NO BILL OF LADING, NO CONTROL?

Managing Documentary Risk Under EXW Letters of Credit

One of the fundamental principles of documentary credits is that banks often rely on transport documents—particularly negotiable Bills of Lading—to maintain a degree of control over the goods until payment is secured. But what happens when the sale is concluded on Ex Works (EXW) terms and the beneficiary insists that no Bill of Lading be required under the LC?

A reader recently raised this practical question. The discussion highlights an important distinction between documentary control and credit risk in LC transactions.

Question

Good evening, Sir,

I came across a practical problem during the issuance of a letter of credit.

The Incoterm was Ex Works (EXW), and since transportation falls under the applicant’s responsibility, the beneficiary insisted on removing the requirement for a Bill of Lading as a document under the LC.

In such a scenario, how can the bank ensure control over the goods when there is no Bill of Lading or other transport document?

We were of the opinion that the applicant could provide prior acceptance of such an arrangement. However, the applicant argues that he cannot do so until he receives the goods and is satisfied with their quantity and quality.

How should we proceed in such a case?

Rohit Sinha

________

Answer

Dear Rohit,

Thank you for your question.

Under Ex Works (EXW) terms, the seller (beneficiary) is only required to place the goods at its premises, ready for collection by the buyer (applicant). Consequently, an LC issued on EXW terms would not normally require a transport document such as a Bill of Lading.

In practice, however, there are situations where a Bill of Lading may still be available. For example, the seller may, at the buyer’s request, assist in arranging shipment, with freight costs borne by the buyer. In such a case, a Bill of Lading could still be obtained and required under the LC.

Another possibility is that a freight forwarder, acting on the buyer’s instructions, arranges shipment and provides the transport document to the beneficiary for presentation under the LC.

Where either of these arrangements has been agreed between the parties and reflected in the sales contract, the beneficiary would generally have no reason to insist on removing the Bill of Lading requirement from the LC.

If no such arrangement exists and the beneficiary insists on deleting the Bill of Lading requirement, the LC may be amended to require an alternative document, such as a cargo receipt or goods receipt signed by the beneficiary and the buyer’s nominated agent.

However, once the Bill of Lading is removed, the issuing bank loses documentary control over the goods. Unlike a negotiable Bill of Lading, a cargo receipt does not represent title to the goods. As a result, the applicant may be able to obtain possession of the goods without first taking up the documents from the issuing bank.

In such circumstances, the transaction becomes largely dependent on the applicant’s creditworthiness rather than on the bank’s ability to control the goods through documents of title. Therefore, the issuing bank should consider accepting this structure only where the applicant is a reliable customer and/or has provided sufficient cash collateral or other security to support the bank’s payment undertaking.

From the beneficiary’s perspective, the risk of non-payment may actually be greater than the applicant’s risk of non-delivery. Once the goods have been handed over to the buyer or the buyer’s carrier, the beneficiary may face difficulties recovering the goods if the documents are later found not to comply with the LC and payment is refused.

Conclusion

The real issue is not whether a Bill of Lading is required under an EXW transaction, but whether the issuing bank is comfortable extending its undertaking without documentary control over the goods.

Where no negotiable transport document is available, the bank’s security shifts from control of title documents to the credit standing and collateral support of the applicant. In other words, the transaction begins to resemble a credit decision rather than a documentary-control decision.

Best regards,

Mr. Old Man