Shipping Guarantee

A shipping guarantee is an undertaking by a bank, given to a shipping line or its agent at the port of discharge, that allows an importer to collect goods without presenting the original bill of lading. The bank promises to indemnify the carrier against any loss it suffers from delivering the cargo to someone who cannot produce the original document, and the importer promises to hand over the original as soon as it arrives.

The product exists because goods often travel faster than paper. On short sea routes, such as many within Asia or the Gulf, a vessel can reach port days before the documents have passed through the banking chain under a letter of credit or a documentary collection. A shipping guarantee is a bank-backed form of the carrier's standard letter of indemnity, and it is mostly issued by the importer's own bank, very often the issuing bank of the related credit.

Think of collecting a parcel from a depot that only hands it over to someone holding the pickup slip. The parcel has arrived, but your slip is still in the post. The depot will not take your word for it, because if someone else turns up later with the real slip, the depot would be liable to them. So your bank writes to the depot: let our customer take the parcel now, and if anyone else claims it later, we will cover your loss.

The importer gets its goods on time and avoids storage charges. The carrier is protected by a bank's promise rather than a stranger's word. When the real slip finally arrives, the importer hands it to the depot and the bank's promise is cancelled.

1. The vessel arrives and the carrier's agent issues an arrival notice to the consignee or notify party, but the original bills of lading are still with the banks.
2. The importer asks its bank for a shipping guarantee, supplying a copy of the bill of lading and the commercial invoice, and signs a counter-indemnity in the bank's favour.
3. The bank checks that the shipment matches a transaction it is financing or handling, issues or countersigns the guarantee on the carrier's form, and gives it to the carrier.
4. The carrier releases the cargo. When the original documents reach the bank, the importer pays or accepts as required, the original bill of lading is surrendered to the carrier, and the carrier returns the guarantee for cancellation.

When the shipment is under a letter of credit, issuing a shipping guarantee changes the importer's position. Having taken the goods, it can no longer realistically refuse the documents, so banks require the importer to waive in advance any discrepancies the documents may contain and to authorise payment regardless. In effect the importer gives up the main protection of a documentary credit in exchange for speed. Under a collection, the presenting bank usually issues the guarantee only for a customer it finances, because the bank does not hold title to the goods and depends on the importer's willingness to pay when the documents arrive.

The bank's comfort usually comes from the document of title it will later receive, from collateral or a cash margin, or from treating the guarantee as a utilisation of the importer's credit line until the original bill is surrendered.

• Open-ended exposure. Carrier forms often have no amount limit and no expiry date, because the carrier's possible liability, for example to a bank that later presents an order bill of lading, is not known in advance. Some guarantees are capped at a multiple of the invoice value, but many are not.
• Lost or misdirected originals. If the original bill of lading is never surrendered, the bank remains liable until the claim period has passed, which can be years.
• Fraud. Fraudsters have used shipping guarantees to obtain goods that were already pledged to another bank, so issuing banks verify the shipment and the importer closely. The protection and indemnity (P&I) clubs that insure shipowners generally do not cover delivery without production of the bill of lading, which is why carriers insist on a bank countersignature.

Several practices remove the need for a shipping guarantee. The seller can arrange a bill of lading surrender at the load port, so the carrier releases goods on instruction, or use a sea waybill, which is not a document of title and needs no original at destination. Both remove the bank's control of the goods, so they suit open-account trade better than a credit. An electronic bill of lading can travel as fast as the ship. Shipping guarantees remain common where paper bills of lading and short voyages coincide, and they help importers avoid demurrage and port storage costs.

• International Chamber of Commerce
• BIMCO