No one can be oblivious to the way in which electronic commerce and communication via the Internet have taken over most areas of business, nor can they be unaware of the stock market’s current predilection for ‘Internet companies’, offering sales and communication solutions to commercial problems via the Web. The fact that international trade payments still languish in the world of paper documentation comes as somewhat of a surprise to those unfamiliar with the process. Why, in an era when data is bounced off of satellites to the other side of the world, are pieces of paper being flown around to be surrendered like a cloakroom ticket to secure delivery of cargo? The answer to this question is to be found in the fact that the documentary credit process, as a means of secure payment in international trade, has grown up around a paper document of title which a computer cannot replicate. The ‘cheque for goods’ function of the carrier’s contract of carriage, the bill of lading, which once promoted world trade as the cornerstone of the doc credit process, is now the very thing that is preventing this process from advancing into the world of electronic commerce.
It is a time-honored process and the reluctance of the parties involved to depart from known and trusted criteria prevents the intrusion of electronic commerce into international trade. Many find it difficult to envisage international trade by sea without a bill of lading being involved, as if there were some mysterious and magical property in this piece of paper which many trust implicitly (many to their cost as it is, in truth, a most insecure instrument).
In any event, the time has clearly arrived when the bill of lading must go. It has served us well and earned a place of honor in the museum of international trade (to whence it should be consigned), but with what will it be replaced? Therein lies the rub!
Various solutions have been promoted, some more feasible than others. One was the ‘Chip’ Bill, an idea that, instead of a paper bill, a ‘smart card’ would be programed with all the necessary data and handed to the shipper, who could read it by popping it into a little machine purchased for that purpose. He then takes it to his bank, and the bank pops it into its machine (which is a bit more sophisticated than that of the shipper), which reads it and confirms that it meets the requirements of the letter of credit held on the computer to which the machine is attached. If it does, the operator pushes a button that de-programs the ‘chip card’ whilst programming one held in a machine in the office of the issuing bank. The bank removes it, gives it to the consignee (who reads it on his little machine), thereby putting him in a position to present it to the carrier (to put in his little machine) to claim delivery. What a wonderful idea! The concept of a tangible document of title is preserved but the need to physically transmit paper from the place of receipt to the place of delivery to secure delivery is overcome. If it ever came to fruition, I wouldn’t mind having a few shares in the company with the patent on the little machines! Move over Bill Gates!
This idea is typical of the ‘straightjacket thinking’ that seems to bedevil this problem. Most people are asking the wrong question and if you ask the wrong question, you are guaranteed the wrong answer. So what is the right question? Not, ‘How can I reproduce a bill of lading using EDI?’ Rather, ‘What do I need a bill of lading for in the first place and is there not some other way to achieve the same objectives?’ The answer here is that, of the three functions of a bill of lading (contract, receipt, and document of title) the two former easily lend themselves of the EDI process, and it is only the document of title function that causes problems. Instead of trying to replicate the document of title function (as Bolero does), more thought should be given to why this function is necessary and whether the same effect can be achieved using an EDI-friendly system without the need to resort to a document of title style function.
Let us first examine the Bolero idea. We have all heard the jokes about Bolero being a short jacket that doesn’t quite cover all the essentials or a piece of Spanish music by a French composer that spends its whole time building to a crescendo only to collapse in a couple of bars (is there a hidden message here?!). Bolero seeks to replicate the document of title function through a central data registry to be run by S.W.I.F.T.: the interbank settlement organization. S.W.I.F.T. would hold and register all data of title to goods and all changes thereto, and then, when called upon by the carrier to advise, would direct to whom the goods could be delivered. This requires an international organization operating 24 hours a day, 365 days a year, with insurance against error in directing delivery to the wrong party. This costs money. Indeed, frightened by the cost, Bolero has used the fact that all users must be under contract to it to limit this liability to US$100,000 per incident, a move that has not amused some of its potential users, as this figure could be wholly inadequate on some cargoes, like oil.
Having consumed substantial funds from BIMCO and the European Community, Bolero now has lawyers chomping their way through funds supplied by S.W.I.F.T. and the TT Club (a mutual combined transport insurer) in an effort, to overcome the legal problems inherent in the idea.
As the law in most countries is too slow to react to commercial changes, commerce has to make its own way using existing legislation, building bridges and bypasses where necessary to achieve its objective. In the case of Bolero, transactions can only take place between fully paid-up members to a ‘Club’, who have signed up to accept a rule book (now redrafted for the umpteenth time at enormous expense!) for all transactions. If you want to transfer to someone outside the ‘Club’, you must either get that party to ‘sign up’ or revert to paper.
Surely, there must be a simpler option. There is. The concept was endorsed by that doyen of documentary credit experts: Bernard Wheble. It is the waybill and the availability of this system is the reason why Wheble fought so hard to secure the incorporation of waybills in the list of permitted transport documents in UCP 500. Unfortunately, UCP 500 provides for the use of waybills, but fails to explain how to do so with security for the interests of all parties involved: seller, buyer, carrier, bank, and insurer.
To explain how this system works, it is necessary first to understand exactly what a waybill is (and equally what it is not!) and how it differs from a bill of lading.
A waybill is a receipt and a contract of carriage, but not a document of title. Unlike the bill of lading, where issue usually subjects the carrier to minimum Hague/Hague-Visby Rules recourse during sea transit, the waybill allows complete freedom of contract. Being a document of title (except where it is a straight bill and within the jurisdiction of the U.S. Pomerene Act), the bill of lading is a ‘cheque for goods.’ He who holds the bill controls the goods and a duly endorsed original must be surrendered in exchange for the goods. Once a seller lets go of his bill, he loses all rights to control the goods. On the other hand, with a waybill, possession of paper counts for nothing. ‘Order’ waybills are not possible and delivery is made to (or to the order of) the nominated consignee. However, whilst a bill of lading shipper loses all right of control over the goods as soon as he releases it, the waybill shipper retains the right of stoppage in transit throughout - up to delivery. On the face of it, the waybill is not a very secure document for many of the parties involved, but the problems are easily surmounted as follows:
For total security, seller and buyer require concurrent exchange of control of goods and payment. In a documentary credit, this is achieved by the seller passing over the bill of lading as part of the letter of credit requirement in exchange for payment to the bank acting on behalf of the buyer. Swedish Simpler Trade Procedures Board (SWEPRO) sought to replicate this in a waybill by coining a NODISP (No Disposal) clause: By acceptance of the Waybill the Shipper irrevocably renounces any right to vary the identity of the Consignee of these goods during transit.
This is fine for the consignee, but what if the documents are refused on presentation? The consignee gets the goods, but the shipper doesn’t get paid. Accordingly, this idea is fatally flawed, as it does not create a concurrent exchange of control of goods and payment.
Having examined the challenge, I have produced a CONTROL clause based on the NODISP clause which overcomes that fatal flaw and lines up the point at which the shipper gets paid with the point at which he gives up control of the goods, thereby satisfying both shipper (seller) and consignee (buyer). This clause reads as follows:
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 of these goods during transit. The CMI Uniform Rules for Sea Waybills agreed by the CMI at its 1990 Paris meeting provides, inter alia, that if any waybill is issued subject to those rules, the carrier guarantees that the contract is identical to what it would have been had the carrier issued a bill of lading. Thus, a waybill so marked should be just as acceptable for recourse purposes to shipper, consignee, and insurer as a bill of lading.
So far, we have satisfied shipper, consignee, and issuer. If we can satisfy the bank, we have a viable system. This can be achieved by giving the bank a lien on the goods, by means of a suitably worded clause on the waybill, so that nobody can take delivery of the goods until the bank has removed its lien, thereby giving it the control it needs.
In this way the bank should be satisfied that its position is protected and prepared to operate a documentary credit with a waybill. Waybills are cheap and simple. Bolero is expensive and complicated. Waybills are flexible and can be paper or electronic. Bolero is rather hide-bound with regulations. Waybills need no Control Data Registry to operate; Bolero does.
It is no secret that some banks are running their documentary credit departments at a loss but must continue to offer the service for the other more lucrative financial services that invariably come with it. S.W.I.F.T. is involved in Bolero and is financing it at the behest of the banks, who do not see Bolero as final product but as the first step to a totally electronic credit operated and based on Bolero.
The Bolero system is tailor-made for bulk cargoes which are extensively traded whilst in transit and it could overcome many of the problems of delivery of cargo without a bill of lading in these trades. This problem can never arise with a waybill where no document is necessary for delivery, merely proof of identity.
Most liner cargoes are not traded in transit so the document of title function is needed only in the documentary credit process for security of payment/delivery. If this can be achieved other than through a Documentary of Title/Central Data Registry system in a way that is cheap and EDI-friendly, then liner cargoes have no need of Bolero. Bolero has need of liner cargoes, as bulk cargoes could not bear the cost of Bolero alone, hence Bolero is making a strong play for liner cargoes, with a tally of contracts hundreds of times that of bulk cargoes, as the only way to spread its costs widely enough to be viable.
Bolero is really a rehash of Chase Manhattan’s abortive SeaDocs system, which failed through lack of support on account of cost. Is Bolero the future or will waybills, simplicity, and common sense prevail? The next few years should prove most interesting.
In fact a Canadian company is developing an internet-based secure payment and trade management system which incorporates the electronic waybill and several other revolutionary ideas. Furthermore, it can cope with electronic and paper documents, so that it has the flexibility to cover the period during which the transfer from paper to electronic commerce occurs. This is important as the changeover period is likely to be protracted for a variety of reasons.
Prior to retiring in April 1999, John W. Richardson worked as a risk analyst at P&O Nedlloyd. Richardson remains active in the industry as a consultant on international trade contracts, as an expert witness, trainer and draftsman. richardson@cceweb.com