SHIPPING GUARANTEE

Now a days Shipping Guarantee’s are very common among importers due to the advancement of
transport system and cargo handling procedures. As a result vessel reach their intended
destinations before documents reach the importer In such circumstances importers are anxious
to clear the goods to avoid

1. Paying demurrage.
2. Reduction of market share due to a competitors penetrating to the market before them. In
case of seasonal imports, delay in clearance will reduce the marketability of the goods
imported.
3. Possible damages to perishable and sensible goods.
4. Financial losses. (Where goods have been financed, capital tied up in stocks which will
restrict further borrowing and increase interest to be paid to the financiers).

I Will take this opportunity to explain what is a shipping guarantee, features in it, bank exposure
and steps to minimize the risk.

In an trade transaction where goods are to be transported from one port to another the usual
practice is for shipper to handover the consignment to a shipping agent who will first arrange the
transport and then issue a transport document based on the mode of transport and the terms
agree. Some of transport documents that may involve are

1. Marine ocean bill of lading

Shipping guarantees are concerned with only the sea shipped goods covered by a transport
document that qualifies as a marine ocean bill of lading that is a document that also serves as a
document of title. Marine ocean bill of lading is legal documents whose properties and features
are well defined and universally accepted and subject to various international conventions and
statutes. In Sri Lanka applicable law in this regard is carriage of goods by sea act no 21 of 1982.
In addition to the common features of transport documents (receipt of goods, contract of
carriage) the bill of lading differ from other transport documents due to the fact that it is a
document of title which also gives it certain features of negotiability (as applied to bill of
exchange). Whoever holds the bill of lading have a legal claim on the goods represented by it
under certain circumstances. (when issued to order). In case of goods not covered by marine
ocean bill of lading, clearance of cargo does not pose many problems. Such documents are not
document of title or negotiable and there is no legal requirement to surrender them to obtain
goods. If goods are consigned direct to the buyer, he can obtain the goods merely by proving his
identity to the shipping agent. In such circumstances shipping agents responsibility does not go
beyond the identification of delivery party mention in the copy documents received by them.

As stated above marine bill of lading is a document of title and the legal holder of the document
is the rightful holder of the goods represented in it. Due to its property of negotiability ownership
can be transfer from one party to another by mere endorsement and delivery. (in case of B/L
issued to order) Therefore only the holder of the B/L has a legal claim for the goods represented
by the B/L and the shipping agent cannot release the cargo until the original B/L is surrender to
them in exchange for goods. In case the shipping agent delivers the goods without obtaining a
B/L they are liable to the true owner who holds the original B/L for wrongful delivery of goods.

1
Copyright Trade Finance Association of Bankers - Sri Lanka - All Rights Reserved.
In the event of goods reaching the destination before the receipt of original documents by the
buyer the original B/L is not available to the buyer to clear the goods. In such circumstances
shipping agent may release cargo in the absence of original B/L provided they are indemnified
against all consequence that may follow as a result of delivering goods without surrendering the
original B/L. By issuing shipping guarantee bank take up the entire risk upon itself by agreeing to
compensate the shipping line up to 300pct of the invoice value of the cargo release against the
shipping guarantee.

We are aware that shipping agents are under no obligation to deliver the goods unless the
original B/Ls submitted. Therefore they are in a strong bargaining position when it comes to
acceptance of a shipping indemnity (shipping guarantee). In these circumstances shipping
agents dictate terms to the bank to make shipping guarantees acceptable to them. Some of such
terms are

1. It should be in a format acceptable to them. (shipping lines usually insist banks to use the
forms issued by them)
2. Cover should be up to between 150 — 300 pct of the invoice of the goods.
3. It should be open ended (There is no expiry for shipping guarantee)
4. Claim need not be supported by any other document. Payable simply on demand.

Therefore shipping agent is in a position to claim up to 300pct at any time by simply on demand
to the bank until the shipping guarantee is cancelled by surrendering the original B/L.

FOLLOWING GUIDELINES MAY HELP BANKER’S TO REDUCE THE RISKS INHERENT IN

1. Shipping guarantee is a legally binding document and issued on a format required by the
shipping agents. Therefore the officers involve in issuing S/G must take extra care to ensure
that format issued does not contain clauses that may have adverse effect to the bank. If the
officer concerned is in a doubtful position legal opinion must be sought.

2. When issuing shipping guarantee banks require two signed commercial invoices (Performa
invoice is not acceptable) relating to the shipment. It is common among customers to submit
fax copy of the commercial invoice or a the fax invoice. When photocopies are submitted.
issuing officer of the bank must satisfy himself that they appear genuine on their face. IF any
unauthorized alterations are visible they must be clarified.

3. Banks remain liable under S/G issued by them to honour claims made under it. This liability
ceases only after the cancellation of S/G by surrendering the original bill of lading. Therefore
banks normally issue S/C’s only under the letters of credit established by them to ensure that
the original documents will be routed through them. In case of collection transactions, banks
have no assurance that the original documents will be routed through them. However it is
customary for bank to issue S/C’S under collection transactions for their valued customers at
its own discretion on a case by ease bases depending on its merits. Usually it is done against
110 pct cash margin. This is banks decision depending on the relationship with the customer
and any other collateral provided by him.

4. As discussed, outstanding S/G’s are liabilities to the bank and payable at any time the
demand is made. Therefore S/G outstanding for unreasonable time should be actively follow
up. Any shipping guarantee outstanding for more than 14 days may be considered as
unreasonable and should be followed up with the customer. At the time of granting S/G
following data should be noted in a register for the following up purposes.

2
Copyright Trade Finance Association of Bankers - Sri Lanka - All Rights Reserved.
 1. Name of the Seller
2. Invoice No
3. Invoice Amount

4. Shipping Line
5. Name of the Vessel
6. In addition, additional invoice may also be retained

5. The bill related to an S/G should be for an identical amount. And disparity indicates that
the customer has submitted forged invoice. If customer has submitted under value
invoice to obtained S/G he has committed an offence under the exchange control
regulations.

6. When the S/G S are issued under a letters of credit, it is deemed that the customer has
accepted all discrepancies. How ever in case where the original documents are received
with out bill of lading such descriptions should not be waived and remittance should not
be made unless the original bill of lading is included.

Bankers have experienced damages, losses and undergone hardships due to lack of know
how and not following accepted practices developed by them on their own experiences
during the past. Therefore I believe this write up will provide some assistance to identify the
risk involve and to mitigate them.

V. G. L RAMALAL
PEOPLES BANK- TRADE SERVICE
CORPORATE BANKING DIVISION

3
Copyright Trade Finance Association of Bankers - Sri Lanka - All Rights Reserved.