CHAPTER II

PRESENT STATUS OF SHIPPING DOCUMENTS

Loans may be classified as unsecured or secured. In granting an unsecured loan, the lender is relying solely on the credit standing of the borrower, or rather on his future ability to make repayment. If the future solvency of the borrower is questioned by the lender, he asks for some form of property, or right to property, which serves as collateral for the loan. In the United States the greater part of domestic loans are unsecured, since American mercantile houses and banks have developed an efficient system of gathering and analyzing credit information. It is difficult to obtain such data concerning firms in other countries due to the difference in nationalities and the general disinclination to furnish confidential information to foreigners. Because of this inability to obtain credit data regarding business houses abroad, most loans extended in overseas trade are based on some form of collateral. This security in the case of a foreign investment transaction may consist of stocks or bonds, and in the case of a commercial transaction may be composed of commercial documents representing merchandise in transit from one country to another. As stated in the previous chapter, these documents usually include the bill of exchange, bill of lading, policy of marine insurance and commercial invoice. In addition to these primary documents, there are several certificates of minor importance used only in special cases. The nature of all these documents has been well presented in a number of treatises dealing with foreign trade, and so only the general characteristics will here be viewed briefly, while detailed consideration will be given to those special features which have developed during and since the War.

I. Bill of Exchange.-Bills of exchange are classified primarily according to whether the parties are bankers or merchants. A banker's bill is an order drawn by one bank on another to pay a specified sum of money. The drawee bank is usually a correspondent carrying a balance previously deposited by the

drawer. The usance of the bill may be either sight or time. As a banker's sight bill is drawn on a bank and is also payable on demand, it possesses the features of an ordinary check and is frequently known by that name. It is in every respect a negotiable instrument, and is usually payable to the order of a party. This sight draft, or check, is used when a bank sells foreign exchange. A person in New York, wishing to send £100 sterling to London, purchases this amount of foreign exchange from his bank, and generally receives a draft drawn against its balance with a British correspondent. The purchaser then forwards the draft by mail to the payee, who receives the money on presenting the instrument to the drawee bank in London. In large transactions where quick communication is necessary, or in time of war when international mail service is uncertain, the cable transfer is used. As it is an order given by a bank to its correspondent to pay an amount of money on demand, the cable transfer is simply a form of banker's check. The two forms of exchange differ in that the cable transfer is forwarded over cable or wireless by the selling bank directly to the payee, while the check is given by the bank to the purchaser, who himself undertakes the responsibility of transmitting it. Furthermore, the cable transfer is payable only to a specified party and is thus non-negotiable, while the check is usually drawn to order and is thus transferable.

Bankers' bills drawn on a time basis state that payment will be made on a certain date or a number of days after sight. These time bills are further grouped according to whether the maturity is over 30 days. If less, they are called short bills; if over, they are termed long bills. Drafts of the latter type usually have a maturity of 60 or 90 days, and seldom more than 120.

Bankers' bills also may be classified according to the purpose for which they are drawn. A bank in the course of its business creates foreign-exchange bills to cover the shipping of goods, reimbursing of freight charges, meeting of insurance premiums, forwarding of remittances, and paying of tourists' expenses. Of a different nature are those bills drawn in order to move funds to a foreign money market. These advances are described as loan bills when supported by collateral and are termed finance bills when based only on pure credit.

Trade bills are instruments to which the parties are merchants. These bills are classified, in general, according to time and purpose. Demand bills can be drawn only by firms with extensive foreign business, but greater use is made of time drafts. These, in turn, are either long or short, depending upon whether their maturity is more or less than 30 days. As to purpose, bills drawn by commercial houses follow a classification quite different from that of bankers' bills. Drafts which arise from the reimbursement of services cannot well be accompanied by any documents representing property which could serve as collateral. Such bills are described as clean or unsecured, and so their value depends primarily upon the credit standing of the acceptor and secondarily upon the drawer. This group also includes all bills from which documents have been detached. Of greater importance in foreign exchange are drafts accompanied by certificates or documents evidencing the ownership of some form of property, and which therefore are called documentary or secured bills. They may be protected, as mentioned above, by stocks and bonds which have been ordered by foreign investors or by shipping documents covering goods imported by merchants.

II. Bill of Lading. The first of the shipping documents to be considered is the bill of lading. It is primarily a receipt in which a transportation company acknowledges that it has accepted from a shipper certain merchandise to be carried from one specified place to another. The instrument contains a detailed statement of the terms according to which the goods shall be moved. But a bill of lading is more than merely a receipt, for it is also a document of title evidencing the ownership of the goods. This certificate may therefore serve as a form of credit instrument since it is a lien upon the merchandise and can be freely transferred by the rightful holder to another party, such as a banker who has granted a loan on the strength of this security.1

In performing the functions of a receipt and a document of title the bill of lading involves several parties. The party who presents the goods for delivery is variously known as shipper, cargo owner or consignor. The acceptor of the goods for trans

1 For legal aspects of bills of lading, see Bennett, Bill of Lading, Poor, Charter Parties, and Ocean Bills of Lading, Scrutton on Charter Parties and Bills of Lading.

portation is called the carrier, and the receiver to whom delivery is ultimately made is termed the consignee. In addition to these three parties, mention must also be made of the banker who grants a loan on the merchandise as represented in the bill of lading, and thereby becomes an interested party.

It was formerly a simple matter to present a classification of bills of lading, but the usual grouping of these instruments has been deranged by the unsettled conditions in commerce since 1914. During recent years innumerable controversies have arisen among consignors, consignees, carriers and bankers. The efforts of these parties to settle their differences have been outlined in the previous chapter, and in attempting a current classification of bills of lading, due consideration must be given to such influences as regulations adopted by mercantile and banking organizations, acts passed by legislative bodies and decisions rendered by courts. Bills of lading will be classified according to such factors as freight, negotiation, number, issue, route, qualification, and shipment.

1. Freight.-Bills of lading may be grouped according to nature of the freight. This may be either general merchandise such as automobiles, farm machinery and hardware, or staple commodities such as sugar, cotton and grain. A banker is often unwilling to grant advances on bills of lading representing merchandise because of its specialized nature. On the other hand, staple commodities can more readily be sold by the banker in the event that he is compelled to press his claim because of non-payment by the borrower.

2. Negotiation.—In a general way, the bill of lading may be regarded as a quasi-negotiable instrument, since it can be made transferable from one party to another and so it is either negotiable or non-negotiable. It should be noted that the transferee does not possess legal title which is any better than that held by the transferor. And in this respect the bill of lading differs from a true negotiable instrument. Under a non-negotiable or straight bill of lading, the goods are consigned to a definite party such as William Smith, who may obtain them from the transportation company without even presenting the bill of lading. This type of bill is employed in transactions in which the goods are shipped to a branch house or where the consignee has already paid cash or deposited collateral as a guarantee of

payment. As the merchandise is thus deliverable without documents to the consignee under the straight bill of lading, it offers little security to the banker who has granted the loan. He therefore prefers a negotiable or order bill of lading, which is made out to the order of William Smith or his assigns. William Smith then writes a blank indorsement in which he simply signs his name as indorser, without designating the indorsee. The bill of lading is then given to the banker who retains full title to the goods, since they can be delivered only to the holder of the bill of lading.

3. Number. The transportation company usually issues three bills of lading, but a larger number may be made if necessary. Any copy of the bill of lading has the same force as the original, for if properly indorsed it enables the holder to possess himself of the goods. It is therefore essential for the banker who has granted a loan on a bill of lading to insist upon receiving a "full” set which includes all the negotiable copies issued by the carrier. 4. Issuer. Goods may be transported by either railway companies or steamship lines and so are evidenced by either railroad or ocean bills of lading. The former cover goods being moved generally to a domestic point, while the latter represent merchandise shipped to a foreign port. Railroads also issue "through" bills of lading covering shipments from inland cities to foreign ports, for example, from Chicago to Liverpool via New York. The rights and liabilities of parties under railroad bills of lading have been clearly defined in the "Pomerene" or so-called "Uniform Bill of Lading Act," while the Harter Act, to a more limited extent, has for many years performed a somewhat similar service in the case of ocean bills of lading. The through bill of lading, however, is still the subject of controversy. With the growth of our export trade after the Civil War, American railways issued through bills of lading to facilitate the movement of goods from an inland point to seaboard, thence to a port abroad and even to an interior foreign point of destination. This combination bill found favor among exporters and bankers in the Middle West, and also among merchants abroad, because it brought sellers and buyers in direct contact with one another. It was widely used before 1914 in moving merchandise from the manufacturing centers of the Northeast to the Orient via Pacific ports, and in shipping staple commodities from the agricultural