Use of transport documents with letters of credit

TRANSPORT DOCUMENTS

The transport document is issued by the “Carrier” whether a
shipping line, airline, trucking company or railroad. They come in
various forms and each serves several, but not necessarily all of
the following functions:

1) Receipt for the goods, evidencing loading, dispatch, or taking
in charge and indicating the general condition of the goods
received.

2) A contract for carriage between the shipper and the carrier

3) An invoice from the carrier for charges.

4) A negotiable document exchangeable for money, allowing
goods to be sold in transit.

5) A document of title representing ownership of the goods,
which will only be released by the shipping company against
presentation of a signed original document.

Only one transport document, the negotiable bill of lading serves
all five functions.

For the exporter, selling on a letter of credit or documentary
collection basis, the last two functions are the most important. A
negotiable title document means that the buyer can only obtain
the merchandise if he surrenders an original bill of lading to the
carrier. On L/C or D/P collection sales, where documents move
through the banks, the buyer must first pay the bank for the bill
of lading or signs a promissory note in the case of a D/A
collection. Only then will the bank provide the bill of lading.

Negotiable bills of lading come in two forms:

1) Marine bills of lading convey title to the goods and are
negotiable title documents when issued “TO ORDER”. This would
be expressed in the Consignee block on the B/L as “TO ORDER
OF SHIPPER”, “TO ORDER OF ABC BANK” or “TO ORDER OF
123 COMPANY”. When shipment is made with an order B/L, the
buyer only gets the merchandise after he surrenders an original
B/L to the carrier. All other copies marked “Original” then
become void.

Note: If an export L/C calls for the B/L to be consigned to the
buyer or for 1/3 original B/L to be sent directly to the buyer. The
buyer will obtain the merchandise and if the L/C documents
contain discrepancies the buyer may refuse payment to the
beneficiary even though he already has the goods.

Less common is the “straight consigned” marine bill of lading
which does not convey title and is not negotiable. As such, the
buyer does not need an original to obtain the merchandise from
the carrier. This negates the utility of the letter of credit and
documentary collection.

2) Multimodal bills of lading are used when two or more forms of
transport are involved from place of receipt to place of delivery.
In all other respects they are the same as marine bills of lading
and may be issued either in negotiable or straight form.

Non-negotiable transport documents are described below:

Charter Party bills of lading are contracts between the ship
owner and the chartering party under which the vessel is put at
the disposal of the charterer. They are not acceptable under the
UCP 600 unless specifically authorized in the letter of credit.
Sea Waybills are not negotiable. They simply evidence that
goods are on the way and should only be used when title and
payment/financing are not issues. Their function is contract,
receipt, and invoice as discussed earlier.

Air Waybills are never negotiable. They are always straight
consignments even if “TO ORDER” is typed in the Consignee
block. Not being a title document, but merely a receipt for
shipment, the importing buyer can pick up the merchandise at
the airport simply by providing proper identification to the carrier.
When a letter of credit or documentary collection is used, how
does the exporter prevent the buyer from getting the
merchandise without paying for it? Answer: The Air Waybill
consignee should be listed as the buyer’s bank. The bank will
transfer the goods to the buyer through an “Air Release”, but
only after the buyer has paid or obligated himself to pay for the
merchandise. Air Waybills should only be consigned to the order
of the buyer’s bank with that bank’s permission.

Truck and Rail Waybills are both receipts for goods, contracts for
carriage and invoices. They are always straight consignments,
never negotiable, and should only be used when the exporter is
prepared to allow the buyer to take possession of the
merchandise irrespective of payment being made.

Courier & Postal receipts are always addressed to a specific
consignee, are not negotiable, and should only be used if getting
paid is not a consideration. They are basically delivery
instructions for a specific consignee at a specific address. Almost
all banks will refuse to accept a parcel consigned to them.
Shipments by courier or post should only be consigned to a bank
if that bank’s L/C so instructs or if the bank has specifically
authorized delivery to them under a documentary collection.

Forwarding Agents Certificates of Receipt or Transportation
(FCR/FCT) are not transport documents. They do not evidence
shipment of the goods; they only show their receipt by the
forwarder.

Summary

When the payment method is letter of credit or documentary
collection, make sure the appropriate transport document and
consignment are used. Otherwise, the unfortunate situation may
arise where the buyer obtains the merchandise and never pays
the seller. Remember, under a waybill all a consignee has to do
to secure delivery is to identify himself to the carrier as the
manifested consignee and claim delivery. Documentation (other
than proof of identity) is not required.

Always consult with your freight forwarder about the nuances of
transport documents and the relationship of payment versus
control of goods in international shipments.