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New treaty could give “negotiable” status to rail and road consignment notes

Geo-political issues surrounding traditional sea routes, like the Red Sea has been affecting global trade especially in ocean shipping between China and Europe.

Overland transport incorporating rail and road freight options has been seen as a viable alternative for customers on this route for the past decade.

Dimerco had previously reported that on the back of these geo-political issues, LCL rail freight saw a 30% increase in volume in January 2024 compared to 2023. Dimerco had further hoped to increase departures from Xi’an, a major hub for their China-Europe Express rail, from 5,351 departures in 2023 to over 7,000 trains in 2024.

As per reports however, this surge in overland trade between China and Europe has seen the emergence of a significant challenge for banks as they were reluctant to finance trades for these intercontinental rail journeys without being legal title holders for the cargoes.

In regular ocean shipments handled under letters of credit, banks are used to working with negotiable transport documents like ocean bills of lading where the goods are consigned “To Order” of the banks. This gives banks the security of being the holder of the title of goods till the payments are received.

In the road/rail freight option, consignment notes used for road and rail movements are non-negotiable transport documents which are less flexible than negotiable documents.

These consignment notes do not permit transfer of title to third parties through endorsements and therefore banks are loathe to use them as collateral.

As per a GTR article, noting this problem, the Chinese Govt requested UN Commission on International Trade Law (UNCITRAL) in 2019 to consider creating a global legal framework to make rail consignment notes as negotiable documents of title.

UNCITRAL is finalizing an international treaty that aims to introduce a new negotiable document covering cargo shipments by sea, air, rail, and land. Once introduced/adopted, this treaty would enable banks to use these documents as security for trade finance lending, similar to ocean bills of lading.

This treaty is also said to be able to accommodate digital versions of negotiable cargo documents, based on the Model Law on Electronic Transferable Records (MLETR), which facilitates the digitization of bills of lading.

The GTR article quotes Sean Edwards, chair of industry group the International Trade and Forfaiting Association “The growth of reliable long-distance transport in the form of rail and road deserves equal treatment, and banks would appreciate closing this gap in their security.

While the proposed treaty offers substantial opportunities, it also introduces new risks as the land and rail transport networks are not as mature as ocean shipping in terms of handling negotiable documentation and associated activities such as cargo tracking.

Creating such supporting systems is crucial to achieving the same benefits as those provided by negotiable maritime bills of lading.

For more details on the evolving legal framework for trade finance and its implications, you can read the full article.

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