Article

by T.O. Lee

In UCP 600, the following three concepts indicate that a party expresses its intent to pass on (a) its title, (b) performance obligations and (c) rights to another party: (1) negotiation, which is defined in UCP 600 article 2 but is restricted to drafts and a compliant set of documents; (2) transfer, which is defined in sub-article 38 (b) and for which the beneficiary passes on its performance obligation (to make delivery) only to another party, but which includes the right to make presentation and to receive payment under the credit; however, this sub-article is silent on the transfer of other rights and title of the goods; and (3) assignment, which is not defined in UCP 600 but is governed by article 39; here the beneficiary passes on only the right to receive payment, not the performance obligation (such as to make delivery) that still rests with the beneficiary.

Cargo insurance documents

Some L/C practitioners assume that bills of exchange, bills of lading and cargo insurance documents are all "negotiable" instruments. Hence, they expect these documents to follow the same rules for transfer of title or ownership, performance obligations and rights. As a result, their credits will require the cargo insurance certificate or policy to be issued or made out in "negotiable form".

In addition, they may believe that words used in bills of exchange and bills of lading - such as "to order", "to order of" or "to ... or order" with endorsements - indicate that the document is in "negotiable form". But they may not realize that cargo insurance documents by their nature are different from bills of exchange and bills of lading.

In the UK Bills of Exchange Act 1882 (BOE Act), which is a model for many other laws, the concepts of "negotiation", "to order", "indorsement", "holder in due course", etc., are introduced in Articles 31 to 38. In the Hague-Visby Rules, Brussels Protocol 1968 , which most bills of lading are subject to, the concepts of "holder" (Article I - b), "title" (Article III - 7), "nonnegotiable" (Article VI) "rights" and "obligations" (Articles VI & VIII) are set forth. In the Marine Insurance Act 1906 of the UK (MIA), also a model for many other laws, the concepts of "assignment" (Article 15) and "right to sue in his own name" (Article 50 - 2) are stated. Here "Negotiations" (Article 20) is used to mean "discussion" only in "negotiations for the (insurance) contract"; it does not mean "passing on of title, performance obligations and rights" as "negotiation" is used in the BOE Act or the Hague-Visby Rules.

To summarize, referring to the BOE Act and the Hague-Visby Rules, negotiation is used in bills of exchange and bills of lading to allow parties to pass on (a) "title or ownership" of goods, (b) "sum certain in money" (definition in the BOE), (c) performance obligations and (d) rights. But in cargo insurance, under the MIA, there is no concept of negotiation, only the concept of assignment to allow the parties to pass on "rights to claim", including the "right to sue the insurer in his own name" in Article 50. There is no passing of title, ownership or "sum certain in money". The title or ownership to be passed on by endorsement of a bill of lading and the passing of "sum certain in money" is to be made by endorsement of drafts. This is not the purpose of a cargo insurance document.

Credits

Hence, it is clear that a cargo insurance document should only be assigned but not negotiated. Therefore, in my view a credit should not use misleading words like insurance document "in negotiable form"; it could use a more accurate term - "in assignable form" - but this is also superfluous, since the MIA has already included this.

The MIA has no provision to govern how assignment is to be done, by endorsement or otherwise. It is the party's free choice provided it is legal. The assured may use a letter of assignment attached to the policy or certificate or simply make a signed statement to this effect in the policy or certificate.

As to a bill of lading, it is not negotiable unless the consignee box is either left blank (rarely seen now) or made out "to order". This means the right to negotiate by endorsement has to be authorized by the shipper. But according to the MIA Article 50, the insurance policy or certificate is automatically assignable unless expressly prohibited, and assignment may occur before or after the loss, i.e., the assured can assign even if the policy or certificate is not made out "to order". In other words, all policies and certificates are automatically assignable, whether or not authorized by the insured, because under common law, a person (legal or natural) has the basic, if not constitutional, right to assign his/her own asset.

There is also no need for the credit to require the insurance document to cover "warehouse-to-warehouse" risk, as this is automatically included in Institute Cargo Clauses (A), (B) and (C) under Article 8.1.

ICC Banking Commission opinions state that if the policy has "warehouse-towarehouse" cover, the issuing date of the policy may be later than the shipped on board date. It follows that all insurance policies subject to Institute Cargo Clauses (A), (B) and (C) would be automatically compliant as far as the issuing date is concerned.

T. O. Lee FAE MCIArb MITD is an accredited court expert and consultant in LC, CPBL, cargo policy and frauds thereof under UCP 600. Please click www.tolee.com for details. His e-mail address is experts@tolee.com.