An underestimated letter of guarantee

A South American port agent acted for a ship that discharged a bulk cargo at his port. There was a cargo shortage in an amount that exceeded the customs allowance, which meant that there would be customs duty and possibly a fine to pay.

As is quite common in South America under local law the agent has a joint and several liability with the carrier for customs claims. Therefore, before the ship sailed, the agent took the precaution of obtaining a letter of guarantee from the ship owner’s P&I Club. In due course, the customs authorities imposed customs claims in the amount of US$ 113,250.

The P&I Club appointed lawyers to defend the customs claim, but lost in court some six years later. In the meantime the ship had been sold, and the P&I Club therefore disinstructed the lawyer and was only willing to contribute the amount of the letter of guarantee to the settlement. Unfortunately, the agent had underestimated the potential claim, and had only obtained a letter of guarantee for US$ 63,000. In view of the lengthy legal proceedings, the customs authorities had also added interest of US$ 43,314. This meant that the agent was found liable for the additional US$ 50,250 not covered by the P&I Club letter of guarantee plus the interest - a total of US$ 93,564. This amount was reimbursed by ITIC.