What issues should be noted when using a letter of guarantee?

Practice has shown that, in order to prevent disputes over the apparent condition and quantity of goods—which are common and where estimated losses are not significant—from disrupting the normal cargo handling procedures, it is feasible for the shipper to issue a letter of indemnity to assume potential liabilities, leaving disputes to be resolved at a later date.

However, issuing a bill of lading based on a letter of indemnity still violates the principle that statements in documents must not be false. A carrier issuing a clean bill of lading based on a letter of indemnity may inevitably be seen as engaging in fraudulent collusion with the shipper. Moreover, in many countries, laws can render such letters of indemnity invalid. Therefore, accepting a letter of indemnity to issue a clean bill of lading poses certain risks for the carrier. Consequently, carriers must exercise particular caution when a shipper requests a clean bill of lading against a letter of indemnity. If the carrier accepts the shipper's request, they should require the shipper to provide multiple copies of the letter of indemnity.

When accepting a letter of indemnity, special attention must be paid to ensure that it is issued in the name of the shipper as the party to the contract of carriage. If potential damages are anticipated to be significant, the carrier may even require a letter of indemnity with joint liability from a bank. After accepting multiple copies of the letter of indemnity from the shipper and issuing a clean bill of lading, the carrier should not only retain the original letter of indemnity as evidence for future recourse but also record the chief officer's remarks from the mate's receipt on the cargo manifest or freight manifest, noting that the clean bill of lading was issued against a letter of indemnity. These documents, along with copies of the letter of indemnity, should then be distributed to the vessel and the shipping company's agent at the discharge port for future claim handling.

Regarding the function of letters of indemnity in maritime cargo transport, there are generally two situations in which a shipper must provide one. The first situation occurs when there is a disagreement between the shipper and the carrier over the quantity, weight, or packaging of the goods—for example, when the carrier suspects the information provided by the shipper is questionable but has no means to verify it, or when the carrier deems the packaging unsuitable for long-distance transport but the shipper cannot repackage at that point. In such cases, the carrier will require the shipper to issue a letter of indemnity to protect the carrier's interests; otherwise, the carrier will add unfavorable remarks to the bill of lading.

The second situation occurs when the shipper, for certain personal purposes, requests the carrier to record information on the bill of lading that is inconsistent with the actual condition of the goods. To protect its own interests, the carrier then requires the shipper to issue a letter of indemnity. The issuance of a clean bill of lading against a letter of indemnity (including requests for antedated bills of lading and advance bills of lading) falls under this latter category.

For letters of indemnity in the first situation, laws in various countries generally adopt a permissive attitude. This is a practical adaptation to facilitate the timely export of goods and does not involve concealing facts from the consignee. However, letters of indemnity in the second situation are legally invalid. The actual purpose of such letters is to jointly deceive innocent third parties.

Regarding the legal validity of letters of indemnity, neither the Hague Rules nor the Visby Rules provide any provisions. Considering the practical significance of letters of indemnity in the maritime shipping industry and the need to protect innocent third parties, the Hamburg Rules, for the first time, established clear provisions on the validity of letters of indemnity. Article 17 of the Hamburg Rules stipulates that a letter of indemnity is an agreement between the carrier and the shipper and is not binding on third parties. A letter of indemnity between the carrier and the shipper is valid only when there is no intention to defraud a third party. If an intention to defraud a third party is found, the carrier is not entitled to the benefit of limitation of liability when compensating the third party, and the letter of indemnity is null and void.