Shipping Guarantee: What the Bank Is Signing For

A carrier that has issued an order bill of lading has undertaken to deliver the goods to whoever presents an original. If it hands them to someone else and the rightful holder later appears, the carrier answers to that holder. Its own liability cover through its P&I club commonly excludes delivery without production of the bill, which is why it will not do it on a customer's word alone.

On short sea routes this is routine: a ship can cross in days while the documents travel through two banks under a letter of credit or a documentary collection, and perishable cargo and port charges do not wait. The importer's answer is a letter of indemnity: release the goods to us, and we will hold you harmless for whatever follows. A carrier may not accept that from a trading company alone. A bank's countersignature, or a guarantee in the bank's own name, is what makes the indemnity worth having.

Shipping guarantees vary from bank to bank and port to port. The standard letters of indemnity recommended by the International Group of P&I Clubs, widely used by carriers, show the moving parts. The requester indemnifies the carrier against any liability, loss or expense from the delivery, funds its defence if it is sued, provides security if the ship is arrested, and hands over the original bills once it has them. The bank joins on narrower terms:

Two things follow. The cap is whatever is written in, and a carrier asking for a bank's support will look for one above the cargo's value, because a misdelivery claim can bring legal costs, interest and the expense of an arrested ship. And the liability does not end when the importer has its goods. It ends when the original bills are surrendered to the carrier and the guarantee comes back, or when its term runs out without the carrier asking for more. Under the IG wording the bank cannot simply let it lapse: a bank unwilling to extend must pay the carrier the cap. A bank's own form may be wider than the IG wording, with no cap or no fixed end.

A fresh-produce importer in New Zealand, constructed for this page like every figure in it, buys US$420,000 of fruit from an Australian grower under a sight letter of credit its bank has issued, calling for a full set of order bills of lading. The ship arrives in four days; the documents, sent between banks, are due in ten. The importer asks for a shipping guarantee, and the bank countersigns the carrier's letter of indemnity with a cap of twice the invoice value. The multiple is the example's, not a market norm.

Before signing, the bank took the importer's agreement to accept the documents whatever discrepancies they show, since once the fruit is released a rejection would leave the bank paying for goods it no longer controls. Terms of that kind appear in banks' shipping guarantee applications. Ten days later the full set arrives under the bank's own credit. The bank pays US$420,000, debits the importer and endorses the bills; the importer surrenders them to the carrier, which returns the guarantee. The guarantee is closed.

Change one fact. The fruit was bought on a documentary collection, not the bank's credit, and the importer does not pay when the documents reach the collecting bank. The original order bills stay outside the importer's control, and with them the right to cargo the carrier has already released. The exporter's claim is against the carrier, and the carrier's is against the guarantee. The importer's bank pays for fruit that has been eaten, perhaps US$420,000 plus costs within its US$840,000 cap, and its recourse is a claim on an importer that has just failed to pay its supplier. A bank asked for a shipping guarantee therefore looks first at how the bills will reach it.

A trust receipt solves a later problem. The documents have arrived and the bank holds them as security, but the importer needs them to collect and sell the goods before it can pay. The bank releases them against the importer's undertaking to hold the goods and their proceeds for the bank. Its risk is that the importer sells and does not pay; the carrier is not involved.

A shipping guarantee comes earlier, when there are no documents to release. The bank lends its name to the carrier instead, and its risk includes a third party, the holder of the original bill, whom it does not control. The two often appear in sequence on one shipment: a guarantee to get the goods off the ship, then a trust receipt or a trade loan to carry them until they are sold.

Where the trade allows, the need can be removed. A sea waybill needs no surrender, and a bill surrendered at the port of loading can be released to the carrier's destination office by message. Each spares the guarantee and gives up the control an order bill offers a lender.

DEFINED IN ONE PARAGRAPH → · THE BILL OF LADING → · TRUST RECEIPTS →

A shipping guarantee is an exposure the bank books like any bank guarantee, against the importer's limit, and keeps open until the guarantee comes back. The questions in the file are short. How will the original bills reach the carrier, and through whose hands? What cap and term does the document carry? Has the importer agreed to take up the documents whatever their condition? And is there a clean record of returned guarantees?

The last question is where portfolios surprise. A guarantee that was not returned because a bill went astray stays live for its term, and an importer with several such guarantees outstanding carries liabilities its accounts may not show. Matching outstanding guarantees against surrendered bills is routine work that keeps old cargo claims from hiding in a small trade facility.

PRODUCT FILE: BANK GUARANTEE → · PRODUCT FILE: TRADE LOAN →