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Shipment consignment: is it risky business?

The Basics of Shipment Logistics

A transport document is required to get products moved logistically from place of origin to destination in the most direct route possible. A documentary letter of credit (LC) will require a transport document as proof that the exporter has sent the required goods in the manner agreed upon between the buyer and seller. The opening bank will stipulate the consignment instructions of the transport document and distribution of the "original" document. These instructions reflect the risk the bank is willing to take and the standard import procedures at destination. Banks will also consider the time required to present negotiable documents to the advising and opening banks and the transportation cycle of the goods.

Documents Prepared for Consignment

There are two types of transport documents, namely negotiable and non-negotiable. Common non-negotiable documents are: the airway bill, forwarders' cargo receipt and truck bill of lading. The ocean bill of lading is the most common negotiable document, but is only negotiable when the consignment area of the bill of lading is preceded with the words "To order." Express bills of lading consigned directly to the buyer or other party are not negotiable documents.

The difference between a non-negotiable document and a negotiable document is that a negotiable document actually transfers title of the goods once one "original" of the document is endorsed and surrendered to the buyer. Though the original bills of lading traditionally come in a set of three, the endorsement of only one of the originals is sufficient to pass title. This is evidenced by the statement on the bill of lading: "Bill of lading issued in three (3) originals, one being accomplished the others to stand void."


Ocean Bills of Lading

When shipping overseas, most letters of credit will require a full set of ocean bills of lading (OBLs) to be prepared in negotiable form for presentation to the bank. This is strictly a condition decided by the opening bank based on the creditworthiness of the buyer and the common customs practices at destination. The process of securing a clean "on board" ocean bill of lading can take from days to weeks depending on the complexity of the shipment and the logistics. The bill of lading will generally go through several proofing processes before it is released to assure the accuracy of compliance with not only the piece count, weights and measures, but for LC language and statement compliance. Once the OBL is secured, more time will be required for preparation of documents and courier delivery to the negotiating bank. This process can be very lengthy and may take a better part of the default negotiation period of 21 days.

On the other hand, some destinations and trade routes involve a very short span of time, requiring about a week, more or less, for the cargo to reach its intended destination. The cargo is in port and needs to be claimed by the buyer, but the opening bank has not yet notified the buyer of the arrival of documents. It is easy to see how this could lead to a series of frantic communications between the buyer and seller as to the fate of the impending shipment. The buyer may face demurrage or storage charges if the document situation is not resolved quickly.

This potential dilemma can be avoided. Copies of documents in advance of the arrival of the shipment will allow the buyer to put the clearance process of securing the goods in motion. In this type of situation, the bank may elect to have one original bill of lading sent directly to the buyer in advance of the bank documents for clearance purposes. Another possible solution is to straight consign the bill of lading making it non-negotiable. All of these options are a possibility, but the risk and the design of this "fix" are exclusively in the hands of the opening bank. The bank will decide what risks, if any, are appropriate based on the buyer's history. This type of scenario can be addressed with the bank in advance of the shipment allowing a smooth transition and harmonized coordination of the goods and the documents.

A shipment not under an LC is the decision of the seller. If a seller wishes to transfer title, they need only state "to order" in the consignee field. A shipment that has been paid in advance or under open account arrangements can be treated as a nonnegotiable transport document.

Airway Bills

CPT, CIP, DAT, DAP and DDP Incoterms[R] rules for air shipments will most often require an airway bill. The scenario of goods arriving before documents is not quite as dire as ocean cargo and definitely more common. In fact, it is the nature of air cargo for this situation to occur. The consignment of air waybills however can play an important role in securing the goods and processing their release through customs at the destination airport. The banks are not as concerned with the air consignment instructions in an LC since it is a non-negotiable document, after all.

Copies of documents can be sent in advance to the buyer to set the customs clearance process in motion just as in the case of ocean shipments. The buyer can even have the goods released and delivered against copies of documents long before the bank documents arrive. So why is this situation so different and what about the payment to the seller? Is the exporter flirting with a potential risk hazard of nonpayment?

The answer is no. There are procedures for air cargo shipments that have been in place for many years. The commercial invoice becomes the negotiable document in an air transaction. When it comes to the consignment of an air waybill, it is best not to consign the goods to a bank. Before hyperventilating, relax and consider the operations of an airline import desk and the destination customs desk that are nearby.

Goods arrive consigned directly to an importer or buyer. Document pouches--generally consisting of an air waybill, invoice and packing list--are sent to the import desk for notification to the potential importers of the arrival of their shipment. Frequent importers will likely have an appointed customs broker to intercede in the process on their behalf. The desk staff will put each document set in the appropriate bin for the customs broker, importer and "other." The last of these bins is best avoided. The customs broker may be the consignee or notify party. The bank could also be a notify party. Envision each party being notified as instructed on the air waybill. We come to a bank to be notified. Is an airline employee even going to attempt to get in touch with a bank that may or may not have a telephone number shown? In our example, let's say the phone number is shown and the LC department on the other end of the line gives a less-than-enthused "OK" and hangs up. What was accomplished by putting the bank on the air waybill as the consignee or notify party? It isn't likely the bank will be sending a truck over to pick up the goods.

In the case of the commercial invoice becoming the negotiable document, it is important to remember that only copies of documents should move with goods having payment restrictions. The bank will hold the original and will exchange it for money from the buyer. There is a "free time" allowed for the exchange of money and documents to take place beyond the clearance process. Generally the default 21 days of negotiation time is more than sufficient. The importer is aware of the procedures and the consequences of noncompliance. The same principle will apply to shipments under open account. The consignee has no relevance in controlling payment or title.

In summary, the exporter or seller need not lose any sleep over the consignment instructions of a transport document. Do not state the consignment instructions on the sales offer or confirmation. The bank is in control and understands the implications and risks that may be involved. So relax, "the check is in the mail" or should I say "in the swift exchange," as long as there are no discrepancies in the documents.

Sherri Lane is the director of consulting and cargo insurance services for Trade Technologies, Inc. She can be reached at
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Title Annotation:SELECTIVE TOPIC
Author:Lane, Sherri
Publication:Business Credit
Geographic Code:1USA
Date:Sep 1, 2012
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