ARTICLE 7

Negotiable instruments embody rights to the payment of money. Documents of title represent title to goods. Under Article 7, a document of title is a writing which, in the regular course of business or financing is treated as adequately evidence that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers (1-201(15)). The most common examples of a document of title are the bill of lading and the warehouse receipt. Article 7 applies to both negotiable and nonnegotiable documents. A determination of negotiability is important because this will determine the application of Article 7.

Under Article 7, the test for negotiability is whether the document by its terms is to be delivered to the bearer or to the order of a named person (7-104(1)). This rule is valid in all transactions except overseas trade. Any other document is nonnegotiable (7-104(2)).

Access to the Goods: The bailee of goods who has issued a document of title is obligated to deliver the goods to a person entitled under the document (7-403(1)). Who is a person entitled under the document to the goods depends on whether the document is negotiable or not. If the document is nonnegotiable, the person entitled to the goods is the person to whom delivery is to be made by the terms of or pursuant to written instructions (7-403(4)). If the document is negotiable, the person to whom the bailee is obligated to deliver goods is the holder of the document (7-403(1),(4)). A holder with respect to a document of title means the person in possession of the document of title if the goods are deliverable to bearer or the order of the person in possession (1-201(20)).

Accountability for delivery: A bailee is under a duty to surrender goods to a person entitled to their delivery under a document covering the goods. Nondelivery occurs when a bailee who is to deliver the goods is unable to do so because the goods have been lost or destroyed. Misdelivery occurs when a bailee cannot deliver the goods because he has given the goods to someone else. In both instances, the person entitled to delivery may sue for conversion.

The major excuses for nondelivery are: (1) Damage, delay, loss, or destruction of the goods, for which the bailee is not liable (7-403(1)(b)); (2) Bailees lien is unsatisfied, (7-403(2)); and (3) The negotiable document covering the goods has not been surrendered (7-403(3)).

The major excuse for misdelivery is that there is a claimant with a better right. A bailee is not liable for having delivered the goods to someone other than the person entitled under the document if the bailee made delivery of the goods to a person whose receipt was rightful as against the claimant (7-403(1)(a)).

Security of Documented Title: A person who buys the goods and is a transferee of the document of title risks having his rights defeated in certain cases by subsequent claimants of the property. In the case of a sale of goods covered by a nonnegotiable document, title to the goods, (i.e., the sellers rights), passes to the buyer when he gets the document (7-504(1)). This title can be defeated by the creditors of, and buyers from, the transferror until such time as the bailee receives notification of the sale to the buyer (7-504(2)(a),(b)). This applies only in the case of a nonnegotiable document. Under 7-504(2)(b), if the seller resells the goods in the ordinary course of business to a third person, that person will defeat the original buyers rights if the bailee has delivered the goods to the third person, or received notice of the third persons rights, before learning of the original buyers claim to the goods (7-504(2)(b)).

A bailee has nothing but a limited right of possession. However, a buyer in the ordinary course of business of fungible goods sold and delivered by a warehouseman who is also in the business of buying and selling such goods takes free of any claim under a warehouse receipt even if it has been duly negotiated (7-205).

Protection Against Prior Claims: A transferee of a document, whether the document is negotiable or nonnegotiable, takes the goods subject to legal and equitable claims against the goods existing at the time of the transfer to him. There is an important exception to this general rule. A holder of a document by due negotiation takes free of all claims to the document and the goods 7-502(1)(a) & (b). This applies if the transferee is a holder, and is holding a negotiable document. There must also be due negotiation which requires the holder to purchase the document in good faith, without notice of any defense against it or claim to it on the part of any person, for some value except for receiving the document in settlement or payment of a money obligation, and in the regular course of business or finance (7-501(4)).

A holder of a negotiable document who acquires it through due negotiation is not protected from claims to the goods that existed before the document was issued. The exception is when the true owner delivered or entrusted them or any document of title covering them to the bailor or his nominee with actual or apparent authority to ship, store, or sell, or with power to obtain delivery under (7-403).

Payment Against Documents: Upon shipping the goods to the buyer, the seller has the carrier issue a negotiable bill of lading to the sellers order. The seller will attach the bill of lading to an Article 3 draft, in the amount of the price of the goods, drawn against the buyer. The seller is both the drawer and payee of the draft, which is payable at sight or on demand. The draft with the accompanying bill of lading is referred to as a documentary draft. The seller will ask his bank to send the draft through banking channels for the purpose of collecting it from the buyer. The seller will indorse both the draft and document that comprise his documentary draft and transfer them to his bank. The sellers bank, which in Article 4 terms is the depositary-collecting bank, must present or send the draft and accompanying documents for presentment (4-501). The bank, however, does not send the documentary draft to the buyer. Rather, it is sent, through banking channels, to the presenting bank where the buyer is located, for the purpose of having the latter bank present the item to the buyer for payment.

The presenting bank is obligated to present the documentary draft to the buyer-drawee for payment. Upon receiving payment, the presenting bank is obligated to deliver the documents to the drawee (4-503(1)). This is the exact moment at which the simultaneous exchange of goods for cash takes place. The buyer tenders actual payment, which is cash or a cash equivalent in the form of a bank obligation and not just the buyers own commitment. This payment is sent back down the collection chain to the sellers bank, which will credit it to the sellers account. In return, the buyer gets the bill of lading covering the goods. Remember that the bill was indorsed in blank by the seller to whose order the bill was issued. Thus, the buyer, by taking possession of the bill, becomes the holder of the document, and thus the holder of the key to the goods, because the carrier-bailees obligation to deliver the goods now runs to the buyer qua holder of the negotiable bill of lading (7-403(1), (4)).

Shipping Under a Non-Negotiable Document: Payment against documents can be structured so that the goods are shipped under a nonnegotiable bill of lading instead of a negotiable document. When a nonnegotiable bill is used, the seller retains control of the goods by consigning them to himself or his agent so that the carrier is obligated to deliver the goods according to the sellers instructions (7-403(1), (4)). The seller or his agent will then instruct the carrier to surrender the goods to the buyer upon the buyers payment of the draft. This variation involves more risks to the buyer.

Buyers Protections: By taking possession of the negotiable bill of lading which the seller has indorsed in blank, the buyer becomes the holder of the document, (1-201(20), 7-501(1)), and is the only person to whom the carrier can rightfully deliver the goods (7-403(1), (4)). Transfer of the document to the buyer will pass the sellers title, that is, the buyer will thereby acquire the title and rights which the seller had or had actual authority to convey (7-504(1)).

Normally, the buyer will be a holder of the document through due negotiation 7-501(4). Under that circumstance, he will take title to the document and also title to the goods free of any claims to them that may have arisen after the document was issued (7-502).

Warranties: The issuer of the document warrants that the issuer has the goods described in the document and that the goods are as described there 7-203 & 7-301(1). In negotiating the bill of lading to the buyer, the seller warrants, in addition to any warranty made in selling the goods, that the document is genuine, that he has no knowledge of any fact which would impair its validity or worth, and that his negotiation or transfer is rightful and fully effective with respect to the title to the document and the goods it represents 7-507. The seller also makes warranties with respect to the goods themselves (2-313 (express warranties), 2-314 (merchantability) & 2-315 (fitness for a particular purpose)).

Remedies : In the event that the goods or the sellers performance fail to conform to the sales contract, the buyer may pursue the remedies that Article 2 provides for breach of contract, including breach of warranty against the seller (2-711, 2-714).

Buyer Dishonors: The buyers dishonor of the documentary draft is a breach of contract which triggers the sellers Article 2 remedies (2-703). In most instances, the seller will react by reselling the goods and suing the buyer for the difference between the contract price and the resale price (2-706).

Bailee Misdelivers Goods: The carrier, which issued the document covering the goods, is obligated to deliver only to a person entitled under the document, which is the seller in the case of a negotiable document still in possession of the seller or his agent. If the carrier violates this obligation, such as by delivering the goods to the buyer before the buyer gets the document, the carrier is liable to the seller for misdelivery.

Presenting Bank Misdelivers Documents: If the presenting bank surrenders the document without getting payment of the draft, the bank is liable to the seller for breaching a duty of ordinary care which the bank, as a collecting bank, owes to the seller as the owner of the documentary draft ( 4-202, 4-103(e)).

Depository Bank Is Negligent: The sellers bank, which is the depository bank, owes the seller a duty of ordinary care in handling the documentary draft for collection. If the bank violates this duty by a delay in sending the draft for collection, by acting unreasonably in giving the seller notice of dishonor, or by not forwarding instructions to the presenting bank, the depositary bank is liable for damages.

Trade Acceptances : A seller may agree that the buyer can acquire the documents accompanying the draft by accepting the instrument upon presentment instead of paying it. Acceptance is the drawees signed engagement to honor the draft as presented and is accomplished by the drawee signing the draft (3-409(a)). The buyer qua acceptor engages that he will pay the draft according to its terms at the time it was accepted (3-413(a)). This is known as a trade acceptance.

A trade acceptance captures the buyers promise to pay in a negotiable form, which is easier to enforce than a contractual promise and for which there may be a wider market should the seller-payee decide to discount his rights against the buyer. From the buyers perspective, credit against documents is preferable to signing a note at the time the sales contract is made because, by accepting a documentary draft, his engagement on an instrument is concurrent with acquiring control of the goods.

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