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Oct 2, 2023
Lockton P.L. Ferrari

Amendments to Standard Letter of Indemnity (LOI) wordings

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

2nd October 2023

Over the past months the International Group of P&I Clubs (the ‘IG’) updated the Letter of Indemnity (‘LOI’) wordings which have been adopted across the shipping sector, specifically with regards to the following circumstances:

- Delivery of cargo without presentation of the Original Bill of Lading;

- Delivery of cargo at a Port other than that stated in the Bill of Lading;

- Delivery of cargo at a Port other than that stated in the Bill of Lading and without presentation of the Original Bill of Lading.

The review was largely carried out by the IG Bills of Lading Sub-Committee. The purpose was to provide clarity to the wording and remove ambiguities which were recognised over time - particularly to assist with the enforcement process before the Courts. Considering that throughout the years, the standard LOI wording was relied upon as an efficient instrument in facilitating international trade, it was decided to maintain the LOI original structure and merely introduce changes to those parts which gave rise to criticalities rather than drafting one from scratch. Before we start reviewing the main changes, we wish to remind readers that the LOI is generally a supplementary contract implemented in situations where the Owner is requested to depart from the terms of the Bill of Lading or its legal mechanism and, consequentially, invalidate the terms of insurance coverage, giving rise to severe uninsured financial consequences. For this reason, utmost care must be used by the Insured when accepting the LOI offered by his commercial counterparts. The new form contains an introductory note highlighting such aspect and underlining the risks arising out of its acceptance.

The preamble containing voyage and Bill of Lading details has been widened so to allow the parties to include additional information with the aim to avoid as much as possible any uncertainty about the involved cargo and Bill of Lading.

Operative paragraphs

Paragraph 1 is unamended.

Paragraph 2 is unamended.

Paragraph 3 has been split into three sub-paragraphs and slightly amended in order to make it clearer. This paragraph deals with Requestor’s undertaking a) to provide suitable security should the Owner’s vessel or any other property be arrested or threatened to be arrested in connection with the specific delivery of cargo and b) to hold Owner harmless in respect of any liability, loss or damage caused by such arrestor threatened arrest or interference. In the new version it is expressly stated that the Owner who has already put up a security to claimants in order to get the release of his vessel can ask the Requestor to replace it (or to provide a counter security) regardless of whether or not Owner has made any prior demand to the Requestor and even if the amount of said security exceeds ship’s value.

Paragraph 4 has been amended to avoid any speculative interpretation in case a liquid or dry cargo is discharged into bulk facilities so that it is no longer possible to identify it once it is mixed with other cargo already existing in such facility. In such a case, discharge into said bulk facility is deemed to be delivery to the person indicated by the Requestor in the LOI.

Paragraph 5 has been amended to better clarify what happens in case all original Bills of Lading are returned to the Owner. Normally Requestor’s liability under the LOI ceases when full B/L set is returned to the Owner, but the new wording makes it now clear that in order to trigger such effect Bills of Lading must be tendered by the same party to whom delivery of cargo has been made.

Paragraph 6 is unamended.

Paragraph 7 has been amended to ensure that all disputes are subject to English Law and to the exclusive jurisdiction of the High Court of Justice of England. Having carefully considered this aspect the Bill of Lading Sub-Committee came to the conclusion that adopting English Law and Jurisdiction would guarantee the best protection for the Owner, considering the long experience of the High Court in this field.

As mentioned above, readers are reminded that accepting to fulfil Charterers / Shippers’ requests expose Owners to huge risks and will deprive them of the benefit of their P&I insurance. It is therefore highly recommended to check the Requestor’s financial strength before accepting an LOI from the latter.

LOI’s are nowadays widely adopted also in a large number of situations other than those mentioned above and the standard LOI Form is logically amended to respond to the specific needs. When doing so, Owners should always ask themselves if what they are requested to do is lawful and if, by accepting to act as requested, they can be considered as a participant to a fraud. In this case, the chances of successfully enforcing of the terms of the LOI may be low.

As a last comment we would like to draw the readers’ attention on the frequent practice (particularly in the tanker sector) to adopt in Charterparties clauses which make it automatic for the Owners the duty to fulfil Charterers’ request by means of a simple message from the latters (generally referred to as “invokation”). Our recommendation to Owners is to always keep for themselves a margin of discretion (and draft the clause accordingly), so to resist such kind of requests in doubtful circumstances.

Amendments to Standard Letter of Indemnity (LOI) wordings
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