Contingent Liability

The speeds of modern ships are out-pacing the speed of banks in processing documents so that it is not uncommon for cargo to be available for collection by the consignee but he is unable to do so because he has no original B/L to enable him to claim his consignment. The carrier is powerless as the obligation to deliver the cargo only to one who presents a valid original B/L is absolute.  There is, however, a tried and tested  way out of this dilemma by the presentation of a letter of indemnity. Unlike letters of indemnity for a “clean” B/L, this is not fraudulent but it does have its problems. First, it has to be thoroughly dependable and this is achieved by the letter being countersigned by a first class bank.  Secondly, it must be unqualified, a feature not popular with bank managers who have no way of assessing the risk they are taking. Thirdly, from the consignee’s point of view, it is expensive; banks charge substantially for accepting open-ended risks even though they demand a counter-indemnity from their customer.  This creates its own problems because the giving of a counter-indemnity creates “contingent liability” which reduces the consignee’s borrowing powers by that amount. There are, however, occasions when the B/Ls have become irrevocably lost and the statute of limitations for the tort of conversion is six years.  However it is seldom, if ever that a carrier demands the letter of indemnity remaining valid for all that time; it is more usual for a commercial, rather than a legal decision to find a way out. It is always wise for an agent to obtain the principal’s agreement to accepting a letter of indemnity for missing B/Ls because there is no protection from the Himalaya clause for conversion.  Thus if the agent accepts a letter of indemnity without reference to the principal and things go wrong, it is the agent who will face the claim in tort.