to be considered valid under the credit requirements.186 Essentially, shippers will



attempt to persuade carriers, occasionally offering a letter of indemnity, to insert a date



on the bill of lading that is in fact earlier than the date the cargo was actually shipped.



This is distinct from the practice of issuing clean bills of lading, because in the case of an



antedated bill of lading, the cargo is in good order, however it is simply shipped later.







Despite its initially innocuous description, an antedated bill of lading is



nevertheless, as fraudulent as a falsely issued clean bill of lading. The courts have been



particularly critical of the practice of antedating, as exemplified by Cresswell, J.‘s



statement that ―…antedated and false bills of lading are a cancer in the international



trade.‖187 Generally, antedated bills of lading tend to be dealt with through claims in



fraud, deceit or fraudulent misrepresentation. In Standard Chartered Bank v. Pakistan



National Shipping Corporation and Others (No. 2) the House of Lords held that an



antedated bill of lading was a fraudulent representation, and once it was relied on, the



defendant became liable in the tort of deceit.188 Here the time charterers persuaded the



shipowner to antedate the bills of lading by over a month in return for a letter of





185

See section II(1), supra.

186

See section V(2), supra.

187

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2), supra

note 7, at 688.

188

Standard Chartered Bank v. Pakistan National Shipping Corporation and Others (No. 2) [2003]

1 Lloyd‘s Rep. 227 (H.L.).

54



indemnity.189 The House of Lords found that the fraudulent representation was relied on



in the sense that the claimant bank would not have released the funds had the bank



known the date was false.190 Similarly, in Xiamen Imports & Exports Co., Ltd. v.



Guangzhou Ocean Co.191 the carrier accepted a letter of indemnity in return for



antedating the bills of lading, and the consignee sued the carrier. The Chinese court held



that the antedating of the bill of lading constituted fraud between the carrier and the



seller, and therefore the carrier was liable for any damages suffered by the consignee,



who was the innocent holder of the bill of lading.192 In The Saudi Crown, the bill of lading



was antedated by 11 days, which resulted in the plaintiff buyers not being able to meet



the timing of their contractual commitments.193 Sheen, J. held that the antedated bill of



lading constituted a fraudulent misrepresentation on the part of the carriers.194







In the United States, the courts have dealt with antedated bills of lading slightly



differently. In Leather’s Best Intl. v. Lloyd Sergipe, the carrier issued bills of lading



representing that the goods were on board ship on March 10th, when in fact the ship did



not even arrive at the port until March 21st.195 Tenney, J. found that ―in this circuit, a



carrier is liable for the loss or damage of cargo if the carrier issued an ‗on-board‘ bill of



lading erroneously representing that the goods were loaded aboard its ship, regardless



of whether or not the representation was fraudulent.‖196 Tenney, J. held that the carrier



was liable for the damage to the cargo, however because the carrier issued false bills of









189

Ibid.

190

Ibid., at 232.

191

Summarized by Chen, supra note 83, at 98.

192

Ibid.

193

The Saudi Crown, supra note 18.

194

Ibid., at 265.

195

Leather’s Best Intl. v. Lloyd Sergipe 1991 AMC 929 (S.D.N.Y. 1991).

196

Ibid., at 1940, relying on Berisford Metals Corp. v. S/S Salvador 1986 AMC 874 (2 Cir. 1985).

55



lading the carrier was not entitled to rely on the package limitation found in art. 1304(5)



of COGSA.197







By and large, the jurisprudence illustrates that courts are unsympathetic to



carriers who have issued antedated bills of lading, and will hold them responsible.198 In



some cases, however, the shipowner may escape liability if the individual who issued the



fraudulent bill did so under the charterer‘s orders.199 Courts, however, are not the only



ones unsympathetic to carriers who issue antedated bills of lading. P & I Clubs have also



considered carriers who issue antedated bills to be acting fraudulently.200 Unlike clean



bills of lading, antedate bills of lading are always fraudulent (barring a typographic error),



as there will never be a genuine doubt as to the correct date of sailing of the ship.







11) Letters of Indemnity and P & I Clubs



Protection and Indemnity Clubs, otherwise known as P & I Clubs, are ―mutual



non profit making insurers which offer shipowners cover for their contractual and third



party liabilities: injury or death of crew or passengers, loss of cargo, collision damages to



vessels, damage to the environment, etc.‖201 Unlike commercial insurers, P & I Clubs do





197

Ibid., at 1944.

198

For further cases on antedated bills of lading see Alimport v. Soubert Shipping Co. Ltd. [2000]

2 Lloyd‘s Rep. 448 (Q.B. Com. Ct.), The Nea Tyhi [1982] 1 Lloyd‘s Rep. 607 (Q.B. Com. Ct.),

Kwel Tek Choa v. British Traders and Shippers Ltd [1954] 1 Lloyd‘s Rep. 16 (Q.B. Com Ct.), and

Giorgio Morandi, Inc. v. Texport Corp. 761 F.Supp 12 (S.D.N.Y. 1991).

199

Where the charterer issued the antedated bills of lading, it has been held that these bills are

not owner‘s bills rather they are charterer‘s bills. See The Hector [1998] 2 Lloyd‘s Rep. 287 (Q.B.

Com. Ct.), where Rix, J. held, at pp. 297-298, that the authority given by the owner to sign bills of

lading on the master‘s behalf was to do so in conformity with the mate‘s receipts, and did not

include fraudulently antedating the bill of lading. See also the The Starsin [2000] 1 Lloyd‘s Rep.

85 (Q.B. Com. Ct), (upheld by the House of Lords on this point in The Starsin [2003] 1 Lloyd‘s

Rep. 517), where the antedated bills of lading were held to be the charterer‘s bills, thus relieving

the shipowner of responsibility.

200

See section V(11), infra.

201

Gyselen, L. ―P&I Insurance: The European Commission‘s Decision Concerning the Agreement

of the International Group of P&I Clubs,‖ in Marine Insurance at the Turn of the Millennium. M.

Huybrechts (Ed.) Intersentia, Antwerpen, 1999, 181, at 181.

56



not charge premiums, rather the clubs makes ―calls‖ where each vessel pays a certain



rate per ton, a portion of which is paid at the beginning of the year, with the remainder



paid after the year has passed once the club has assessed the cost to cover actual



losses for that year.202 In order to obtain cover from a P & I Club a shipowner must



become a member of the club, at which point their contractual relationship is then



governed by the membership rules of the specific club. At present there are fourteen P &



I Clubs in operation, which are for the most part situated in England, Scandinavia, and



the Caribbean.203







When a carrier issues a clean bill of lading in exchange for a letter of indemnity,



he places himself in a precarious position. Not only is the carrier potentially liable to the



owner of the goods or the receiver of the cargo, his P & I Club coverage generally does



not extend to cover such liability, and thus his club may not indemnify him for any



liabilities he incurs as a result of issuing the falsely clean bill of lading.204 It is important to



note, however, that the P & I Club cover will only be voided if the letter of indemnity goes



to the point of the dispute.205 For example, if cargo other than the cargo covered by the



letter of indemnity was damaged en route, the P & I Club cover with respect to the



damaged cargo would not be voided on the basis that the shipowner had accepted a



letter of indemnity prior to departure. The defective or damaged cargo must be the



subject of the letter of indemnity in order for the P & I Club cover to be void.









202

Ibid., at 182.

203

Tetley, W. International Maritime and Admiralty Law, Editions Yvon Blais, Montreal, 2002, at

591.

204

Luddenke, C. Marine Claims, LLP, London, 1993, at 36: ―If the agent or master knowingly

issues a bill of lading which contains a misdescription of the cargo or if, for example, mate‘s

receipts disclose pre-shipment damage and an unclaused bill is nevertheless issued, any

resulting liabilities may be excluded from P & I Cover.‖

205

Personal communication from P. Rozum, Shipowner‘s Assurance Management Limited, 620

St. Jaques W. suite 305, Montreal, Canada.

57



Generally, P & I Clubs cover liability to cargo interests, which for example, can be



loss, damage or shortage, when cargo is carried under approved contracts of



carriage.206 There are, however, exceptions to cover for cargo liabilities. P & I Clubs



have adopted the position that the practice of accepting letters of indemnity in return for



clean bills of lading is not recognized, therefore carriers who engage in these practices



may find that their P & I Club cover is jeopardized.207 Certain P & I Clubs specifically



exclude cover for such liabilities, for example, the American Steamship Owners Mutual



Protection and Indemnity Association Form Policy, covers cargo liability in clause 7,208



but with the caveat that ―provided, however, that no liability shall exist hereunder for:…(f)



Loss, damage or expense arising from issuance of clean bills of lading for goods known



to be missing, unsound or damaged.‖209







It has been recommended that when there is genuine doubt as to the quantity,



weight or the condition of the cargo, the carrier should stamp the bill of lading with



―weight, quantity and condition unknown.‖210 In carriage of oil or other liquid cargoes,



there is frequently a difference between the measurement of the quantity of the cargo on



shore and the measurements taken by the ship after loading.211 P & I Clubs have



advised that a difference of between 0.2% and 0.3% is acceptable, however, if the



discrepancy exceeds this tolerance then the master is advised by the clubs to either









206

Luddenke, supra note 204, at 4.

207 rd

Sparks, A. Steel: Carriage by Sea, 3 Ed., LLP, London, 1999, at 101.

208

―(7) Liability for loss of or damage to or in connection with cargo or other property (except mail

or parcels post), including baggage and personal effects of passengers, to be carried, carried or

which has been carried on board the insured vessel.‖

209

American Steamship Owners Mutual Protection and Indemnity Association Form Policy can be

found online at: http://www.american-club.com/

210

Hazelwood, supra note 8, at 179.

211

Ibid.

58



―clause the bill of lading with the vessel‘s measurement or clause it generally or refuse to



sign the bills at all.‖212







The practice of antedating bills of lading is viewed by the P & I Clubs much in the



same manner as falsely issuing clean bills of lading. ―All liabilities resulting from ante-



dating or post-dating of a bill of lading are excluded from P & I Club cover.‖213 Any



member who knowingly issues an incorrectly dated bill of lading is considered to be



acting fraudulently and will not be indemnified by his club for liabilities that arise as a



result.214 It is the practice for P & I Clubs to specifically identify and outlaw the practice of



ante-dating bills of lading as one of the exclusions to club cover with respect to cargo



liabilities.215 Unlike issues regarding the condition or quantity of the goods, there is



unlikely to be a genuine doubt as to the date of sailing, and therefore P & I Clubs have



not proposed any recommended course of action in such a case.216







12) Conclusion: Letters of Indemnity at Shipment



The use of letters of indemnity to procure clean bills of lading is a reprehensible



practice that, despite legal sanctions, is unfortunately widespread. Shippers whose



goods fail to meet the standards as required by the documentary credit, the contract of



sale, or commerce generally, should be forced to deal with the consignee or the other







212

Ibid.

213

Luddenke, supra note 204, at 36.

214

Hazelwood, supra note 8, at 179.

215

Ibid. The American Steamship Owners Mutual Protection and Indemnity Association Form

Policy, supra note 209, covers cargo liability in provision 7, but specifically excludes ante-dating

in provision 7(g): ―(7) Liability for loss of or damage to or in connection with cargo or other

property (except mail or parcels post), including baggage and personal effects of passengers, to

be carried, carried or which has been carried on board the insured vessel. Provided, however,

that no liability shall exist hereunder for: …(g) Loss, damage or expense arising from the

intentional issuance of bills of lading prior to receipt of the goods described therein, or covering

goods not received at all.‖

216

Hazelwood, supra note 8, at 179-180.

59



party to the sales contract if they are unable217 to or unwilling to ship the goods under



claused bills of lading. Enlisting the help of the carrier to perpetrate a fraud on an



innocent third party is unacceptable, and should not be tolerated by the courts or by the



shipping industry. The notion of acceptable situations in which one can receive letters of



indemnity, or ‗proper letters of indemnity‘, serve only to exacerbate the problem, causing



the courts to examine the merits of each case rather than simply condemning the



practice. I would urge the shipping community to create a system of acceptable clauses



for bills of lading in conjunction with documentary credit systems, which parties acting in



good faith with a genuine factual dispute could employ, rather than resorting to hidden



transactions unapparent to the consignee.







VI. LETTERS OF INDEMNITY AT DISCHARGE: LETTERS OF GUARANTEE







1) Introduction



With the speed of international business, it is often the case that vessels will



reach their intended destination before the bills of lading arrive. This is especially true in



short haul voyages, and this fact has been recognized by the English courts.218 When



the bills of lading are either way laid in the banking system or have yet to arrive,



merchants and charterers will attempt to persuade the carrier to accept a letter of



indemnity rather than the bill of lading, and such commercial pressure is often



successful.219 The carrier may also wish to deliver without the bills of lading in order to





217

As discussed infra in section V(2), it is likely that the shipper will be unable to ship the goods if

the bill of lading is claused without having the goods refused because the bill of lading does not

conform to the documentary credit requirements.

218

The Aegean Sea [1998] 2 Lloyd‘s Rep 39 (Q.B.), at 57, per Justice Thomas ―As is common in

short haul voyages, it was clear that the vessel would almost inevitably reach one of the

discharging ports specified in the charterparty before there was any prospect that bills of lading

would arrive.‖

219

Gaskell, supra note 103, at 425-426.

60



avoid waiting in port until the bills of lading have arrived. The Law Commission (of



England) has recognized that a bill of lading can take up to a year, or even longer, to



reach the intended receiver,220 a fact that can cause a carrier to bow to the commercial



pressure to deliver prior to the bills of lading arriving.







Although the use of letters of guarantee has become common practice, it



becomes problematic when the goods are never paid for. Another problem that arises is



when the consignee named in the bill of lading is not entitled to delivery because the bill



of lading has been pledged to the bank - should the carrier deliver to the consignee, the



carrier then can become liable to the bank.221 Traditionally, delivery to a receiver not



entitled to the goods can place the carrier in a precarious position as this may involve



the tort of conversion, therefore rending the carrier liable for the full value of the cargo



without the benefit of contractual exemptions.222







The law in different jurisdictions is not yet completely settled on the question of



carrier liability for discharge without a bill of lading. In the past the trend was that the



carrier was held liable to the holder of the bill of lading, however, more recently the



courts have on occasion found otherwise.





220

Rights of Suit in Respect of Carriage of Goods by Sea, Report No. 196, 1991, p.17, section 2-

42. See also P.A. Myburgh, ―Current Developments Concerning the Form of Bills of Lading –

New Zealand,‖ in Ocean Bills of Lading: Traditional Forms, Substitutes, and EDI Systems, A.N.

Yiannopoulos (Ed.), Kluwer Law International, The Hague, 1995, 237. Myburgh surveyed the

New Zealand shipping community, finding that three quarters of the respondents had reported

problems with lost or delayed shipping documents, including specifically, shippers not having

forwarded the bills of lading promptly and the banking system having either lost the shipping

documents or delayed their processing. (Ibid., at 255). See also A.N. Yiannopoulos, ―XIVth

International Congress of Comparative Law: Current Developments Concerning the Form of Bills

of Lading,‖ in Ocean Bills of Lading: Traditional Forms, Substitutes, and EDI Systems. A.N.

Yiannopoulos (Ed.), Kluwer Law International, The Hague, 1995, 3, at 17, reporting that ―Belgium,

Germany, Greece, Japan and New Zealand all report that delayed arrival of the bill of lading at

the port of discharge is a primary problem wit the use of traditional paper bills of lading.‖

221

Gaskell, supra note 103, at 421.

222

The Sagona [1984] 1 Lloyd‘s Rep. 194, at 198.

61









2) The Traditional Position: At the carrier’s own risk



a) Introduction



Delivery of the goods takes place when, once arrived at the destination, the



original bill of lading is surrendered.223 In the past the law dictated that a carrier who



delivered without receiving the bill of lading in return does so at his own peril.224 Lord



Denning has stated that ―it is perfectly clear law that a shipowner who delivers without



production of the bill of lading does so at his own peril.‖225 Lord Denning went on to



reason that a carriage of goods contract is to deliver the goods on production of the bill



of lading, and in failing to do so, a carrier is liable for breach of contract, or in other



words, liable in conversion.226 When a bill of lading is issued in respect of a contract of



carriage, a shipowner is not bound to surrender possession of the goods to any



individual, even if named as a consignee, other than the individual who is holder of the



bill of lading.227 Should the carrier decide, however, to ―part with possession he does so



at his own risk if the person to whom he surrenders possession is not in fact entitled to



the goods.‖228







b) Current Law



The general approach by the courts has been to maintain the traditional position:



delivery without the bill of lading is at the carrier‘s own risk. English law has continued to





223

Honka, supra note 31, at 136. Honka refers specifically to delivery as defined in the Maritime

Code of Finland (Chapter 13, Section 52.1) and the Maritime Code of Norway (s. 302.1). The

Nordic definition of delivery, however, is similar, if not identical to other jurisdictions. For example

doctrinal authors in England state that: ―Delivery will occur when the carrier surrenders

possession of the cargo, usually in exchange for a bill of lading.‖ (Gaskell, supra note 103, at 448)

224

See Sze Hai Tong Bank v. Rambler Cycle Co. [1959] A.C. 576 (H.L.); and Barclay’s Bank Ltd.

v. Customs and Excise [1963] 1 Lloyd‘s Rep. 81 (Q.B. Com Ct.).

225

Sze Hai Tong Bank, ibid., at 586.

226

Ibid., at 586.

227

The Stettin (1889) 14 P.D. 142.

228

Barclay’s Bank, supra note 224, at 89.

62



uphold that, in the absence of a specific term in the contract, the master of a vessel must



only deliver the cargo to the holder of a bill of lading.229 Recently, Lord Justice Stuart-



Smith of the Court of Appeal stated that, ―it has been established for well over a century



that under a bill of lading contract a shipowner is both entitled and bound to deliver the



goods against production of an original bill of lading.‖230 In some cases, the English



courts have applied this principle very strictly. In two cases this year, the Court of Appeal



held several carriers responsible for delivery of the cargo without the production of the



original bills of lading, even though the carriers were obliged to deliver the goods to



customs, and it was the customs‘ warehouse operator who subsequently released them



without the bills of lading.231 Canadian courts, for the most part, have followed suit and



apply the English authorities.232







Australian courts have also relied on the English authorities and adopted the



same approach. Justice Tamberlin in the Stone Gemini,233 an Australian decision,



acknowledges the prevalence of the practice but cautions that, ―the fact that there is a



practice that vessels will discharge against letters of indemnity cannot detract from the



rights of the holders of a bill of lading…All that the practice indicates is that some owners



229

The Sormovskiy 3068, supra note 1, at 274. See also The Houda [1994] 2 Lloyd‘s Rep. 541

(C.A.) (particularly at pp. 550, 552-553 and 556), The Ines [1995] 2 Lloyd‘s Rep. 144 (Q.B. Com

Ct.), and The Rafaela S [2003] EWCA Civ 556,[2003] All E.R. (D) 289 (Apr.) (C.A.) at para 96

where the Court of Appeal states: ―It is established law that at any rate in the case of a classic

(negotiable) bill of lading the obligation of the ship is to deliver only against its surrender.‖

230

Motis Exports Ltd. v. Dampkibsselskabet Af 1912 [2000] 1 Lloyd‘s Rep. 211 (C.A.), at 216.

231

East West Corp. v. DKBS 1912 and another; Utaniko Ltd v. P & O Nedlloyd BV [2003] 2 All ER

700 (C.A.). The two sets of proceedings were tried together as they both related to losses of

goods in containers cleared through customs and delivered to a Chilean company by the

customs‘ warehouse operator, without the presentation of the original bills of lading.

232

Kanematsu GMBH v. Acadia Shipbrokers Limited, supra note 1, relying on Sze Hai Tong Bank

v. Rambler Cycle Co, supra note 224, and Barclay’s Bank Ltd. v. Customs and Excise, supra,

note 224. The decision was reversed on appeal for reasons discussed infra in s. VI(3)(c),

however, the Federal Court of Appeal acknowledged that had the defendant been the shipowner,

as opposed to the charterer, he might well have been liable according to the English authorities,

(Kanematsu GMBH v. Acadia Shipbrokers Limited (2000) 259 N.R. 201; 2000 Fed. Ct. Appeal

LEXIS 193 at para 16).

233

The Stone Gemini, supra note 15, at 255.

63



are prepared to run the risk of being held liable for wrongful discharge of cargo should



problems arise in relation to payment.‖234







French decisions have considered the letter of guarantee to be completely



independent from the contract of carriage; if the carrier delivers without the bill of lading,



regardless of a letter of guarantee, the carrier runs the risk that he will be liable should



other individuals eventually present themselves as the holders of the original bills of



lading.235 Article 49 of the decree of 1966 obliges the carrier to deliver the merchandise,



if under a bill of lading, to the consignee who presents the bill of lading upon arrival. 236



Failure to do so results in the carrier‘s liability. The French courts have been strict with



carriers, offering them little leeway, with the exception of forced delivery without the bill



of lading under ‗restraint of princes‘.237 Delivery without the bill of lading has even been



described as ‗faute lourde‘.238







In Nordic law239 the obligation to deliver against the presentation of the original



bill of lading is clear.240 When the carrier delivers to the consignee without having



received the bill of lading, it has been termed ―intentional wrongful delivery‖ because the









234

Ibid., at 266.

235

Rodiere, supra note 2, at 344. The French have adopted the term ‗letter of guarantee‘ to refer

to a letter of indemnity presented to the carrier in consideration for delivery of the cargo without

presentation of the bills of lading. The French, aside from Professor Tetley, supra note 6, appears

to be the only ones who consistently use the term letter of guarantee to refer to the situation at

discharge.

236

Ibid., at 334.

237

Remond-Gouilloud, supra note 129, at 361.

238

Ibid., at 360, where Remond-Gouilloud states that: ―Livrer la marchandise sans exiger le

connaissement représente de la part du transporteur une ‗lourde faute‘‖. See also Cour d’Appel

d’Aix, September 6, 1984, DMF 1986, 157.

239

The term Nordic law covers Denmark, Finland, Iceland, Norway and Sweden. In the context of

carriage of goods by sea however, Iceland, as it does not have a maritime code. (Honka, supra

note 31, at 15).

240

Honka, ibid., at 139.

64



carrier knows that the bill of lading must be surrendered.241 Intentional wrongful delivery



under Nordic law results in the extensive liability for the carrier as he loses the



contractual defences, along with the right to limit liability. 242 The Nordic courts have



traditionally held the carrier liable for the invoice value of the goods.243







Under the German law, if the captain delivers the cargo without presentation of



the bill of lading, ―the carrier remains liable under the contract towards the entitled holder



of the bill of lading (and the captain is personally liable as well).‖244 The obligation to



deliver to the holder of the bill of lading is mandatory, and cannot be contracted out of,



excluded, or mitigated.245







In the United States, a carrier who delivers the goods to anyone other than the



holder of the bill of lading is then strictly liable to the true holder of the bill of lading for



damages arising from misdelivered goods.246 The Pomerene Act provides that, ―[w]here



a carrier delivers goods to one who is not lawfully entitled to the possession of them, the



carrier shall be liable to anyone having a right of property or possession in the goods if



he delivered the goods otherwise than as authorized by…section 89 of this title [which



241

Ibid., at 138.

242

Ibid., at 139. The carrier, however, may not lose all defences in a case of wrongful delivery.

The Norwegian Maritime Code, s. 501.18, stipulates that suit must be brought within one year

from when the goods should have been delivered, or if they were delivered, one year from the

date of delivery. The approach in Denmark is identical, however, the Finnish law is different. The

Finnish Maritime Code does not have a specific stipulation, and therefore the time bar is dictated

by the general law, which is ten years from when the claim arose. (Ibid., at 173).

243

Honka, supra note 31, at 143. Although, the Nordic courts have been inclined to hold the

carrier liable to the seller or the bank for the estimated resale value of the goods at the port of

discharge rather than the invoice value, where the goods have been damaged or to correspond

with the security value of the goods. See NMCases 1980.137 (Ranno) Turku Court of Appeal,

Finland, where in the case of intentional wrongful delivery the court declined to accept the invoice

value claimed by the bank, but rather declared that as the cargo was defective, the value would

be set to reflect the defective condition. (Ibid., at 144).

244

Herber, supra note 125, at 350.

245

Ibid.

246 rd

Schoenbaum, T. Admiralty and Maritime Law, 3 Ed, Volume 2. West Group, Minnesota,

2001, at 96.

65



requires delivery to the consignee in possession of the bill of lading]…‖247 The American



courts have been very stringent in applying strict liability for the carrier who misdelivers.



In International Harvester Co v. TFL Jefferson, a carrier was held to have, ―breached its



delivery obligation and assumed the risk that the consignee would not pay for the goods‖



when the carrier delivered to the a Sudanese Government Organization, in return for a



letter of guarantee from the Government Cargo Agent, after coming under pressure from



the Ministry of Agriculture to deliver before the planting season had passed.248







c) Exclusion or Permission Clauses



A clause in the bill of lading allowing the shipowner to accept letters of indemnity



in return for discharge will not necessarily protect a shipowner.249 Charterparties often



contain a clause entitling the master to deliver without production of a bill of lading and



entitling the shipowner to an indemnity from the charterer for any consequence of



obeying an order by the charterer to deliver.250







In The Stone Gemini the bill of lading contained a clause allowing shipowners to



discharge the goods against a bank guarantee if the original bills of lading were not at



the port of discharge in time. The Court held that this clause could not provide the



shipowner with ―a defence to wrongful discharge of the cargo against a letter of



indemnity and establishing the claim in conversion.‖251







247

Pomerene Bills of Lading Act, supra note 14, at s. 90.

248

International Harvester Co v. TFL Jefferson 695 F.Supp 735 (S.D.N.Y. 1988).

249

The Stone Gemini, supra note 15, at 267.

250

The Aegean Sea, supra note 218, at 57, for an example of such clause: ―Should bills of lading

not arrive at discharge port in time then Owners to release the entire cargo without presentation

of the original Bills of Lading. Charterers hereby indemnify Owners against all consequences of

discharging cargo without presentation of original Bills of Lading. Wording of Letter of Indemnity

to be in accordance with Owners P and I Club, excluding Bank Guarantee.‖ See also The

Sargona, supra note 222.

251

The Stone Gemini, supra note 15, at 267.

66



A similar clause, under which the shipowner could discharge without production



of the bill of lading in exchange for a ―bank guarantee‖, was considered in The



Sormovskiy 3068.252 The court held that the clause was insufficient to protect the



shipowner from liability for delivery without the bills of lading, and interpreted the



existence of the clause as reinforcing the traditional position that the shipowner will be



liable to the holder of the bill of lading if he delivers without production of the bills of



lading.253







d) Policy Arguments



One of the rationales for maintaining the ‗at the carrier‘s own risk‘ approach in



recent decisions is to protect the rights of the holder of a bill of lading as well as to avoid



undermining the integrity of bills of lading as documents representing the entitlement to



take delivery of the goods.254 Another factor is the commercial argument recently raised



in The Sormovskiy 3068.255 Justice Clark stated that, ―It makes commercial sense to



have a simple rule that in the absence of an express term in the contract the master



must only deliver the cargo to the holder of the bill of lading who presents it to him. In



that way both the shipowners and the persons in truth entitled to possession of the cargo



are protected by the terms of the contract.‖256 Finally, the proper functioning of bills of



lading is linked to the efficiency of the financing systems, as it has been argued that,



―efficiency of financing by banker‘s documentary credit or any other arrangement, where



252

The Sormovski 3068, supra note 1.

253

Ibid.

254

The Stone Gemini, supra note 15, at 266. See also Motis Exports Ltd. v. Dampkibsselskabet

Af 1912 [1999] 1 Lloyd‘s Rep 837 (Q.B. Com. Ct), at 843, where Justice Rix states ―…policy

favors [this] answer. If a shipowner was entitled to deliver the goods against a forged bill of

lading, then the integrity of the bill as the key to a floating warehouse would be lost…If one of two

innocent people must suffer for the fraud of a third, it is better that the loss falls on the shipowner,

whose responsibility it is both to look to the integrity of his bills and to care for the cargo in his

possession and to deliver it aright, rather than on the true goods‘ owner, who holds a valid bill and

expects to receive his goods in return for it.‖

255

The Sormovski 3068, supra note 1.

256

Ibid., at 274.

67



the bill is needed, is simultaneously enhanced, as the value of the bill of lading as



security is protected.‖257







3) The Erosion of the “At the Carrier’s Own Risk” Argument/Principle



Several courts have circumvented the principle of ―at the carrier‘s own risk‖. This



has been done most often by finding exceptions to the general rule; however in certain



rare cases, courts have even failed to acknowledge the principle of ―at the carrier‘s own



risk‖. Although the exceptions are few, they are still significant.







a) Knowledge



It has been held that, should the consignee have knowledge of the fact that the



carrier has delivered to an individual not entitled to receive the goods and not informed



the carrier of this fact, then the consignee may be estopped from claiming any damages



arising from the wrongful delivery.







In Hong Kong Co. v. A Zhuhai Co., a Chinese case, a claim was brought against



the carrier for delivering goods upon a letter of indemnity rather than insisting on



production of the original bills of lading.258 The court found that the carrier was not liable



because the proper holder of the bill of lading had actual knowledge of the fact that the



goods were delivered to someone without the original bill of lading and had not protested



or informed the carrier of the fraud.259







b) Custom







257

Honka, supra note 31, at 139.

258

Chen, supra note 83, at 98-99.

259

Ibid.

68



When bills of lading are issued, they are presumed to be issued subject to the



customs of the industry.260 Whether the carrier has properly delivered the goods will



depend upon the terms of the bill of lading and the custom at the port of delivery, since



―the contract is always made with regard to the custom of the port of discharge, and the



discharge must take place in accordance with what is the usual way of performing the



operation.‖261







In Nebco International v. National Integrity262 the court held that where local



industry customs at the port of destination are involved this principle is equally



applicable. In Nebco, the court concluded that, ―it was the custom of the Port of Spain,



Trinidad, for ship‘s agents to accept bank letters of guarantee and indemnity in lieu of



negotiable bills of lading on delivering the cargo to consignees.‖263 The court went on to



hold that, as the plaintiffs knew that the cargo was being repeatedly cleared by means of



letters of indemnity rather than bills of lading, and the plaintiffs benefited in the past from



such an arrangement, they had waived their right to require delivery by bills of lading and



could not claim against the carrier.264 Custom, however, has been used in specific



instances but has yet to be accepted generally in the context of delivery without a bill of



lading against letters of guarantee.







Given the widespread practice of issuing letters of indemnity in return for the



discharge of the cargo in certain trades, it is surprising that it is not recognized as a



custom more often. In the oil trades of the North Sea and the Gulf, as well as the short-





260 nd

Encyclopedia Britannica v. SS Hong Kong Producer 1969 AMC 1741, 1755. (2 Cir).

261

Hare, supra note 84, at 599, quoting from the South African decision The Hydaspes (1903) 20

SC 325, at 328.

262

Nebco International v. National Integrity, supra note 3.

263

Ibid., at 1117.

264

Ibid., at 1118-1119.

69



sea trades of South East Asia, it is common for cargoes to arrive at the destination



before the bill of lading - which may be caught in the mail or held up in the banking



chain.265 It has been noted that, ―some masters engaged in the Gulf Oil trade will say



that they have rarely, if ever, enjoyed the luxury of delivering their cargoes in exchange



for a bill of lading.‖266 Although this practice has been judicially recognized,267 it has yet



to be widely recognized as a custom of the trade. In The Sagona, the court held that



while delivery without the bills of lading in the Gulf oil trade was common, it was not a



universal practice and therefore did not amount to a ―custom‖ of the trade.268







Clark J. in The Sormovskiy 3068 has also given ―custom‖ a strict reading, in the



context of delivery to governmental authorities without the bills of lading.269 It was held



that the carrier may only be excused from liability where he was legally obliged



[emphasis mine] by local law or custom to deliver to the government authority without



the bills of lading, and that if it was simply the ―practice‖ to deliver to the local authority



then the carrier will be unable to escape liability.270







Nordic courts have been particularly strict with regard to custom. Nordic law



accepts very few situations where the carrier may avoid liability for wrongful delivery and









265

Hazelwood, supra note 8, at 182.

266

Ibid.

267

The Agean Sea, supra note 218.

268

The Sagona, supra note 222, at 203. The shipowners had delivered the cargo of oil without

presentation of the bill of lading. When the master of the vessel, who had been in command of oil

tankers for 14 years, was giving his evidence, he was asked how often an original bill of lading

had been presented to him prior to discharge, he answered: ―I have never seen it‖. (Todd, supra

note 168, at 245). In the oil trade it is not uncommon for it to takes months, or years even, for the

bills of lading or other documentation to arrive. (Ibid.).

269

The Sormovskiy 3068, supra note 1.

270

Ibid., at 275.

70



the courts have decided that, ―any reference to customs of the trade allowing delivery



without the presentation of the bill of lading does not hold ground.‖271







c) Charterer



Courts may read the authorities or previous decisions stating that a shipowner



who delivers without production of bills of lading does so at his own peril, narrowly so as



applying only to shipowners and not charterers as well.







In Kanematsu GMBH v. Acadia Shipbrokers Limited, the Canadian Federal Court



held that a charterer who had accepted a letter of guarantee in return for discharging, or



rather inducing the owners to allow them to discharge, without securing the bills of lading



was liable to the unpaid holder of the bill of lading.272 Dube J. reasoned that the



charterer, as carrier of the cargo, ―had the legal obligation to ensure that the cargo was



not released save against the surrender of the originals of the Bill of Lading.‖273 Dube J.



relied on Lord Denning‘s classic statement that it is, ―perfectly clear law that a shipowner



who delivers without production of the bills of lading does so at his own peril,‖274 and



held that the carrier (the charterer) relied at their peril on a letter of indemnity and parted



with the cargo at their own risk.275 This approach by Dube J. is in line with the traditional



approach and does not, in my opinion, expand the authorities. If the charterer adopts



some of the rights, duties and obligations of the shipowner, then the charterer should in



effect be considered the carrier.276 The charterer, acting as the carrier, should not be





271

Honka, supra note 31, at 140.

272

Kanematsu GMBH v. Acadia Shipbrokers Limited, supra note 1.

273

Ibid., at 1536.

274

Sze Hai Tong Bank v. Rambler Cycle, supra note 222, at 586.

275

Kanematsu GMBH v. Acadia Shipbrokers Limited, supra note 1, at 1537-1538.

276

See Tetley, supra note 6, at 242: ―Carriage of goods is effectively a joint venture of owners

and charterers…and, consequently, they should be held jointly and severally responsible as

carriers. Owners and charterers are not only bound together by contract but share the

71



allowed to discharge, or induce discharge, in the absence of the bills of lading without



being subject to the maxim that he does so at his own peril.







The Federal Court of Appeal, however, felt otherwise. The Court of Appeal was



critical of the trial judge, and drew a sharp distinction between a shipowner and a



charterer:277



The Trial Judge, however, did not consider at all the fact that these appellants

were not the ship‘s owners, who might well be liable according to these

authorities. They were merely charterers…The claim against the appellants was

not as owners, offloading to someone who does not possess the bill of lading, but

as tortfeasors who converted the goods or who induced the shipowners to

breach their contract. Hence, the venerable authorities relied on by the

respondents are not applicable to this situation.

The fact that the Court of Appeal described the charterers as possibly liable under the



tort of conversion, in my opinion, does not effectively distinguish the charterers from the



carriers who have been held liable in the past. The authorities are not restricted to



shipowners, as Motis Exports Ltd. v. Dampkibsselskabet Af 1912 illustrates. The



defendants owned or operated several vessels and were held liable in conversion by the



court who stated that, misdelivery ―is an intentional act inconsistent with the true



owner‘s rights…and is a conversion.‖278







d) Consent from the Shipper



If the shipper instructs the carrier, or consents to the release the cargo without



production of the original bills of lading, this may release the carrier from liability from



responsibilities of a carrier under the Hague and Hague/Visby Rules, which responsibilities

cannot be contracted out of in virtue of art. 3(8).‖ See also Canastrand Industries Ltd. v. The Lara

S (1993) 60 F.T.R. 1 (Can. Fed. Ct.), at 24, where the court adopted Professor Tetley‘s view of

carriage of goods as a joint venture, and held that the shipowner and the charterer were jointly

and severally liable.

277

Kanematsu GMBH v. Acadia Shipbrokers Limited, supra note 232.

278

Motis Exports Ltd. v. Dampkibsselskabet Af 1912, supra note 254, at 845.

72



wrongful delivery. The issue of shipper‘s consent should be distinguished from clauses



in bills of lading or charterparties that entitle the master or the shipowner to delivery the



cargo in return for a letter of guarantee, or in consideration for the charterer‘s agreement



to indemnify them.279







Where the carrier establishes that the shipper has given his consent for the



delivery of the cargo without the production of the bills of lading, the carrier may be



found not liable. The Turku Court of Appeal, Finland, found a carrier not liable where for



21 consecutive voyages no original bills of lading had been presented.280 The consignee



had paid the seller for the first fifteen deliveries and then went bankrupt.281 The shipper



sued for wrongful delivery. The Court held that the fact that the shipper had accepted



postponed payments and delayed payments in the past, ―entitled the carriers to believe



that the shipper had waived his right to require the presentation of the bill of lading prior



to the delivery of the cargo at the port of discharge.‖282 The above case is unique, and



should not be extended beyond the facts, since Nordic law is normally quite strict with



regard to exceptions to the general principle that the carrier is liable for intentional



wrongful delivery.283







A separate contract has been used in an attempt to combat the problem. In the



contract the shipper consents to allow the carrier to discharge in exchange for a letter of









279

See section VI(2)(c), supra, for further discussion.

280

NMCases 1981.130 (Lohja) Turku Court of Appeal, Finland. See Honka, supra note 31, at

140.

281

Ibid.

282

Ibid.

283

Honka, supra note 31, at 140-141.

73



guarantee without exposing the carrier to liability.284 The GAFTA 100 form in the grain



trade contains at line 100 an express provision stating:285



In the event of the shipping documents not being available on arrival of the

vessel at destination, sellers may provide other documents or an indemnity

entitling Buyers to obtain delivery of the goods and payment shall be made by

Buyers in exchange for the same.







If the shipper expressly consents or even instructs the carrier to discharge



without the bill of lading in return for a letter of guarantee, another solution may be for



the shipper to issue a letter of guarantee as well, because a letter of guarantee has been



held to be conclusive proof that the carrier is acting on the shipper‘s direct



instructions.286







4) The Carrier’s Right to Refuse to Deliver



It is within the carrier‘s right to refuse to discharge or deliver the cargo to anyone



other than the holder of the bill of lading. The consignee, or the charterer, cannot force



the shipowner to deliver in return for a letter of guarantee, nor can an indemnity



provision in a charterparty be construed as a demand for delivery.







In The Houda, Lord Justice Neill reaffirmed the rule that a shipowner who



delivers without production of a bill of lading does so at his own peril.287 The Court of



Appeal then held that the shipowner was entitled to decide if he was adequately



protected by the letter of indemnity and discharge without the bills of lading, however,



―the rights of a time charterer to give orders do not entitle him to insist that cargo should



284

Wilson, supra note 86, at 165, discusses the fact that most solutions are imperfect and do not

solve the problem.

285

Ibid.

286

Hof van cassatie van belgie, January 31, 2003, [2003] ETL 197.

287

citting Sze Hai Tong Bank v. Rambler Cycle Co, supra note 224.

74



be discharged without the production of the bill of lading.‖288 The Court of Appeal also



held that the existence of the indemnity clause, providing for a letter of indemnity if



discharge without the bill of lading took place, was not to be construed as imposing a



contractual duty on the owners.289







In The Aegean Sea, the argument was raised that a letter of indemnity



constituted a demand for delivery of the cargo from the carrier within s.3(1)(c) of the



Carriage of Goods by Sea Act 1992.290 The Court declined to accept the argument that,



by virtue of the letter of indemnity, the owners became obliged to deliver the cargo to the



issuer, and characterized the letter of indemnity as nothing more than an agreement to



indemnify only if delivery was in fact made to the issuer.291







Under Swedish law, the carrier has the right to refuse to deliver unless the bills of



lading are presented. The Swedish Maritime Code, Chapter 13, section 54 states:292



The consignee is entitled to receive the goods only if he deposits the bill of lading

and gives receipts concurrently with delivery of the goods. After delivery of all

goods, the bill of lading, duly receipted, shall be returned to the carrier.

[Emphasis mine].







288

The Houda, supra note 229, at 552. See also Hamblen, N. & Jones, S. ―Charter Party

Symposium – Part II: Charterer‘s Orders: To Obey or Not to Obey,‖ (2001) 26 Mar. Law. 105.

289

Ibid., at 556.

290

The Aegean Sea, supra note 218, at 61. The relevant portion of section 3(1) of COGSA is:

Where subsection (1) of section 2 of this Act operates in relation to any document to which this

Act applies and the person in who, rights are vested by virtue of that subsection—(a) takes or

demands delivery from the carrier of any of the goods to which the document relates; (b)…(c) is a

person who, at a time before those rights were vested in him, took or demanded delivery from the

carrier of any of those goods, that person shall (by virtue of taking or demanding delivery or

making the claim or, in a case falling with paragraph (c) above, of having the rights vested in him)

become subject to the same liabilities under that contract as if he had been a party to that

contract.

291

Ibid., at 62. The Court re-affirmed that the owners, despite the letter of indemnity, remained

under the obligation under the bills of lading to deliver to the lawful holder of the bills.

292 nd

Swedish Maritime Code, 1994, 2 Ed. Andrea Upplagan T.O.M. 30 June 2000, Stockholm,

Chapter 13, section 54.

75



A final note, although the carrier is within his right to refuse to deliver the cargo,



the length of time for the decision process with regards to that right may be limited. The



carrier may not have the right to stay in port considering, or waiting to decide whether to



deliver or refuse to deliver, if so he may be held responsible for delays and



demurrage.293 In The Houda, however, the English Court of Appeal held that the refusal



to deliver by the shipowner did not breach the charterparty, and therefore hire was



payable during the period of delay.294







5) The Responsibility of the Issuer of a Letter of Guarantee



a) Responsibility of the Issuer to the Shipper



The shipowner is responsible for discharging the goods. Under the line of cases



supporting the principle of ―at the carrier‘s own risk‖, the carrier would be liable for



wrongful discharge with or without the letter of indemnity. The letter of guarantee simply



aids to ensure that should the carrier encounter problems, he may have some redress.



The issuer of the letter of guarantee, most often a bank, is a stranger to the contract of



carriage. Although the issuer of the letter of guarantee may be held responsible to the



carrier for an indemnity, the issuer should not be held directly responsible to the shipper



for loss as a result of misdelivery.







In a 1995 Singapore Court of Appeal case, a shipper sued the bank that had



issued a letter of guarantee to the carrier so that the consignee could receive the goods



without the original bills of lading.295 The Court of Appeal acknowledged that, although



the bank‘s letter was required by the carrier before he would discharge the goods, the



letter of guarantee by itself did not operate as delivery to the consignee. The Court of



293

Hazelwood, supra note 8, at 190.

294

The Houda, supra note 229.

295

UCO Bank v. Ringler Pte Ltd [1995] 1 S.LR. 713 (Sing. C.A.).

76



Appeal held that, ―the banker‘s guarantee only entitled the carrier to indemnity against



any claim by the [consignee]. It in no way affected the liability of the carrier toward the



[consignee] for damages arising out of the delivery of the goods without production of



the bills of lading.‖296 The bank, therefore, was not held liable for conversion or



wrongfully assisting the carrier in the wrongful transfer of goods.297









b) Responsibility of the Issuer to the Carrier



Although the issuer of a letter of guarantee has been held not to be responsible



to the shipper or consignee, the issuer remains responsible for expenses incurred or



damages suffered by the carrier as a result of the discharge of the cargo without



production of the bills of lading. This is not the case, however, if the shipowner accepted



the letter of guarantee in exchange for discharge where the shipowner knew or



suspected that the issuer or consignee was not entitled to the cargo.298 In this situation,



the letter of guarantee would be unenforceable and treated much like a letter of



indemnity aforementioned in section V. Regardless, where the shipowner accepts a



letter of guarantee in good faith, it should be enforceable if the shipowner is liable to the



holder of the bill of lading because the consignee was not entitled to the cargo.299







Letters of guarantee are independently binding contracts and, as such, are



subject to traditional principles of contractual interpretation to determine their scope and









296

Ibid., at 718.

297

Ibid.

298

Hazelwood, supra note 8, at 193

299

Ibid.

77



effect. The responsibility of the issuer of the letter of guarantee is then determined on the



basis of the construction of the contract.300







In The Stone Gemini301 the court interpreted the following letter of



indemnity, given in consideration for delivery without production of the bills of lading;



―…to indemnify you, your servants and your agents and to hold you harmless in respect



of any liability loss or damages of whatsoever nature which you may sustain by reason



of delivering the goods to…‖302 The court held that the letter was cast in broad language



and was therefore sufficient to cover all loses that the vessel and those interested in her



may have incurred, including the claim of the holder of the bill of lading, costs relating to



the arrest and custody of the vessel, provision of security, release from arrest, loss of



hire for that period, and other costs.303







The French regard the letter of guarantee as a contract independent from both



the contract of carriage and the contract of sale.304 The courts have treated letters of



guarantee as ordinary contracts between merchants.305 The letter of guarantee is



subjected to general principles of contractual interpretation and, ―si le texte de la lettre le



prévoit, le transporteur maritime peut prétendre a la réparation de tous les dommages



qu‘il n‘aurait pas subis s‘il avait délivrer la marchandise.‖306







300

Depending on the jurisdiction, the letter of guarantee is either the entirety of the contract, or it

may be construed as a collateral contract to some other contract between the parties, a

charterparty for example. See discussion of Louis Dreyfus v. Blystad, infra, note 307.

301

Supra note 15.

302

Ibid., at 260.

303

Ibid., at 270.

304

Cour d’Appel de Rouen. November 9, 1999, DMF 2000, 729: ―L‘action fondée sur la lettre de

garantie souscrite pour garantir une livraison sans présentation du connaissement est

indépendante du contrat de transport même si la lettre de garantie a été souscrite dans le cadre

dudit contrat.‖

305

Tribunal de commerce de Marseille, Decembre 11, 1979, Scapel, June 1980, 29.

306

Rodière, supra note 2, at 335.

78



Letters of guarantee on some occasions have been held not to be completely



independent of other agreements. In Louis Dreyfus v. Blystad, the U.S. Court of Appeal



(2nd Circuit) considered a stay application by the carrier, who sought to enforce a



London choice of forum clause in the letter of guarantee, against a charterer who



commenced arbitration proceeding in New York according to a provision of the charter



party.307 The Court of Appeal found that, while the letter of guarantee may constitute a



fully executed contract, it was not intended to supplant the charterparty and as such was



deemed a collateral contract to the charterparty.308 The Court of Appeal, relying on the



fact that the letter of guarantee had referred to a clause in the charterparty, held that suit



under the letter of guarantee fell within the arbitration clause of the charterparty, and



dismissed the carrier‘s application for a stay.309





Finally, an Australian case, Pacific Carriers Ltd. v. Banque Nationale de Paris,310



illustrates the possible complex nature of claims by the carrier against the issuer, or co-



signer, of a letter of guarantee. The plaintiff was a time charterer who had entered into a



voyage charter, with a company. The company issued a letter of guarantee to have the



goods discharged without the bills of lading; the letter was co-signed by the defendant



bank. The partial owner of the goods sued the shipowner who, in turn, claimed indemnity



from the time charterer. The voyage charterer who had issued the letter of guarantee,



had since filed for bankruptcy. The time charterer then sued the bank claiming that the



bank was liable in negligence for the time charterer‘s economic loss, which had come



about as a result of the voyage charterer having gone into liquidation. Hunter, J. held



that, ―the true nature of the defendant‘s execution of the letters of indemnity was that of a





307 nd

Louis Dreyfus v. Blystad [2001] A.M.C. 1939 (2 Cir.).

308

Ibid., at 1950-1951.

309

Ibid., at 1951-1953.

310

[2001] N.S.W.S.C. 900 (16 Oct. 2001) (Unreported). See also Derrington, S & White, W.

―Australian Maritime Law Update: 2001‖ (2002) 33 J. Mar. L. & Com. 275.

79



banker‘s assurance of the financial capacity of a customer to meet a particular



obligation.‖311 Although the defendant bank argued that the court should be cautious



before imposing a duty of care for pure economic loss in a situation not falling within a



clearly established category, Hunter, J. found the bank liable in negligence.312







6) Letters of Guarantee, Prescription and Time Bars



The question arises: how long should a letter of guarantee be valid? While the



carrier may be subject to suit taken for conversion, the carrier may also be subject to a



suit in fraud from the holder of the bill of lading, which in some jurisdictions may not be



subject to a time bar at all.313 A second question also arises: how long is the prescription



period with regards to suit based on the letter of guarantee?







If the claim is founded on the Hague/Visby Rules it is likely that, barring



fundamental breach, the carrier will be allowed to rely on the one-year time bar



stipulated in art. III(6):



Subject to paragraph 6 bis [indemnity against a third person] the carrier and the

ship shall in any event be discharged from all liability whatsoever in respect of

the goods, unless suit is brought within one year of their delivery or of the date

when they should have been delivered…





In The Captain Gregos No. 1314 Lord Justice Bingham held that the time for suit limit in



the Hague/Visby Rules covered all claims arising out of carriage or miscarriage of goods



by sea under bills of lading subject to the Hague/Visby Rules.315 In The Zhi Jiang Kou,316





311

Derrington, ibid., at 286.

312

Ibid.

313

Gaskell, supra note 103, at 426.

314

[1990] 1 Lloyd‘s Rep. 310 (C.A.).

315

Ibid., at 315. The time for suit may also depend on the interpretation of the bill of lading

contract. See Gaskell, supra note 103, at 426, who describes an Australian decision, Collern &

80



an Australian case, delivery was made without the bill of lading and the court also held



that the carrier was allowed to rely on the one-year time bar in the Hague/Visby Rules.



When the bill of lading invokes the Hague Rules, however, the situation becomes even



less clear. The Hague Rules art. III(6) provides:



In any event the carrier and the ship shall be discharged from all liability in

respect of loss or damage unless suit is brought within one year after delivery of

the goods or the date when the goods should have been delivered.







It has been noted that the wording of the Hague Rules, ―appears to apply the time limit



not to all claims but only to claims for ‗loss or damage‘ to the goods and this might not



include misdelivery claims.‖317 There are, however, arguments to the contrary.318







The situation in China is interesting. In theory, claims with regard to delivery



without the bill of lading return for a letter of guarantee are barred by the one-year



limitation period in the Hague or Hague/Visby Rules. In two Chinese cases, claims were



brought for misdelivery after the one-year period. In the first case ―the defendant did not



pay any attention to the statute of limitation and disposition of the case was conducted



as if no such procedural bar was in existence,‖319 while in the second case ―this



procedural bar was not asserted by the involved parties.‖320 Chen, commenting on the



decisions, noted that in both cases the defendant simply neglected to assert the time bar





Co. Ltd v. China Ocean Shipping Company [1993] P & I International 16 (Sup. Ct N.S.W.), where

a carrier who negligently delivered the goods without production of the bills of lading was allowed

to rely on the limits of liability in the bill of lading as it contemplated limitation for negligence.

316

[1991] 1 Lloyd‘s Rep. 493 (C.A. N.S.W. Australia)

317

Hazelwood, supra note 8 at 194.

318

In The New York Star [1980] 2 Lloyd‘s Rep. 217 (P.C), the Privy Council held that the one year

time limit applied to wrongful delivery, however Hazelwood argues that ―the case is not conclusive

as the Hague Rules apply only from loading to discharge were not incorporated in the contract of

carriage in full.‖ (Hazelwood, supra note 8, at 194).

319

Chen, supra note 83, at 98, summarizing and commenting on A Hong Kong Co. v. Xiamen

Knitting Co. & Xiamen Foreign Vessel Agency.

320

Chen, supra note 83 at 98-99, summarizing and commenting on A Hong Kong Co. v. A Zhuhai

Co.

81



defence.321 In China the time bar appears to be valid, although perhaps not always



pleaded.







Should the claim not fall under the statutory regime of the Hague or Hague/Visby



rules, then the prescription period or time limitation will vary depending on the place of



suit or, on law of the contract or tort.322 In Canada, maritime matters fall under federal



jurisdiction, however, s. 49 of the Federal Court Act323 stipulates that if an incident takes



place in a part of the country that is not part of a province the limit is six years, otherwise



the time limit is that of the province in which the incident occurred. The prescription



period in the province of Quebec, for example, is three years.324 In England, the time bar









321

Ibid., at 99.

322

Previously, time limitations were subject to the law of the forum, and therefore, the time

limitation would be of the forum where the plaintiff chose to sue. Statutes of limitations were

considered procedural and thus the time limit was of the forum. Periods, which extinguish a right

as opposed to merely barring a remedy, were considered substantive, and thus were part of

proper the law of the contract or tort. See Tetley, W. International Conflict of Laws, Editions Yvon

Blais, Montreal, 1994 at 684, quoting Dicey & Morris: ―English law distinguishes two kinds of

statutes of limitation: those which merely bar a remedy and those which extinguish a right.

Statutes of the former kind are procedural, while statutes of the latter kind are substantive.‖ More

recently, however, jurisdictions have begun to recognize that the time limitation is determined by

the proper law of the right which is subject to the time limitation. (Ibid., at 685). See Tolofson v.

Jensen [1994] 3 S.C.R. 1022 (S.C.C.), where the Supreme Court of Canada held that time

limitations are substantive. For the United States see The Arctic Explorer, 1984 AMC 2413 (S.D.

Tex. 1984), where Justice McDonald determined that the time limitation was substantive, as it

attached to the right of action, and held therefore that as the substantive law of Canada governed

the dispute, so should the Canadian Limitation Statute. The civilian systems have a similar

approach. In Quebec, the rule in found in the Civil Code at art. 3131 (―Prescription is governed by

the law applicable to the merits of the dispute‖), while in the Louisiana Civil Code, art. 3549 is

almost identical to Quebec‘s provision. (Tetley, ibid., at 709). With regard to maritime matters in

France, the Law of June 18, 1966 (Law No. 66-420), art. 16, imposes that law of the forum for

prescription wherever there is no applicable convention, however, this may no longer be

applicable as the Rome Convention 1980 E.E.C. 80/934, signed at Rome, June 19, 1980 (now in

force in France) stipulates in art. 10(1)(d) that prescription is governed by the proper law of the

contract. (Ibid, at 711 and 712).

323

R.S.C. 1985, c. F-7.

324

Article 2925: an action to enforce a person right or a movable real right is prescribed by three

years, if the prescriptive period is not otherwise established.

82



is six years for tortious and breach of contract claims.325 It has been noted that in other



jurisdictions, ―the time limit for claims tainted by fraud can be as long as thirty years.‖326







In Nordic law, the time bar varies depending on the country. The Norwegian



Maritime Code, s. 501.18, stipulates that suit must be brought within one year from when



the goods should have been delivered or, if they were delivered, one year from the date



of delivery.327 The approach in Denmark is identical in s.501.16, but the Finnish law



differs.328 The Finnish Maritime Code does not have a specific stipulation, and therefore



if no specific stipulation applies then the time bar is dictated by the general rules, which



is ten years from when the claim arose.329







Suit taken based on the letter of guarantee contract would appear to fall into the



general contractual prescription period associated with the law of the contract. In most



jurisdictions this period is five, six, or ten years.330 In France, the past prescription period



for suit based on letters of guarantee was one year: ―l‘engagement du signataire d‘une



lettre de guarantie a la livraison se prescrit par un an.‖331 In 1997, the Cour de cassation



overturned the previous prescription period,332 and held that a letter of guarantee, ―est



soumise non à la prescription annale du droit des transports, mais à la prescription



commerciale de droit commun.‖333 The Cour de cassation reasoned that a letter of



guarantee is a contract apart from the contract of carriage and is thus subject to the





325

Limitation Act 1980, s. 5.

326

Hazelwood, supra note 8, at 195.

327

Honka, supra note 31, at 173.

328

Ibid.

329

Ibid.

330

Tetley, supra note 6, at 831.

331

Bonassies, P. ―Le droit positif français en 1995‖ DMF 1996, 245. See Cour d’Appel de

Versailles, November 18, 1994, DMF 1995, 558.

332

Cour de Cassation, June 17 1997, Naivre ―Happy Buccaneer‖, DMF 1997, 725. See also Cour

d’Appel de Rouen, November 9, 1999, DMF 2000, 729.

333

Bonassies, P. ―Le droit positif français en 1998‖ DMF 1999 (H.S.) 57.

83



normal commercial prescription period, which is stipulated in art. 189 bis of the Code de



commerce.334 The decision from the Cour de cassation is in line with the opinions of



doctrinal writers.335







7) Letters of Guarantee and P & I Clubs



A carrier who decides to deliver the goods without the bill of lading does so at his



own risk and, although a letter of guarantee may be offered in exchange, the carrier has



no recourse should the letter of guarantee fall through. Most P & I Clubs do not offer



protection against the risk of delivery without production of the bill of lading.336 P & I



Clubs will only provide cover in respect of liability arising from the delivery of cargo if



there is at least one original bill of lading.337 The carrier is in a difficult position when



facing increasing pressure to release goods without the bill of lading.338 Does he release



the goods at his own risk, or waste valuable time in port waiting for the bills of lading to



arrive?









334

Cour d’Appeal de Rouen, supra note 332, at 731.

335

See Martine Remond-Gouilloud, supra note 129; Bonassies, supra note 333; Tetley, supra

note 6, at 831.

336

Chan, F. ―A Plea for Certainty: Legal and Practical Problems in the Presentation of Non-

Negotiable Bills of Lading‖, (1999) 29 Hong Kong L. J. 44, at 54.

337

Gaskell, supra note 103 at 445.

338

Wilson has outlined several of the problems a shipowner, as well as the charterer, or cargo

owner, may face when the bill of lading has yet to arrive at the port of discharge, which is

especially common in the carriage of bulk cargo. If the shipowner insists on the presentation of

the original bill of lading, several problems arise: ―As [the shipowner] will be unaware of the

identity of the current holder of the bill, or the reason for the delay in the bill‘s arrival, he will be

unable to make any assessment of the time at which it will be ultimately available. On many

occasions there may be no place available to store the cargo, pending arrival of the bill, except on

board the ship. In such an event a charterer may face liability for demurrage or damages for

detention, while the shipowner may run the risk of losing the next charter should it contain a

canceling clause. Similarly on the liner trade the carrier will be worried about his schedule. Again

there are obvious risks to the cargo owner should the goods be perishable or subject to

fluctuating market prices.‖ (Wilson, supra note 86 at 164). Conversely, should the shipowner

accept a letter of guarantee in lieu of the bill of lading, he exposes himself to liability as discussed

supra in section VI(2).

84



P & I clubs universally warn their members that liability arising from delivery will



not be covered.339 For example, the West of England P & I Club Newsletter recently



stated that, ―Members are reminded that, unless of Association‘s Committee otherwise



determines, there is no cover in respect of liabilities arising out of the delivery of cargo



without production of the original bill of lading...and that, in such circumstances,



members are strongly advised to ensure that they are fully satisfied with the financial



standing and authority of those who are to issue and sign these [letters of]



indemnities.‖340 Some clubs have included in their policies a specific exclusion for liability



to cargo as a result of delivery without the bills of lading, for example, the American



Steamship Owners Mutual Protection and Indemnity Association Form Policy, covers



cargo liability in provision 7, but stipulates that:341



(7) Liability for loss of or damage to or in connection with cargo or other property

(except mail or parcels post), including baggage and personal effects of

passengers, to be carried, carried or which has been carried on board the

insured vessel. Provided, however, that no liability shall exist hereunder for: …(h)

Loss, damage or expense arising from delivery of cargo without surrender of bills

of lading.





It has been noted, however, that some clubs allow themselves the discretion to cover



such liabilities in appropriate cases, yet carriers are strongly urged to not rely on this



leniency as it is not regularly exercised.342 In a recent article, Rumbold has observed that



if the shipowner can get a standard letter of guarantee as well as a bank ―join in‖ letter



from people with the right authority and financial standing to issue such documents, then



339

Rumbold, I. ―Commercial Reality Meets Club Culture‖ (2003) 17 LawGram 1, at 1. (LawGram

can be found online as well at: www3.lawgram.com/pub/publications/shipping_lawgram_17.pdf)

340

―International Group: new wordings for Letters of Indemnity‖ (2001) 15 West of England

Newsletter 3, at 3. The Newsletter can also be found online at:

www.westpandi.com/subscriptions/news_letters/newsletter_2001_04.pdf

341

American Steamship Owners Mutual Protection and Indemnity Association Form Policy, supra

note 209.

342

Hazelwood, supra note 8 at 193.

85



the shipowner can expect some support from his P & I Club if things go wrong.343 This



practice, however, has led to tensions between shipowners who have had their claims



arising from delivery without a bill of lading paid for by the P & I Clubs, and those who



have not.344 Nevertheless, one must keep in mind that the general understanding in the



P & I insurance industry, according to P. Rozum, is that if a carrier chooses to deliver



without the bill of lading to someone who turns out to be the rightful owner, then the P & I



Clubs do not get involved, but if problems arise, the carrier has technically breached the



rules by delivering the cargo without the bill of lading and thus any liability will not be



covered.345







The International Group of P&I Clubs has issued several standard form letters of



indemnity. These forms are recommended by the International Group of P & I Clubs for



use by its members,346 but the use of the forms will not likely alter the fact that the carrier



is not covered should he discharge the cargo without the bills of lading. The standard



forms, ―[have] been provided simply to assist innocent members who find themselves in



a dilemma. Rather than having to draft suitable wording on the spot or accept perhaps



the inadequate or hostile wording provided by the consignee, the standard club wording



is designed to be immediately available and acceptable to banks and others who







343

Rumbold, supra note 339, at 1.

344

Ibid. It has also been noted that there is unrest in at least one P & I Club over claims that were

paid out to a board member concerning delivery without a bill of lading.

345

Personal communication with P. Rozum, Shipowners Assurance and Management Limited,

620 St. Jaques W., suite 305, Montreal, Canada.

346

Gaskell, supra note 103 at 445. It is of course at the carrier‘s discretion what type of letter of

guarantee to accept. Honka, supra note 31, at 142, suggests that three major points be attended

to when determining what kind of letter of guarantee is acceptable: ―1) the time during which the

letter of guarantee is in force has to be long enough, 2) the person of the guarantor must be

trustworthy, 3) the sum included in the guarantee must cover more than the value of the goods.‖

With regard to who to accept a letter of guarantee from, because a guarantee from an unknown

charterer or consignee may be worth nothing at all, P & I Clubs recommend that aside from the

use of the standard letter, the letters should be countersigned by a bank and that the bank should

be a first class or ―triple A‖ rated bank. (Hazelwood, supra note 8, at 194).

86



provided the necessary counter-security.‖347 The use of a standard letter is likely to be a



good idea, as it will hopefully prevent contractual drafting that fails to adequately cover



the carrier.348







In the past few years a series of revisions of the standard forms has taken place.



In December 1998, the International Group of P & I Clubs, issued a circular to members



recommending revised wording of the standard form letters of indemnity.349 As a result of



the comments from shipowners and shipowner‘s organizations, further review was



undertaken and new modifications were made, with the result that in early 2001 the



current versions were accepted.350 What is significant about the recent versions, is that



through negotiations with the British Bankers Association (BBA), members of the BBA



are now prepared to join in the letters of indemnity, and through the auspices of the



International Chamber of Commerce, the BBA will promote the agreed standard wording



within the international business community.351 There are essentially three standard



forms, which are issued in two versions each. Appendices A and B, have version 1 and



2 respectively of the first standard form, which is a letter of indemnity for delivery of



cargo without production of the original bill of lading, and is thus the most relevant for



this discussion.352 The first version of the form, found in Appendix A, is to be used when



the commercial party requesting delivery (termed ―the Requestor‖ in the form) will alone



347

Hazelwood, supra note 8, at 194.

348

See Cour de Versailles, July 1, 1993, DMF 1994, 110, where the carrier delivered the goods

without the bills of lading in return for a letter of guarantee that was the value of only the

merchandise delivered. The carrier was held liable for the delivery at issue, as well as to the

freight forwarder for related transactions. The result was that the letter was insufficient to cover

the carrier‘s liability.

349

North of England P & I Club Circular, February 2000, at 1. Online at:

http://www.nepia.com/circulars/bills.htm.

350

Ibid. See also The American Club Circular No. 2/01 (January 2001). Online at: www.american

_club.com/circulars/cir2-01.pdf

351

American Club Circular, ibid.

352

The other two forms deal with, first, delivery at a port other than that stated in the bill of lading,

and second, delivery at a port other than that stated in the bill of lading and without production of

the original bill of lading.

87



be signing the letter of indemnity. The second version, found in Appendix B, is initially



the same form, however, at the end there are provisions for when a bank will be joining



in the letter of indemnity. Aside from the new provisions that allow a bank to join in, there



are several other changes to the previous standard form, which can be found in



Appendix C. The old standard form, Appendix C, assumes the carrier will be liable to



the true holder of the bills of lading, and provides for that loss - up to 200% of the CIF



value of the cargo delivered.353 The new standard form, Appendix A, does not have a



provision limiting liability, and the P & I Clubs suggest that the liability of ―the Requestor‖



should generally not be limited.354 When a bank joins the form, however, the bank will



insist upon a monetary limit, which will be inserted in clause 3 of the bank‘s section in



Appendix B. It has been noted that the amount will be ―a matter for negotiation in order



that it properly reflects the potential exposure in the particular circumstances, taking into



account, inter alia, the sound market value of the cargo at the time of delivery, but it is



recommended that the limit should be a minimum of 200% of the sound market value of



the cargo at the time of delivery.‖355 Another change in the standard forms relates to the



duration of the liability of the Requestor. The old and the new forms both have no time



limit, so as to ensure that the letter does not expire prior to the end of the prescription



period.356 Although the standard letters have no time limit, the letters do stipulate that



they will expire only when all the original bills of lading have been surrendered to the



carrier,357 at which time the carrier will be able to ensure that no endorsee of the contract







353

See Clause 6 of the Standard Form Letter of Indemnity in Appendix C. The fact that the letter

provides for 200% of the C.I.F. value is important as this ensures leeway to include interest and

costs. Interest is particularly important because, as discussed in section VI(6), supra, prescription

times vary and should suit be taken several years after the misdelivery, the accumulated interest

may amount to a considerable sum. The new form, however, with no limit, provides even more

leeway, for the above-mentioned matters.

354

North of England Circular, supra note 349.

355

American Club Circular, supra note 350, at 2.

356

Hazelwood, supra note 8, at 195.

357

Clause 5 in Appendix A and B, and Clause 4 in Appendix C.

88



or owner of the cargo will present himself or herself and take suit.358 The bank join in



provisions in Appendix B, nevertheless limit the bank‘s liability for an initial period of six



years, but that can be renewed automatically for further periods of two years at the



shipowner‘s request, subject to two exceptions.359 Finally, in the new standard forms



provision four has been added, which will give greater security to tankers, as delivery of



bulk liquid or gas cargo to a terminal, facility, other ship or barge, is deemed to be



delivery to the party to whom delivery was requested.360







P & I Clubs have attempted to alleviate the problem of presentation of bills of



lading by creating the standard form letter of indemnity. Conversely, P & I Clubs have



been opposed to several of the solutions suggested to address the problem of



presentation of bills of lading, such as: P & I Club insurance against the risk of



misdelivery, and new systems of documentation, particularly a proposed registry system.







P & I Clubs do not condone the acceptance of letters of guarantee in exchange



for releasing the goods without production of the bill of lading, rather ―clubs universally



warn their members that liabilities arising from delivery of cargoes without production of



bills of lading will not be covered.‖361 It has been noted that with regard to accepting



letters of guarantee, ―the position of the clubs remains firmly against such practices.‖362



The possibility has been raised that shipowners should be able to insure themselves



against the risks involved when accepting letters of guarantee to secure the release of

358

Hazelwood, supra note 8, at 195

359

The exceptions are found in provision 5 of the bank‘s join in, in Appendix B. Essentially, the

bank can discharge its liability by paying that maximum amount payable under the letter of

indemnity, rather than extend its liability for another two years. Another exception is that if prior to

the expiration of the bank‘s liability under the letter, legal proceedings are commenced under the

letter and the bank was notified of this, the liability of the bank will continue until the claim is paid

or the proceedings are finished.

360

American Club Circular, supra note 350, at 2.

361

Hazelwood, supra note 8, at 182.

362

Ibid., at 193.

89



the goods, however, the P & I Clubs do not cover these types of risks. Nor are the P & I



Clubs likely to in the near future as it has been stated that, ―P & I Clubs at present do not



think it appropriate to offer such cover.‖363







More recently, several new systems of documentation have been suggested to



counteract the traditional problems associated with the use of bills of lading.364 The



problem arises in that for new systems of documentation to be effective, the shipping



community, including P & I Clubs, must accept it.365 The problem is exacerbated by the



fact that P & I Clubs have been ―traditionally conservative in their reaction to



innovation.‖366 One proposed solution is a central registry system.367 Essentially, after



the bill of lading is issued by the carrier at the port of loading in normal negotiable form,



the shipper would deposit it in the central registry, at which point there would be no more



subsequent physical transfers of the bill.368 Rather, ―all subsequent transactions



involving the bill will be recorded at the registry on notification by the consignee of



record.‖369 Using such a system, the banks may register its security interest, and the



carrier may also register unpaid freight charges.370 A registry system would solve the



problem of the late arrival of the bill of lading, as the carrier may simply check the



registry to ascertain the party entitled to the goods.371 P & I Clubs, however, have yet to



be convinced of whether a registry system is secure enough to ensure the identity of the





363

Wilson, supra note 86, at 169.

364

For example, the popularity of EDIs or ‗electronic data interchange‘ is increasing due to its

efficiency and cost reduction, and in 1990 the CMI adopted the Rules for Electronic Bills of

Lading, whose main feature is ―the creation of an electronic bill of lading by the carrier who also

acts as an unofficial registry of negotiations.‖ (Yiannopoulos, supra note 220, at 26).

365

Wilson, supra note 86, at 169.

366

Ibid.

367

Ibid. The project was originally sponsored by Intertanko in collaboration with the Chase

Manhattan Bank.

368

Ibid.

369

Ibid.

370

Ibid.

371

Ibid., at 170.

90



party entitled to the goods.372 A second objection is that such a system would be



expensive to establish and run, and P & I Clubs, as well as carriers, have objected to the



costs associated with the system and have argued that ―the major costs should be borne



by cargo owners since the presentation problem stems solely from the methods they



adopt to conduct their business.‖ As P & I Clubs are an integral part of the shipping



industry, it is therefore unlikely that any new system of documentation such as the



registry will succeed without the P & I Clubs‘ approval.







8) Waybills: A Solution to the Letter of Guarantee dilemma?



Several variations of shipping documents have increased in popularity in recent



years. In particular, the use of waybills has grown,373 and many countries and



international bodies have amended legislation and documentation to provide for their



use.374 For example the Carriage of Goods by Sea Act 1992375 covers waybills, and the



Comité Maritime International has created the CMI Uniform Rules of Sea Waybills.376



The Hamburg Rules also cover waybills, by defining a ―contract of carriage by sea‖ as



referring to ―any contract whereby the carrier undertakes against payment of freight to



carry goods by sea from one port to another,‖377 as opposed to the Hague Rules, which









372

Ibid.

373

Ibid., at 167. It has been noted that waybills are being increasingly used, and in the early

1990‘s already ―as much as 85 per cent of trans-Atlantic trade in containerized cargo could be

carried on waybills.‖ (Ibid).

374

Several countries have amended their respective maritime codes or bills of lading acts to

address the use of waybills. The English Carriage of Goods by Sea Act 1992, U.K., Ch. 50, in

force September 16, 1992, now covers waybills. Denmark, and Norway, address the use of

waybills in provisions 308 and 309 of their common Maritime Code, which came into force on

st

October 1 1994. Finland, and Sweden, who‘s common Maritime Code entered into force at the

same time as the Danish and Norwegian codes, address waybills in Chapter 13, section 58

(which defines waybills) and section 59 (which describes the requirements of waybills).

375

Carriage of Goods by Sea Act 1992, U.K., Ch. 50, in force September 16, 1992.

376

The text of the CMI Uniform Rules for Sea Waybills, can be found in Wilson, supra note 86,

Appendix 5 at 378.

377

The Hamburg Rules, article 1(6).

91



defines a ―contract of carriage‖ as applying only to ―contracts of carriage covered by a



bill of lading or any similar document of title.‖378







The use of waybills simplifies the problem of presentation of the bill of lading



because the carrier must simply deliver the cargo to the consignee upon presentation of



proper identification.379 Also Rule 7(ii) of the CMI Rules limits the carrier liability for



misdelivery: ―The carrier shall be under no liability for wrong delivery if he can prove that



he has exercised reasonable care to ascertain that the party claiming to be the



consignee is in fact that party.‖380 The use of waybills, therefore, eliminates the carrier‘s



dilemma of being placed in the unenviable position of having to choose between



potential liability if he releases the goods in exchange for a letter of guarantee, or an



indeterminate wait in the port until the bill of lading arrives. The problem with the use of



waybills, however, is the fact that when a waybill is substituted for the use of a normal



bill of lading, the consignee looses the advantage of a negotiable document. The waybill,



is non-negotiable, and therefore may not be used to sell the goods in transit as can be



done with a bill of lading, which is a negotiable document of title.381 Due to this



characteristic, waybills cannot be used for sales involving documentary credits.382 The



limitations of waybills unfortunately make it unable to effectively counteract the





378

The Hague Rules, article 1(b).

379

CMI Uniform Rules for Sea Waybills, supra note 376, rule 7. Delivery: ―7(i) The carrier shall

deliver the goods to the consignee upon production of proper identification.‖ The Singapore Court

of Appeal in Peer Voss v. APL Co. Pte Limited [2002] 2 Lloyd‘s Rep. 707 (Sing. C.A.), at 722,

affirms that in order to receive delivery of the goods under waybill, the waybill itself need not be

presented.

380

CMI Rules for Sea Waybills, ibid., rule 7(ii).

381

Tetley, supra, note 6 at 941, outlines the distinctions between waybills and bills of lading: ―The

bill of lading has three characteristics: it is a receipt, a contract of carriage and a document of title.

Delivery of the goods is obtained by the production of the original. The non-negotiable receipt or

waybill, on the other hand, has only two characteristics: it is a contract of carriage and receipt. It

is not a document of title. The waybill consignee does not obtain delivery of the goods by

presentation of the waybill; rather he proves that he is the person named on the waybill and thus

entitled to take delivery.‖

382

The use of documentary credits are discussed in section V(2) supra.

92



presentation problems that arise when the carrier arrives at the destination prior to the



bill of lading.







8) Conclusion: Letters of Indemnity at Discharge, Letters of Guarantee.



The prevalence of the use of letters of guarantee is symptomatic of the delays



and problems associated with the use of traditional bills of lading in modern shipping.



The speed of transport has increased over the past few decades, yet the arrival of the



bill of lading at the port of discharge still takes considerable time, as a result of its transit



through the banking and postage systems. This situation results in congestion at the



ports and delays because under the current law the carrier cannot rightfully release the



goods until the consignee surrenders the bill of lading.







The industry and the law are evolving and changing to address other forms of



transport documents, such as waybills and EDIs. The problem resides in the fact that a



suitable alternative has yet to be found to replace the traditional bill of lading. To date the



advantages of bill of lading, its uniformity and widespread use, and the fact that it is a



negotiable document of title, have yet to be replicated in another document.



Nevertheless, until there is a change in the status quo, carriers are likely to remain



placed in the unenviable situation of having to choose between potential liability, with the



possibility of indemnification through a letter of guarantee, on one hand, and long delays



and irate consignees on the other.







VII. GENERAL CONCLUSION







1) Letters of Indemnity and Letters of Guarantee Are Fundamentally Different and



Should Be Distinguished

93



Although both letters of indemnity issued at shipment and letters of guarantee



issued at discharge are indemnity contracts, in reality they are fundamentally different



and should be distinguished. The tendency of authors and courts to use the terms



interchangeably has led only to confusion, and a lack of understanding of the differences



between them. In practice, letters of indemnity and letters of guarantee function very



differently and when examined in detail they highlight separate problems and



shortcomings within the law, and within the shipping trade generally.







2) Letters of Indemnity: A Problem of Good Faith and Uniformity



The acceptance of a letter of indemnity in return for the issuance of a clean bill of



lading is a fraudulent and reprehensible practice. The courts, the P & I Clubs, and the



industry in general should adopt an intolerant attitude with respect to such practices.



Jurisdictions such as China and the United States, who in some instances have allowed



carriers to enforce letters of indemnity against shippers, are in essence condoning the



practice by enforcing what is essentially a contract to perpetrate a fraud on an innocent



third party. One could characterize this is a problem of good faith, and when courts



condone letters of indemnity, they are essentially condoning behavior that is contrary to



good faith.







The concept of ‗proper letters of indemnity‘ or cases where it is permissible to



accept a letter of indemnity, serve only to confuse the issue, as courts and legal systems



are then unable to completely outlaw the practice. Countries such as England, France,



Finland and China, who have through either legislation, obiter or rulings, held that



permissible letters of indemnity are possible, should re-examine their position on the



matter. Condoning contracts that are essentially misrepresentations is incongruent with

94



the fundamental principles of most legal systems, especially countries such as France



where the duty to act in good faith is longstanding.







Ensuring that the law and the courts do not condone letters of indemnity is really



only the first step in eradicating what is unfortunately a widespread practice. Proactive



measures, such as the Nordic law‘s ‗duty to inform‘ which forces the carrier on demand



by the consignee to declare whether he received a letter of indemnity and to give it to the



consignee, arms the consignee with the tools to help protect himself against the shipper



and the carrier‘s fraudulent actions. The marine insurance industry, specifically the P & I



Clubs, can also help to condone the practice, by ensuring that the policies specifically



exempt the carrier‘s cover when a letter of indemnity is accepted in return for a clean bill



of lading, and that no exceptions are made. Such measures, therefore, ensure that the



carrier is fully aware of the lack of cover should he be sued by cargo interests, which will



hopefully deter him from engaging in the practice.







There is no single solution to the problem; rather the initiatives must come from



all the different legal jurisdictions, as well as from within the industry itself. What is



encouraging is the increasing uniformity across both civilian and common law legal



systems, and different national jurisdictions, in their approach to dealing with letters of



indemnity. Fundamental concepts such as fraud and good faith are employed with



increasing regularity. Hopefully, as good faith grows in popularity in the common law, it



will provide a flexible tool with which to deal with the practice of letters of indemnity,



perhaps when other legal remedies are inadequate to deal with the factual situation.



Perhaps through the use of good faith, the historically different approaches of the



common and civil law systems will converge and adopt a uniform approach to this



international problem. What is needed in the years to come is the cooperation of the

95



various national and international entities, to develop and refine an international uniform



body of carriage of goods law.







3) Letters of Guarantee: A Problem of Documentation



The same need for uniformity and reform is present with regard to letters of



guarantee issued at discharge. This practice, however, has arisen due to the inability of



the current documentary system to adequately deal with problems of presentation. In



this instance neither the carrier, shipper, or the holder of the bill of lading, are acting



contrary to good faith or in a fraudulent manner, rather the fraud is extrinsic to the



contract of carriage. In reality, it is the documentation problem that often forces the



carrier to open himself up to the risk of fraud, and thus misdelivery.







Across the jurisdictions, the general approach is fairly similar. The carrier is liable



if he delivers the cargo without a bill of lading in return for a letter of guarantee to anyone



other than the holder of the bill of lading. Exceptions, however, have been made under



specific circumstances in several jurisdictions, including the United States, Canada,



China, and the Nordic countries. What is truly needed is not a reform of the law; rather it



is a reform of the system of documentation to keep it in step with the realities of the



modern shipping trade. To date, other forms of transport documents, such as waybills



and EDIs, have yet to replicate all the functions of a traditional bill of lading. This is



exacerbated by the fact that the shipping industry, with P & I Clubs in particular, is



conservative in its reaction to change and innovation. New systems of documentation



that are proposed, such as the central registry system, are therefore likely to be met with



much resistance. The industry is now in a difficult position, in the coming years the



problem with only become worse, and the age old system of bills of lading will have to



come under revision. What will prove to be a challenge will be striking a balance

96



between shipping practices that have evolved over hundreds of years, and new



electronic systems that have become prevalent in so many other industries.

97





APPENDIX A



(International Group of P & I Clubs Standard Form, as approved by the British Bankers

Association, released in 2000. This form can be found at P & I Club websites, including

American Club, www.amercian-club.com, North of England, www.nepia.com, and West of

England, www.westpandi.com)





STANDARD FORM LETTER OF INDEMNITY TO BE GIVEN IN RETURN FOR

DELIVERING CARGO WITHOUT PRODUCTION OF THE ORIGINAL BILL OF LADING





To: [insert name of Owners] [insert date]

The Owners of the [insert name of ship]

[insert address]



Dear Sirs:



Ship: [insert name of ship]



Voyage: [insert load and discharge ports as stated in the bill of lading]



Cargo: [insert description of cargo]



Bill of lading: [insert identification numbers, date and place of issue]





The above cargo was shipped on the above ship by [insert name of shipper] and consigned to

[insert name of consignee or party to whose order the bill of lading is made out, as appropriate]

for delivery at the port of [insert name of discharge port stated in the bill of lading] but the bill of

lading has not arrived and we, [insert name of party requesting delivery], hereby request you to

deliver the said cargo to [insert name of party to whom delivery is to be made] at [insert place

where delivery is to be made] without production of the original bill of lading.



In consideration of your complying with our above request, we hereby agree as follows:



1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any

liability, loss, damage or expense of whatsoever nature which you may sustain by reason of

delivering the cargo in accordance with our request.



2. In the event of any proceedings being commenced against you or any of your servants or

agents in connection with the delivery of the cargo as aforesaid, to provide you or them on

demand with sufficient funds to defend the same.



3. If, in connection with the delivery of the cargo as aforesaid, the ship, or any other ship or

property in the same or associated ownership, management or control, should be arrested or

detained or should the arrest or detention thereof be threatened, or should there be any

interference in the use or trading of the vessel (whether by virtue of a caveat being entered on the

ship‘s registry or otherwise howsoever), to provide on demand such bail or other security as may

be required to prevent such arrest or detention or to secure the release of such ship or property

or to remove such interference and to indemnify you in respect of any liability, loss, damage or

expense caused by such arrest or detention or threatened arrest or detention or such

interference, whether or not such arrest or detention or threatened arrest or detention or such

interference may be justified.

98



4. If the place at which we have asked you to make delivery is a bulk liquid or gas terminal or

facility, or another ship, lighter or barge, then delivery to such terminal, facility, ship, lighter or

barge shall be deemed to be delivery to the party to whom we have requested you to make such

delivery.



5. As soon as all original bills of lading for the above cargo shall have come into our possession,

to deliver the same to you, or otherwise to cause all original bills of lading to be delivered to you,

whereupon our liability hereunder shall cease.



6. The liability of each and every person under this indemnity shall be joint and several and shall

not be conditional upon your proceeding first against any person, whether or not such person is

party to or liable under this indemnity.



7. This indemnity shall be governed by and construed in accordance with English law and each

and every person liable under this indemnity shall at your request submit to the jurisdiction of the

High Court of Justice of England.







Yours faithfully





For and on behalf of

[insert name of Requestor]

The Requestor







…………………………………

Signature

99





APPENDIX B



(International Group of P & I Clubs Standard Form, as approved by the British Bankers

Association, released in 2000. This form can be found at P & I Club websites, including

American Club, www.amercian-club.com, North of England, www.nepia.com, and West of

England, www.westpandi.com)



STANDARD FORM LETTER OF INDEMNITY 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 INDEMNITY





To: [insert name of Owners] [insert date]

The Owners of the [insert name of ship]

[insert address]



Dear Sirs:



Ship: [insert name of ship]



Voyage: [insert load and discharge ports as stated in the bill of lading]



Cargo: [insert description of cargo]



Bill of lading: [insert identification numbers, date and place of issue]







The above cargo was shipped on the above ship by [insert name of shipper] and consigned to

[insert name of consignee or party to whose order the bill of lading is made out, as appropriate]

for delivery at the port of [insert name of discharge port stated in the bill of lading] but the bill of

lading has not arrived and we, [insert name of party requesting delivery], hereby request you to

deliver the said cargo to [insert name of party to whom delivery is to be made] at [insert place

where delivery is to be made] without production of the original bill of lading.



In consideration of your complying with our above request, we hereby agree as follows:



1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any

liability, loss, damage or expense of whatsoever nature which you may sustain by reason of

delivering the cargo in accordance with our request.



2. In the event of any proceedings being commenced against you or any of your servants or

agents in connection with the delivery of the cargo as aforesaid, to provide you or them on

demand with sufficient funds to defend the same.



3. If, in connection with the delivery of the cargo as aforesaid, the ship, or any other ship or

property in the same or associated ownership, management or control, should be arrested or

detained or should the arrest or detention thereof be threatened, or should there be any

interference in the use or trading of the vessel (whether by virtue of a caveat being entered on the

ship‘s registry or otherwise howsoever), to provide on demand such bail or other security as may

be required to prevent such arrest or detention or to secure the release of such ship or property

or to remove such interference and to indemnify you in respect of any liability, loss, damage or

expense caused by such arrest or detention or threatened arrest or detention or such interference

, whether or not such arrest or detention or threatened arrest or detention or such interference

may be justified.

100





4. If the place at which we have asked you to make delivery is a bulk liquid or gas terminal or

facility, or another ship, lighter or barge, then delivery to such terminal, facility, ship, lighter or

barge shall be deemed to be delivery to the party to whom we have requested you to make such

delivery.



5. As soon as all original bills of lading for the above cargo shall have come into our possession,

to deliver the same to you, or otherwise to cause all original bills of lading to be delivered to you,

whereupon our liability hereunder shall cease.



6. The liability of each and every person under this indemnity shall be joint and several and shall

not be conditional upon your proceeding first against any person, whether or not such person is

party to or liable under this indemnity.



7. This indemnity shall be governed by and construed in accordance with English law and each

and every person liable under this indemnity shall at your request submit to the jurisdiction of the

High Court of

Justice of England.





Yours faithfully





For and on behalf of

[insert name of Requestor]

The Requestor









…………………………………

Signature







We, [insert name of the Bank], hereby agree to join in this Indemnity providing always that the

Bank‘s liability:-



1. shall be restricted to payment of specified sums of money demanded in relation to the

Indemnity (and shall not extend to the provision of bail or other security)



2. shall be to make payment to you forthwith on your written demand in the form of a signed letter

certifying that the amount demanded is a sum due to be paid to you under the terms of the

Indemnity and has not been paid to you by the Requestor or is a sum which represents monetary

compensation due to you in respect of the failure by the Requestor to fulfill its obligations to you

under the Indemnity. For the avoidance of doubt the Bank hereby confirms that:



(a) such compensation shall include, but not be limited to, payment of any amount up to

the amount stated in proviso 3 below in order to enable you to arrange the provision of

security to release the ship (or any other ship in the same or associated ownership,

management or control) from arrest or to prevent any such arrest or to prevent any

interference in the use or trading of the ship, or other ship as aforesaid, and



(b) in the event that the amount of compensation so paid is less than the amount stated

in proviso 3 below, the liability of the Bank hereunder shall continue but shall be reduced

by the amount of compensation paid.

101





3. shall be limited to a sum or sums not exceeding in aggregate [insert currency and amount in

figures and words]



4. subject to proviso 5 below, shall terminate on [date six years from the date of the Indemnity)

(the ‗Termination Date‘), except in respect of any demands for payment received by the Bank

hereunder at the address indicated below on or before that date.



5. shall be extended at your request from time to time for a period of two calendar years at a time

provided that:-



a) the Bank shall receive a written notice signed by you and stating that the Indemnity is

required by you to remain in force for a further period of two years, and



b) such notice is received by the Bank at the address indicated below on or before the

then current Termination Date.



Any such extension shall be for a period of two years from the then current Termination

Date and, should the Bank for any reason be unwilling to extend the Termination Date,

the Bank shall discharge its liability by the payment to you of the maximum sum payable

hereunder (or such lesser sum as you may require).



However, in the event of the Bank receiving a written notice signed by you, on or before

the then current Termination Date, stating that legal proceedings have been commenced

against you as a result of your having delivered the said cargo as specified in the

Indemnity, the Bank agrees that its liability hereunder will not terminate until receipt by

the Bank of your signed written notice stating that all legal proceedings have been

concluded and that any sum or sums payable to you by the Requestor and/or the Bank in

connection therewith have been paid and received in full and final settlement of all

liabilities arising under the Indemnity.



6. shall be governed by and construed in accordance with the law governing the Indemnity and

the Bank agrees to submit to the jurisdiction of the court stated within the Indemnity.





It should be understood that, where appropriate, the Bank will only produce and deliver to you all

original bills of lading should the same come into the Bank‘s possession, but the Bank agrees

that, in that event, it shall do so.



The Bank agrees to promptly notify you in the event of any change in the full details of the office

to which any demand or notice is to be addressed and which is stated below and it is agreed that

you shall also promptly notify the Bank in the event of any change in your address as stated

above.



Please quote the Bank‘s Indemnity Ref ………………… in all correspondence with the Bank and

any demands for payment and notices hereunder.







Yours faithfully,









For and on behalf of

[insert name of bank ]

102



[insert full details of the office to which any demand or notice is to be addressed]









…………………………….

Signature

103





APPENDIX C



(Standard Form Letter as recommended by the International Group of P & I Clubs prior to

rd

2000. This form can be found in Hazelwood, S.J. P & I Clubs: Law and Practice, 3 Ed.

LLP, London, 2000, at 442-443.)





STANDARD FORM LETTER OF INDEMNITY TO BE GIVEN IN RETURN FOR DELIVERING

CARGO WITHOUT PRODUCTION OF THE ORIGINAL BILL OF LADING



To : [insert name of Owners] [insert date]

The Owners of the [insert name of ship]

[insert address]



Dear Sirs



Ship: [insert name of ship]



Voyage: [insert load and discharge ports as stated in the bill of lading]



Cargo: [insert description of cargo]



Bill of lading: [insert identification numbers, date and place of issue]





The above cargo was shipped on the above ship by [insert name of shipper] and consigned to

[insert name of consignee or party to whose order the bill of lading is made out, as appropriate]

for delivery at the port of [insert name of discharge port stated in the bill of lading] but the bill of

lading has not arrived and we, [insert name of party requesting delivery], hereby request you to

deliver the said cargo to [insert name of party to whom delivery is to be made] at [insert place

where delivery is to be made] without production of the original bill of lading.



In consideration of your complying with our above request, we hereby agree as follows :-



1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any

liability, loss, damage or expense of whatsoever nature which you may sustain by reason of

delivering the cargo in accordance with our request.



2. In the event of any proceedings being commenced against you or any of your servants or

agents in connection with the delivery of the cargo as aforesaid, to provide you or them on

demand with sufficient funds to defend the same.



3. If, in connection with the delivery of the cargo as aforesaid, the ship, or any other ship or

property belonging to you should be arrested or detained or should the arrest or detention thereof

be threatened to provide on demand such bail or other security as may be required to prevent

such arrest or detention or to secure the release of such ship or property and to indemnify you in

respect of any liability, loss, damage or expense caused by such arrest or detention or threatened

arrest or detention whether or not such arrest or detention or threatened arrest or detention may

be justified.



4. As soon as all original bills of lading for the above cargo shall have come into our possession,

to deliver the same to you, whereupon our liability hereunder shall cease.

104



5. The liability of each and every person under this indemnity shall be joint and several and shall

not be conditional upon your proceeding first against any person, whether or not such person is

party to or liable under this indemnity.



6. The liability of each and every person under this indemnity shall in no circumstances exceed

200% of the CIF value of the above cargo.



7. This indemnity shall be governed by and construed in accordance with English law and each

and every person liable under this indemnity shall at your request submit to the jurisdiction of the

High Court of Justice of England.







Yours faithfully







For and on behalf of

[insert name of Requestor]









…………………………………

Signature







For and on behalf of

[insert name of Bank]









……………………………….

Signature