Background: The Presentation of Paper Documents under Documentary Letters of Credit with Special Focus on Bills of Lading and Insurance Certificates
Where financing of a cross-border sale occurs through a letter of credit, the seller will be 10.02 required to produce documents of a certain type that comply with the letter of credit’s requirements.
In these instances, the bank as creditor will require collateral, which will usually come in the form of a pledge over the goods being sold. In order to effect this pledge, an original bill of lading will usually be required among the documents presented to the bank in compliance with the letter of credit. Indeed, because bills of lading are documents of title,[951] if a bill of lading is pledged to a bank as security for the credit advanced, the bank will have a pledge over the actual goods that the document represents. Assuming that it is made with the appropriate intention, the transfer of the bill of lading constitutes a pledge of the goods that it represents (by transferring a special property), as opposed to transferring their ownership (or the general property).[952]10.03 A pledge is a form of consensual security and consists of the actual or constructive delivery of possession[953] of an asset to the creditor by way of security.[954] It can be viewed as a type of bailment that carries with it a mandate of sale on default of payment.[955] Under English law, there is no need to have recourse to a court of law for authority to sell on the default of the debtor-pledgor.[956] The operation of a letter of credit agreement is such that the bank does not pay out money before it has had the negotiable bill of lading delivered to it (in the case of a bearer bill) or indorsed in its favour (in the case of an order bill), either of which, if the appropriate intention is present, is sufficient to create a pledge.
If the bill is non-negotiable (or ‘straight’), the bank would need to be designated as consignee in the bill in order to obtain constructive possession of the goods,[957] and therefore a pledge over them.face="Times New Roman">10.04 If it rejects the bill of lading, the bank does not become its holder;[958] but, if the beneficiary fails to resume possession of the document, the bank remains in a position to take it up, provided that the bank has the beneficiary’s consent to do so, and it is not necessary for a fresh presentation to be made.[959] While in the period between the bill of lading’s rejection and the bank taking up the documents, the legal rights and obligations that the physical possession of the bill of lading confers upon the bank may be ambiguous, in practice, the physical possession by the bank of a full set of bills of lading, whether negotiable or not,[960] precludes any other person from lawfully claiming delivery of them from the carrier.[961] This gives the bank effective control over the goods, or a remedy against the carrier, if they are delivered in the absence of the bill.[962] Once the bill of lading has been pledged to the bank, the latter becomes the holder for the purposes of sections 2 and 5 of the Carriage of Goods by Sea Act 1992 (‘COGSA 1992’);[963] although the bank is not liable to the carrier under section 3 of COGSA 1992, unless it takes or demands delivery from the carrier of any of the goods to which the bill of lading relates or makes a claim under the contract of carriage against the carrier in respect of those goods.[964] Furthermore, the bank obtains an insurable interest under the Marine Insurance Act 1906 (‘MIA’).[965]
It is common for banks to have the cargo insurance rights assigned to them, when they act as pledgees,[966] in order to protect the value of their collateral if the goods are lost or damaged. The bank acquires these rights through the assignment of an insurance document, usually a cargo insurance certificate, which would normally be one of the documents required to be presented under the letter of credit.
Having been designed by the insurance industry specifically for use in the international sales of goods, cargo insurance certificates were conceived as documents granting rights to the holder.[967] The assignment of such a certificate was discussed briefly in Koskas v Standard Marine Insurance Co,[968] in which the argument was initially raised by the insurers that the cargo insurance certificate had not been properly indorsed. The insurers later withdrew the argument, and the court commented that ‘the underwriters have very properly decided not to press that point’[969] because the language of the certificate was not sufficiently clear specifically to require indorsement. Thus, it would seem that indorsement is only necessary to effect assignment of a cargo insurance certificate where this is explicitly required by the certificate itself. Koskas also suggests that the courts were happy to accept that being the holder of the certificate conferred standing to claim against the insurer.[970]Thus, bills of lading and cargo insurance certificates are not just documents that the bank checks to verify their compliance with the credit. They are also essential steps in the mechanism whereby the bank obtains collateral for its security interest and protects the value of that collateral. If paper documents are dispensed with and replaced by data, new mechanisms need to be devised to put the bank in an equivalent position.
III.
More on the topic Background: The Presentation of Paper Documents under Documentary Letters of Credit with Special Focus on Bills of Lading and Insurance Certificates:
- Hare C., Neo D. (eds.). Trade Finance: Technology, Innovation and Documentary Credit. Oxford University Press,2021. — 417 p., 2021
- Commercial paper