The Invisible Article – 2.0
My previous blog post included the following statement:
Such requirement is not helpful – rather: it is destructive!
Why not say: “Bill of Lading” or perhaps even better: “Non-negotiable sea
waybill?”
One may question why the “Non-negotiable sea waybill” is
mentioned in this context. Or taking it one step further: On many occasions I
have mentioned the Non-negotiable sea waybill. In these cases I refer to my
article “The Invisible Article” and the book where it can be read. So I find
it most fair to re-publish that particular article, so that it can be read free
of charge. So below is the article … and even in a new version, where it has
been updated to UCP 600. I hope you enjoy it:
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The Invisible Article – 2.0
by Kim Sindberg 2013
Kim Sindberg explains why non-negotiable sea way bills
covered under UCP 600 Article 21 are rarely called for under LCs, what their
benefits are, and how trade can be simplified by using them rather than
negotiable bills of lading.
It would have been interesting to be able to read your
thoughts, when your read the headline on this article. Was it:
1. “oh no – he must mean Article 20 – typical!” or
2. “what is Article 21 exactly – have to check” or
3. ‘the non-negotiable sea waybill’?
I bet that a clear majority of readers would have answered 1
or 2 while only few would have said 3; the latter of course is exactly right.
The purpose of this article is to discuss the non-negotiable sea waybill
(NNSW), which is covered by UCP 600, Article 21. I call it “The Invisible
Article” because it seems that – even though it may indeed be relevant in many
situations – no one is able to find it; or more precisely: it is practically
never used in LC transactions.
The NNSW and the UCP 600
The Non-negotiable Sea Waybill was introduced in UCP 500. In
what you may refer to as “the bright light of hindsight,” it is very
interesting to read the comments in “UCP 500 & 400 Compared”(1):
‘This is a new article to reflect the NC’s comments on the
need for individual transport articles to address the non-negotiable sea
waybill.’
And
“There has been an increasing commercial trend towards the
use of the non-negotiable sea waybill…”(2)
No doubt the introduction of this article was based on facts
and apparent “market need.”
The NNSW is a document that is being used more and more out
there in the real world, and consequently there should be a UCP article to
cover it!
It is, however, fair to say that even if one accepts the
argument above (and I see little reason not to), then the life of UCP 500
Article 24 and today UCP 600 article 21 has so far not been successful at all.
I have never seen any statistics, but it is my clear impression that this
document simply is never required in LCs!(3)
This is also the impression you will get if you look at
additional ICC publications: I have not been able to find one ICC opinion the
deals exclusively with UCP 500 Article 24 or UCP 600 article 21. The closest I
could find was R.285/TA.29 which was a “combined Article 24 and Article 26
(multimodal) question.”
In all fairness it must be mentioned that the NNSW have
finally found its way into the ISBP. ISBP 745 includes paragraphs describing
the practice regarding NNSW (Although one may argue that there hardly is any
practice).
And so it is clear: for one reason or another no one seems
to notice Article 21.
UN and the Rules for NNSW
Before going further into the reasons that may provide the background for this lack of interest in Article 21, I will draw the attention to a document issued by UN/CEFACT: “Recommendation 12/Measures to Facilitate Maritime Transport Procedures.”(4)
One purpose of this document is to agitate for the use of
the NNSW. The overall recommendation is that the NNSW should be used in all
cases “except in cases where it is intended that the goods will be sold in
transit, or where there is a strong and valid case for independent documentary
security.”
In LC transactions the report states that “Removing the
negotiable transport document from the vast majority of international maritime
transport movements could have a beneficial effect on Documentary Credit
procedures.” The document even goes as far as to argue that the absence of the
bill of lading (“a complicated document of title”) “could result in a significant
reduction in the rejection rate.”(5)
In any case the report argues strongly that a document
according to UCP 500 Article 24 (now UCP 600 article 21) is just as good as one
according to Article 20 (Bill of lading). The only “but” is the question of “passing
control and ownership of the goods to the buyer.”
I am sure that sellers, buyers, and bankers reading this
consider this a significant issue. There are, however, ways around it, as will
be discussed later.
What may also be interesting to touch on are the rules
governing the NNSW. These are called “CIM Uniform Rules for Sea Waybills.” In
these rules there are a couple of issues that may be of interest to the LC
banker considering using Article 21:
First of all, there is one “discrepancy” if the CIM rules
are compared to UCP 600 Article 21.
Article 21 is almost identical to Article 20 (bill of
lading), which means that it is a so-called port-to-port document, whereas the
CIM rules indicate that they covers a carriage “which is to be performed wholly
or partly by sea.”(6) This latter is therefore a multimodal transport – with
the twist that, at least one leg of the transport must be performed by sea.
Second, Rule 6 “Right of Control” is relevant. From this it
follows that the default rule is that the shipper has the right to control the
goods until the consignee is claiming delivery.(7) This may of course be
unfortunate in LC transactions, as the seller may (in theory) utilize this
right, after presentation of the documents under the LC.
It is however possible for the shipper to transfer the right
of control to the consignee.(8)
The introduction to the rules states that “Paragraph (ii)
relates to the shipper’s transfer of control to the consignee. The problem of
how this option should be exercised was discussed but no changes made.” The
important element is that it is possible to transfer the right of control from
the shipper to the consignee.(9)
I may be misinterpreting the UN/CEFACT document, but I sense
an almost hostile tone towards the banks and the LC instrument, which I do not
quite understand. That set aside, I must say that I support the purpose: To
facilitate the NNSW being used more often – and actually more often than the
traditional bill of lading – and also in LC transactions.
Identifying the problem
So what is the problem? Why is it that no one seems to be
able to find Article 21?
Most likely there is not one problem, but a number of
problems. Let me address some of them:
The LC and the B/L is Like Hand in Glove
I once chaired a debate on transport documents in the UCP at
the Danish Chamber of Commerce. I asked the audience if they used the NNSW. Not
surprisingly the answer was “no.” The reason given was that “this offers no
security,” that is, the goods are just being delivered to the buyer and that’s
all. I then asked: what about the air waybill – or for that matter the CMR
consignment note? I must admit that I was surprised by the answer: “Those
should not be under LC transactions either. Only the negotiable bill of lading
should be under the LC, as it carries ownership to the goods – so when the
documents are paid for and delivered – ownership of the goods is passed on.”
The reason the answer surprised me is that I often see LCs
calling for air waybills and CMR consignment notes (not at the same time of
course). It goes without saying that there are some elements for the parties to
consider; e.g., access to goods, collateral – that sort of thing. To me,
however, the problem has been to find out the intention of the parties, and
(perhaps) how important a lien is. If the goods are an important element in
determining whether to issue the LC or not (for the issuing bank), then a
common practice is to consign the goods to the issuing bank. That would in any
case prevent delivery of the goods to the buyer before the buyer has paid under
the LC.
Thus there is no doubt that the bill of lading is a good
match for the LC, but that does not rule out other options.
… If Goods Are to Be Sold While at Sea …
When you ask buyers and sellers why it is that they ask for
a negotiable transport document, you will often get the reply that it is
possible that the goods are to be sold while at sea. When you then ask how
often that happens, by far most companies will reply: hardly ever.
I would suggest that, before goods are shipped, buyers and
sellers have a pretty good idea whether ownership of the goods is to be
transferred to third parties while at sea. In most transactions it will not;
while in others, it happens almost every time, such as in oil transactions.(10)
The bottom line is that the argument that a negotiable bill
of lading must be used because the goods may be sold while at sea is simply not
valid – as the parties know beforehand if this is to be the case or not.
We Used To
Another argument you may meet is that “we used to do it like
this and do not want to fix what isn’t broken.” To some extent I can understand
that argument, but it does not really drive innovation. One should also
consider the risks involved. The argument above by UN/CEFACT that the bill of
lading is a “complicated document” is not at all wrong. If everything goes as
planned, then there is no problem. But if something does go wrong, then it may
not be the easiest problem to fix. For example, if the full set of original
bills of lading is lost in the mail, then usually the only way for the buyer to
get the goods is to persuade his bank to issue a shipping guarantee. Such is
often without amount and expiry date. If a NNSW is lost in the mail, then the
goods will still be released to the stated consignee.
The way forward
The way forward is extremely simple – and obviously very
hard. It is just a matter of doing it – but apparently no one is. So first of
all a humble request: For buyers, sellers, and bankers requiring a negotiable
bill of lading under an LC, please consider carefully if it is really
necessary, or if something else – like the NNSW – could be considered for the
specific transaction. And before you argue that this does not provide the same
“security:
1: for the LC bank; that they loose ‘control’ over the
goods,
2: for the seller; that goods may be delivered to the buyer
before payment, and
3: for the buyer; that goods may be re-routed by the seller,
and the buyer will still have to pay because LC compliant documents are
presented,
let me suggest a practical way forward:
1. Make sure that the NNSW is consigned to the issuing bank,
and not to the buyer (LC applicant) – just as happens so often in air
shipments. That way there is no risk that goods can be automatically released
to the buyer, as this will require a “release of goods” by the issuing bank,
which of course is not made until the documents are accepted.
The LC requirement could be something like:
“Non-negotiable sea waybill issued to bank XX [issuing
bank], showing Company YY [LC applicant] as notify party, marked freight ZZ
[collect / prepaid]”
2. Make sure that the shipper transfers the right of control
to the consignee (issuing bank) to prevent a situation where the seller (LC
beneficiary) is paid under the LC and afterwards utilizes his right to have
control over the goods, for example, to nominate another consignee.
Bimco has suggested the following wording (which of course
also should be a LC requirement):
“I, the Shipper (named in the Shipper Box on the face of
this Waybill) hereby transfer the right of control to the cargo carried under
this Waybill to the consignee (named in the Consignee Box on the face of the
Waybill).”
In my view this would satisfy most of the LC transactions
where a negotiable bill of lading is required today.
Conclusion
If has been said that the negotiable bill of lading is the
main obstacle to making the entire LC process electronic. It goes without
saying that there are more obstacles than that, but nevertheless if it is
possible to “remove” the bill of lading, a major obstacle has been removed!
I will conclude this article, not just by making strong
argument in favour of the NNSW, but also in favour of “free thinking”; that is,
that when a ‘transport document’ is chosen for a specific deal, then it should
be the one that fits the deal best and not the one that the parties used to
choose.
I would argue that the bill of lading is too complicated in
many cases, but it also goes without saying that, in others, the NNSW is too
simple.
Albert Einstein once said that: “Everything should be made
as simple as possible, but not simpler!”
Exactly the same applies for trade – and the choice of
transport documents.
Endnotes:
(1) ICC Publication No. 511. Edited by Charles del Busto.
Comments on Article 24 are on page 72.
(2) It is also interesting (in the light of the discussion
about B/L clauses creating confusion about delivery with or without the
original B/L) to note that the comments clearly consider the NNSW not to be a
traditional bill of lading or document of title, but a waybill allowing the
goods to be delivered to the consignee upon proof of identity. Nothing in the
UCP 500 – except the name of the documents – makes the distinction.
(3) In this connection also refer to The UNCTAD report : The
Use of Transport Documents in International Trade, November 2003 (search
UNCTAD/SDTE/TLB/ 2003/3 to download the report). This report indicates that the
great majority – 88% – use negotiable bills of lading – but 51% also use
non-negotiable sea waybills.
(4) Document CEFACT/2004/IT022, 26 November 2004. Prepared
by the International Trade Procedures Working Group (ITPWG)
(5) Unfortunately the document does not offer further
arguments for this statement, which from a UCP point of view seems strange;
simply because article 23 (Bill of lading) and 24 (NNSW) are almost identical –
title of articles excluded of course.
(6) Rule 2; Definitions.
(7) This is reflected in Rule 6 (i).
(8) This is reflected in Rule 6 (ii).
(9) Again it is fair to refer to The UNCTAD report: The Use
of Transport Documents in International Trade, November 2003 (search
UNCTAD/SDTE/TLB/2003/3 to download the report). On page 13 the ‘control clause’
is discussed. The conclusion is, that due to little litigation this clause has
never been tested, so it is ‘not entirely clear to which degree clauses of this
kind achieve their objective.’
(10) This is interesting indeed, as it seems that the bill
of lading is almost ‘designed’ to cover oil transactions. In real life it is
unfortunately so that the agreements travel faster than the bill of lading, for
which reason a number of LOI’s (indefinable guarantees often without maximum
amount and expiry) are issued.
Kim Sindberg is Trade Finance Consulatnt at Sindberg Consult
His e-mail address is kim@kimsindberg.com
More information: www.kimsindberg.com
Note that version 1 of this article has been published in:
* LC Monitor March/April 2006 Volume 8, Issue 2
* The book “UCP 600 Transport Documents” (2012, ISBN
978-1-888870-54-1) Page 129+
* The book “From Beginning to Beginning – Trade Finance
Articles from 2003 to 2011” (2012, ISBN: 978-87-7114-551-9) Page 138+
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Have a nice weekend and take care of each other and the LC!
Kim