All cargoes transported on ocean going vessels are undercover of a bill of lading (BL), giving the lawful holder theright of possession to the cargo. The BL is the key document,amongst many, presented to banks to facilitate payments.BsL are issued in triplicate as Originals, it is also common tohave non-negotiable or “copy” BsL issued. These copy BsLgive no rights over the cargo or against the carrier. It is adocument used purely for information purposes. If paymentfor the cargo is made against any document other than theOriginal BL one assumes the risk that they cannot thencompel the carrier to deliver the cargo, as the carrier is onlybound to deliver the cargo against presentation of an OriginalBL.

If the Original BsL are unavailable cargoes can be dischargedagainst a Letter of Indemnity (LOI) indemnifying the carrierof the consequences of delivery in the absence of thepresentation of an Original BL. LOIs are regularly used in commodity trade finance, but it should beremembered they are only as reliable as the party issuing it. If the issuer is unwilling or unable to meettheir obligations, then the counterparty may remain liable for any losses.

This was further demonstrated in a recent case referred to IMB where a Singaporean commodity traderprovided LOIs for the sale of the cargo to another trader but also to the shipowner to secure delivery ofsaid cargo without the BL. After taking delivery of the cargo, the Singaporean trader sold onto a thirdparty. A third trader then claimed they were the legal holders of the Original BsL and entitled to thecargo. Upon discovering the cargoes had already been released arrest warrants were obtained againstthe six carrying vessels. When called on by the trader and the shipowners to indemnify them againsttheir losses as per the LOI provided, the Singapore trader failed to respond to any requests andultimately disappeared, leaving the vessel owner and the charterers to make good the loss to the thirdtrader. While the ultimate risk of mis delivery against an LOI, lies with the vessel owner, a recent caseheard in the UK courts, concerning the troubled oil trader Gulf Petroleum, ruled in favour of the owner,highlighting a shift in the way courts are looking at LOIs and their associated BsL.

Other documents often referred to IMB are Forwarder’s Certificates of Receipt (FCRs), issued byfreight forwarders to confirm they have assumed control of the goods with irrevocable instructions tobe forwarded to the consignee. FCRs are not transport documents. They are not negotiable and they do 12not confirm a cargo has been loaded. Its only purpose is to act as a receipt for the cargo, to be loaded atsome point. It is not uncommon for IMB inquiries to find that the details on FCRs do not match theBsL, when finally issued, or that shipments are not affected for weeks or even months after the FCRswere issued. IMB are also frequently referred mates’ receipts and Draft BsL. Whilst these mayevidence an underlying shipment has or will take place, in addition to demonstrating the partiesinvolved, they do not carry the same security as that offered by a BL. Furthermore, until the finalOriginal BsL are issued, all details are always subject to change.

There may be genuine reasons why Original BsL are unavailable, but it would be prudent to ascertainwhy they are unavailable and who is in possession of them at the time of financing. Are they simplyheld up because there are several parties, and their respective banks, in the trading chain, as is oftenseen in oil trades? Or are they unavailable because the trader has already negotiated them elsewhereand is now looking for secondary financing? When BsL are inoperative and issued purely for financingpurposes, as seen in the steel trade, the original BsL are also deliberately withheld.

Ultimately several documents can be presented for either the sale and purchase or the discharge anddelivery of the cargo. The onus lies on the bank or the shipowner who must then decide whether toproceed based on their assessment of both the transaction and counterparty risk. Due to the difficultiescouriering documents during the early days of the Covid pandemic, scanned copies of the Original BsLwere also more widely accepted by both banks and shipowners. Whilst this was a business necessity atthe time, it must be acknowledged that paying for or discharging against anything other than theOriginal BsL alters the risk parameters of the transaction. The IMB is available to assist all ourmembers evaluate these risks with our document verification and counterparty due diligence services.