consignment note in 2006 which is used for block trains, wagon groups, single
wagons or containers, in either paper or electronic format.
42 The CIM/SMGS
consignment note is recognized as a customs transit document and as a bank
document. However, exporters and banks exercise caution when dealing with a
letter of credit transaction that involves a railway consignment note, because neither
exporters nor banks can use the goods as collateral as the rail carrier can deliver
goods to the consignee without obtaining the original document.
43
The existing railway carriage laws were designed around non-negotiable waybills
as transport times were generally short and shippers did not have much reason to
develop elaborate trade finance practices involving carriage documents. To the
contrary and by contrast, in sea carriage, documents of title such as bills of lading
have been in use for centuries to facilitate the financing of goods while they remain
afloat on-board vessels for months, being transported across continents. The banks in
China developed their practices for letters of credit around sea transport and require a
bill of lading as security. The emphasis on negotiability for security purposes is well
developed in the sea carriage law of China and can be found in Article 79 of the
Chinese Maritime Code (CMC) which provides -
The negotiability of a bill of lading shall be governed by the following provisions:
a. A straight bill of lading is not negotiable
b. An order bill of lading may be negotiated with endorsement to order or endorsement in
blank;
c. A bearer bill of lading is negotiable without endorsement
Also, pursuant to Article 71 of the CMC, a bill of lading is a document of title and
the rightful holder of the bill can require the carrier to deliver the goods to them.
When the bill is held by a bank, it will have proprietary interest over the goods. The
precise nature of the bank’s right, as absolute owner of the goods or as a form of
security is unclear under Chinese law, but in practice banks can require carriers to
deliver the goods to them. In case of bankruptcy of a seller who has shipped the
goods and received the price, the seller no longer has title to the goods. A bank which
has subsequently received the bill of lading will be free from any claims from the
liquidator or administrator to return the goods or the bill of lading.
44
Chinese banks have insisted on negotiable documents to issue letters of credit as
they perceive cross-border trade transactions as having moderate levels of information asymmetry, and in the absence of a document of title, banks are required to set
aside higher capital as a regulatory requirement. Higher capital requirements have
often been cited as one of the prominent reasons for global shortage of trade finance
and there exists a huge gap for Asia and the Pacific.
45 To avoid tying up more capital,
42 Yan and Filimonov (2018), p. 121.
43 It is to be noted that recognizing established trade practice, Article 24 of the UCP600 provides for
the issuance of credit based on non-negotiable railway consignment notes.
44 Tricks et al. (2018) Appendix 10, p. 55 https://www.clydeco.com/uploads/Files/The_Legal_
Status_of_E-bills_of_Lading_-_ICC_and_Clyde_Co.pdf, accessed on 17 April 2019.
45 DiCaprio and Yao (2017), p. 6.
50
A. Basu Bal and T. Rajput
wagons or containers, in either paper or electronic format.
42 The CIM/SMGS
consignment note is recognized as a customs transit document and as a bank
document. However, exporters and banks exercise caution when dealing with a
letter of credit transaction that involves a railway consignment note, because neither
exporters nor banks can use the goods as collateral as the rail carrier can deliver
goods to the consignee without obtaining the original document.
43
The existing railway carriage laws were designed around non-negotiable waybills
as transport times were generally short and shippers did not have much reason to
develop elaborate trade finance practices involving carriage documents. To the
contrary and by contrast, in sea carriage, documents of title such as bills of lading
have been in use for centuries to facilitate the financing of goods while they remain
afloat on-board vessels for months, being transported across continents. The banks in
China developed their practices for letters of credit around sea transport and require a
bill of lading as security. The emphasis on negotiability for security purposes is well
developed in the sea carriage law of China and can be found in Article 79 of the
Chinese Maritime Code (CMC) which provides -
The negotiability of a bill of lading shall be governed by the following provisions:
a. A straight bill of lading is not negotiable
b. An order bill of lading may be negotiated with endorsement to order or endorsement in
blank;
c. A bearer bill of lading is negotiable without endorsement
Also, pursuant to Article 71 of the CMC, a bill of lading is a document of title and
the rightful holder of the bill can require the carrier to deliver the goods to them.
When the bill is held by a bank, it will have proprietary interest over the goods. The
precise nature of the bank’s right, as absolute owner of the goods or as a form of
security is unclear under Chinese law, but in practice banks can require carriers to
deliver the goods to them. In case of bankruptcy of a seller who has shipped the
goods and received the price, the seller no longer has title to the goods. A bank which
has subsequently received the bill of lading will be free from any claims from the
liquidator or administrator to return the goods or the bill of lading.
44
Chinese banks have insisted on negotiable documents to issue letters of credit as
they perceive cross-border trade transactions as having moderate levels of information asymmetry, and in the absence of a document of title, banks are required to set
aside higher capital as a regulatory requirement. Higher capital requirements have
often been cited as one of the prominent reasons for global shortage of trade finance
and there exists a huge gap for Asia and the Pacific.
45 To avoid tying up more capital,
42 Yan and Filimonov (2018), p. 121.
43 It is to be noted that recognizing established trade practice, Article 24 of the UCP600 provides for
the issuance of credit based on non-negotiable railway consignment notes.
44 Tricks et al. (2018) Appendix 10, p. 55 https://www.clydeco.com/uploads/Files/The_Legal_
Status_of_E-bills_of_Lading_-_ICC_and_Clyde_Co.pdf, accessed on 17 April 2019.
45 DiCaprio and Yao (2017), p. 6.
50
A. Basu Bal and T. Rajput