The Use of Transport Documents in International Trade

The Role and Function of Transport Documents in International Trade

International sale of goods, i.e. the sale of goods across national borders, poses different challenges to sales in a domestic environment. Sellers and buyers are typically located in different countries and the goods sold are often not in the physical possession of the seller, but in the hands of a third party, possibly in yet another country or on board a vessel. Invariably, international sales involve transportation of the goods, often over large distances. This means that either the seller or the buyer needs to make arrangements relating to the transportation and insurance of the goods sold. Above all, both parties to the sale contract need to perform their respective main obligations, that is, the delivery of goods in accordance with the contract (seller) and payment of the agreed price (buyer), while at the same time seeking to ensure contractual performance by the other party. Sales on shipment terms, such as CIF and FOB5, have evolved to enable the international sale of goods to be performed, to a considerable extent, by way of documentary means, i.e. by the tender of documents in exchange for payment. Often, banks play an important part in this process as payment under a letter of credit provides added security to both buyer and seller.

Although no uniform international law exists to define the characteristics and effects of different transport documents, the relevant rules, having been established by the custom of merchants, appear to be remarkably similar in most jurisdictions. 

Negotiable Bill of Lading

Traditionally, the so-called "negotiable bill of lading", issued by a carrier upon shipment of goods, has played a key role in international trade, as it fulfils a number of functions facilitating trading in an international environment. First, it operates as a receipt providing evidence that goods conforming to the contract have been shipped as agreed and are in the physical possession of the carrier for delivery to the consignee at destination. This evidentiary aspect of the document is important, both as between seller and buyer, in relation to obligations under the sale contract, and as between a potential cargo-claimant and the carrier, should goods be lost or damaged during transit. Secondly, the bill of lading contains or evidences the relevant terms of contract with the carrier. Where goods are lost or damaged in transit or are short delivered, these terms are the basis on which cargo interests may be able to pursue a claim against the carrier. Thirdly, the negotiable bill of lading operates as a transferable document of title, and it is this aspect, which sets the document apart from non- negotiable sea waybills. A document of title in this context is a document, which provides its holder with the exclusive right to demand delivery from the carrier. As the goods will only be released at the port of discharge against surrender of the bill of lading, possession of the document amounts to constructive possession of the goods. If the document is "negotiable", i.e. is made out "to order", or to the order of a named party, or to the bearer, the right embodied in the document can be transferred along a chain of sale contracts by delivery, with any necessary endorsement, of the document alone. Thus, while goods are in the physical possession of a carrier during transit, a seller is able to pass possession and property in the goods to a subsequent buyer simply by passing on the negotiable document of title. By the same token, the document can be pledged to a bank and thus may be used as a security to raise finance.

Negotiable bills of lading and similar documents of title may also be subject to the mandatory application of the minimum standards of liability established in The Hague Rules of 1924 and the Hague Rules, as amended by the Visby and SDR protocols 1968 and 1979 (Hague-Visby Rules). Both sets of rules apply mandatorily only to contracts covered by a "bill of lading or any similar document of title".

The reason for this is that where goods are carried under bills of lading, the terms of the contract are contained in or evidenced by the bill of lading, i.e. in a standard form document issued and signed by the carrier, and usually drafted in terms favorable to the carrier, with no scope for negotiation. Where such bills are negotiable, i.e. are intended for sale of the goods in transit, the need for protection of a third-party consignee becomes particularly urgent. In international trade on shipment terms, risk usually passes on shipment and the final endorsee in possibly a long chain of different buyers will have to sue the carrier in case of loss of or damage to the goods on the terms of the bill of lading. 

Non-Negotiable Sea Waybill

A sea waybill is a non-negotiable document that also functions as a receipt for shipment and as evidence of the contract of carriage. However, the document need not be presented in order to obtain delivery of the goods from the carrier. Sea waybills, therefore, do not provide constructive possession of the goods covered, an aspect, which has a number of consequences.

On the one hand, the utility of this type of document is limited by the fact that the document itself cannot be used to transfer possession and property. Sea waybills are thus not suitable (a) if sale of the goods in transit is envisaged or (b) if independent, documentary security is required by a buyer or by a bank involved in a letter of credit or other finance arrangement.

Moreover, the document may not - at any rate without express contractual incorporation - attract the mandatory application of the Hague or Hague-Visby Rules, which is restricted to "bills of lading or similar documents of title"9. Non- negotiable sea waybills are not expressly covered by The Hague and Hague-Visby Rules. However, as they are also standard form documents, issued by a carrier and operating as a receipt and as evidence of a contract of carriage, the national legislation of some States extends the protection of The Hague and Hague-Visby Rules to non-negotiable sea waybills.

In some cases, such (statutory) application is, however, only triggered if the contract evidenced in the document effectively incorporates the Rules. Moreover, where-under national law-the Rules are applicable to sea waybills, the evidentiary value of statements in the document relating to the goods shipped may be less strong. This is, for instance, the position in English law. A third-party endorsee of a bill of lading may, in a cargo claim, rely conclusively on the description of the goods in a bill of lading. In contrast, the description of the goods in a sea waybill is, in cases where the Hague-Visby Rules apply, only prima facie evidence. The Hamburg Rules 1978 apply to all contracts for the carriage of goods by sea, other than charter parties and thus include contracts covered by negotiable as well as non-negotiable transport documents.

On the other hand, as presentation of a non-negotiable sea waybill is not required to obtain release of the goods from the carrier, the issue of delayed arrival of documents at destination, which may be a particular problem in the context of short sea transit times, does not arise. 

Straight Bill of Lading

Bills of lading made out to a named consignee, so-called "straight" or "straight consigned" bills of lading, are not transferable and can thus not be "negotiated" along a chain of sale contracts. As a consequence, these documents are, similarly to sea waybills, not suitable where sale of goods in transit is envisaged. However, a separate question is, whether these types of documents need to be produced to obtain delivery of the cargo and may thus be considered documents of title.

The answer to this question matters, primarily for two reasons. First, if a straight bill of lading is a "non-negotiable document of title", it may be used to transfer ownership from a seller to a buyer, albeit on only one occasion. At the same time, it also provides independent documentary security to a seller, buyer or a bank. Secondly, if recognized as a document of title, a straight consigned bill of lading attracts, without more, the mandatory application of The Hague and Hague-Visby Rules.

Views on whether a straight bill of lading is a document of title appear to differ between jurisdictions and may depend on the characteristics of any particular document in question.

In US law, where the term "straight bill of lading" was first used to identify a bill of lading made out to a named consignee and marked non-negotiable, the carrier is entitled to deliver the goods to the named consignee without production of the document. In English Law, a bill of lading made out to a named consignee has traditionally been regarded akin to a non-negotiable sea waybill but, until recently, there was no clear legal authority on whether production of the document by the named consignee was required to obtain delivery of the goods.

Other Transport Documents

In carriage of goods by road, rail and air, consignment notes are used. However, these documents do not operate as documents of title. Equally, other documents which may be issued in relation to sea-carriage, such as ship's delivery orders or freight forwarders' receipts (FCR) do not share the document of title function.

In recent years, the growth in multimodal transportation has given rise to an increase in the use of multimodal or combined transport documents. Standard form documents are often designed to be used both for carriage of goods by sea (port of loading to port of discharge) and for transport from point-to-point (receipt to delivery). Documents for multimodal transport may be made out in negotiable form ("to order"), so as to operate as a negotiable document of title. In some jurisdictions, such as the UK, the legal status of these documents is not entirely clear, but it is likely that courts would recognize a multimodal document made out in negotiable form as a document of title, similar to a negotiable bill of lading. Both the 1980 United Nations Convention on International Multimodal Transport of Goods (1980 MT Convention) and the 1992 UNCTAD/ICC Rules for Multimodal Transport Documents envisage the issue of negotiable multimodal transport documents, as do existing national, regional and sub-regional laws and regulations on multimodal transport, which are often based on either or both of these international sets of rules.
Summary of Central Functional Differences between Different Types of Transport Document

As has become apparent, a main functional distinction applies in respect of transport documents commonly used:

A Document of Title

A document of title needs to be presented in order to obtain delivery of the goods from the carrier. This type of document provides constructive possession, i.e. exclusive control over the goods. If the document is made out in negotiable form, the rights inherent in the document may be transferred by delivery of the document, with any necessary endorsement.

A negotiable document of title, such as a negotiable bill of lading, thus provides clear advantages, if sale of goods in transit is envisaged and/or if documentary security is required by banks or buyers involved in an international sale or its financing. As, however, the document needs to be physically transferred to the final consignee, possibly along a chain of buyers and banks, a number of problems may be associated with the use of negotiable bills of lading. These include high administrative costs related to the issue, processing and transfer of paper documentation and additional costs due to delayed arrival of the document at the port of discharge, in particular where travel times are fast, e.g. in short-sea shipping. If a negotiable document is not available by the time a vessel is ready to discharge the cargo at destination, costly delays may arise. While in practice, a carrier may frequently agree to release the goods against a letter of indemnity, this may seriously compromise the position of an unpaid seller or bank. Moreover, where delivery is made against a letter of indemnity to the wrong consignee, the carrier faces a claim for misdelivery by the lawful consignee and may not in all cases be able to enforce the indemnity. 

A Non-Negotiable Straight Bill Of Lading

A non-negotiable "straight" bill of lading, if recognized as a non-negotiable document of title, as is now the case in English law, offers the same advantage as a negotiable bill of lading in terms of documentary security, but, due to its non-negotiable character, is not suitable where sale of goods in transit is envisaged. Delayed arrival of the document at the port of discharge may be less likely, if still possible. The legal effects of a non-negotiable "straight" bill of lading are, however, not entirely clear in all jurisdictions and may differ depending on the specific features of the document itself. 

Non-Negotiable Sea Waybills

Non-negotiable sea waybills and other documents, which do not qualify as documents of title, are advantageous where the distinct characteristics of a document of title are not required, as the need for physical transmission of the document and thus the potential for delayed arrival of the document does not arise. As a consequence, the use of non-negotiable sea waybills may be considered advisable if sale of goods in transit is not envisaged and independent documentary security is not required by the parties.

In an effort to minimize the problems associated with delayed arrival of bills of lading, commercial parties have, over recent years, been increasingly encouraged to use sea waybills rather than bills of lading in all cases where sale of goods in transit is not envisaged23. A number of standard contractual clauses have been developed, which seek to equip sea waybills with some 'security features' by providing contractually for limits to the shipper's right of control over the goods. Examples are:

1. The so-called NODISP clause (No Disposal clause), which provides: "By acceptance of this Waybill, the Shipper irrevocably renounces any right to vary the identity of the Consignee of the goods during transit ";
    
2. A so-called CONTROL clause, which provides: "Upon acceptance of this Waybill by a Bank against a Letter of Credit transaction (which acceptance the Bank confirms to the Carrier) the Shipper irrevocably renounces any right to vary the identity of the Consignee".

While a number of standard form sea waybills used by some major container carriers now include "control" clauses, there does not yet seem to have been much litigation in which "control" clauses were put to the test. At present, it is therefore not entirely clear to which degree clauses of this kind achieve their objective.