Rain letters of indemnity – guidance for shipowners and charterers

This article was co-written by Ben Lim, senior associate in the marine, trade and aviation team.

‘Non-standard’ letters of indemnity

The aim of this article is to provide some guidance relating specifically to rain letters of indemnity (LOIs): their wording and potential scope, the shipowner’s entitlement to rain LOIs, and the charterer’s obligation to provide them.

Shipowners and charterers everywhere are familiar with LOIs, particularly the International Group (IG) ‘standard form’ LOIs applicable in three specific situations:

1. LOI requested/given in return for delivery of cargo without production of an original bill of lading (‘Int Group A/AA LOI’);
2. LOI requested/given in return for delivery of cargo at a port or place other than that stated in the bill of lading (‘Int Group B/BB LOI’); and
3. LOI requested/given in return for delivery of cargo at a port or place other than that stated in the bill of lading and without production of an original bill of lading (‘Int Group C/CC LOI’).

Both shipowners and charterers are also likely, however, to encounter ‘non-standard’ LOIs. One such ‘non-standard’ LOI is the LOI requested/given in return for loading/discharging cargo under conditions of rain (the so-called ‘rain LOI’).

The rain letter of indemnity

The purpose of a rain LOI is twofold. It is, firstly, a request by charterers to shipowners to continue loading or discharging weather-sensitive cargo under conditions of rain. Secondly, in consideration for shipowners complying with this request, charterers thereby agree and commit to indemnify shipowners against damages, expenses and other consequences (including vessel arrest) due to wet damage of cargo caused by or arising from their request.

Rain LOIs serve these purposes because shipowners are usually the contractual carriers of cargo carried under bills of lading signed by or for and on behalf of the master. This means that when cargo damage claims arise, they are made directly to shipowners from cargo interests. If the nature of the cargo claim is wet damage resulting from rain, then shipowners (who face primary liability towards cargo interests) will have recourse against their charterers under the terms of the rain LOI for a full indemnity to cover their primary liability towards cargo interests.

Lastly, charterers provide shipowners with rain LOIs to prevent disruptions to loading and discharging and to enable operations to continue unabated even during periods of rain in order not to lose time.

Does the charterparty stipulate for a rain LOI to be provided to shipowners?

If the answer to this question is yes, then shipowners are entitled to a rain LOI as a matter of contract, and charterers would then be obliged under the charterparty to provide one.

Even here, because the scope of a rain LOI is prescribed and limited by its very wording and its construction, it is worth highlighting the following points to avoid some potential pitfalls when drafting and negotiating rain LOI wording, whether pre- or post-fixing.

• Some rain LOIs are worded simply to request and indemnify shipowners for loading/discharging under conditions of ‘rain’. The obvious point here is that wet damage to weather-sensitive cargo does not arise solely from rain. A whole host of other possible types of precipitation – snow, hail and even sleet may be as injurious (or even more so) to certain types of cargo as rain. A rain LOI requesting and indemnifying shipowners for loading/discharging simply in ‘rain’ may preclude its application when other forms of precipitation are relevant. It would therefore be prudent when drafting and negotiating the wording of a rain LOI to include a request to load/discharge under conditions of not just ‘rain’, but also ‘…snow, sleet, hail and other forms of precipitation’, just to be safe and cover all bases. However, if it is obvious that cargo operations will be performed in areas and/or during seasons where only rain is expected (eg in tropical ports, during summer months), then simply stating ‘rain’ may suffice.
• In addition to wording requesting and indemnifying shipowners for permitting loading/discharging in ‘rain, snow, sleet, hail and other forms of precipitation’, it is worth considering adding the words ‘…or impending/threat thereof’. There have been situations where shipowners refuse to continue with loading cargo when the rain or other precipitation is not yet over the ship (and may not actually materialise over the ship), but when weather forecasts or the master’s assessment reveal impending (or the threat of) rain or snow. Such wording will serve to make it absolutely clear that cargo loading/discharging is to continue even when there is not yet any precipitation over the vessel, but merely a threat of precipitation, or impending precipitation (which may or may not materialise).
• Some rain LOI wording (in particular relating to grain cargo) can apply only in situations of ‘light rain’. This would preclude loading/discharging cargo in situations of heavy rain – when shipowners are entitled to suspend cargo operations. It is not difficult then to expect that shipowners and charterers may have different, indeed diametrically opposing, views as to what amounts to ‘light rain’ (would a drizzle, or passing showers count, for example?) with the result that shipowners tend to err more to the side of caution (eg suspending cargo operations when the rain starts getting heavier than a drizzle) and charterers sometimes pushing the boundaries (insisting that cargo operations continue in that same situation). When does ‘light rain’ cross the line to become heavy rain thereby making such a rain LOI inapplicable? This is a completely factual enquiry and is likely to depend on what is typical at the loading or discharging location.
• For charterers, it is critical that the adverse consequences of cargo damage that are indemnified under a rain LOI be restricted to wet damage and, further, such wet damage being freshwater wet damage and not seawater wet damage. Simply stating ‘cargo damage’ in a rain LOI wording without further specifying ‘wet damage’ may expose charterers to shipowner’s indemnity claims for cargo damage which have nothing to do with precipitation. Simply stating ‘wet damage’ without further specifying ‘freshwater wet damage’ may expose charterers to shipowner’s indemnity claims for cargo wet damaged by seawater ingress (which fall under the shipowner’s responsibility).

Whether the charterparty provides for a rain LOI depends entirely on commercial negotiations and the relative bargaining power of the parties. This is especially so if shipowners have the upper hand and another competing charterer(s) would be willing to fix with shipowners on charterparty terms that provide for a rain LOI to be given. When agreeing to provide a rain LOI in the charterparty it is always preferable that the wording is agreed pre-fixture and expressly stated.

When the charterparty does not stipulate for a rain LOI

When the charterparty is silent on the subject of a rain LOI, then shipowners are not entitled to one as a matter of contract, and charterers are not obliged to provide one.

In such instances, this is a useful guide to follow to guide decision-making as to whether or not to request/provide a rain LOI:

1. consult the latest edition of the International Maritime Solid Bulk Cargoes (IMSBC) Code or the International Code for the Safe Carriage of Grain in Bulk (for grain cargo);
2. check the section containing the relevant cargo being carried. This is usually a straightforward exercise (eg standard names for coal, cement, gypsum), but sometimes it is not (eg blast furnace slags which are carried under different non-standardised names); and
3. check under the column ‘Weather precautions’.

For example, for gypsum and diammonium phosphate, two common cargoes carried in bulk, under ‘Weather precautions’ the IMSBC states:

‘This cargo shall be kept as dry as practicable. This cargo shall not be handled during precipitation. During handling of this cargo all non-working hatches of the cargo spaces into which this cargo is loaded or to be loaded shall be closed.’

In these cases, shipowners would be within their rights to request a rain LOI and charterers should provide one. Negotiations between parties on the wording would then follow, keeping in mind the various pointers and pitfalls discussed in the previous section.

In another example, for iron ore, another common cargo carried in bulk, under ‘Weather precautions’ the IMSBC states: ‘No special requirements.’

In this case charterers can justifiably reject a shipowner’s request to provide a rain LOI, although the charterer’s final decision to provide one may be guided by commercial considerations. Indeed, any decision to issue or request a rain LOI is usually guided by commercial considerations (eg how close parties are, history of commercial dealing between parties, state of the market, etc).

Concluding remarks

LOIs (of which the rain LOI is a sub-type) are a practical and useful tool to progress time-sensitive matters in the shipping business, where every minute counts. Born out of commercial necessity and sheer practicality, they assist parties greatly in being able to short-circuit what would otherwise be lengthy documentary or operational processes. However, the advantages that they offer do not come without risks.

It is useful to always bear in mind that although LOIs may be related to the charterparty, an LOI stands as a contract of indemnity independent of, and separate from, the charterparty. It provides the shipowner with an independent and separate cause of action against the charterer in addition to his rights under the charterparty, which remain undisturbed.

A second important note is the usual caveat that the use of LOIs may prejudice club cover. Under the rules of every IG P&I club, cover is invariably discretionary when LOIs are issued/accepted, even in the case of the IG ‘standard form’ LOIs discussed at the beginning of this article, and equally in the case of rain LOIs.

Therefore, the creditworthiness of the party giving the LOI would often be the only thing that can be relied on by the party accepting the LOI (in place of P&I club cover). For good and effective risk management, both shipowners and charterers must ensure that their LOI counterparty is good for the money and good for their word, otherwise they might find that the LOI they have in hand is not worth the paper it is printed on.