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"Warehouse receipts are typically acknowledgements, in hard-copy or electronic form, issued by warehouse operators to the depositors of stored goods."
The Model Law was adopted by the UNCITRAL Commission at its 57th session in New York on 27 June 2024. The joint initiative between UNIDROIT and UNCITRL will likely significantly impact international trade by providing a robust and unified legal framework for the issuance, transfer and enforcement of warehouse receipts.
It is hoped that the ripple effect of the Model Law will result in new finance sources for commodity producers in developing countries and, ultimately, assist in curbing fraud in international trade. The final text of the Model Law will be made available by end-2024.
What is a Warehouse Receipt?
Warehouse receipts are typically acknowledgements, in hard-copy or electronic form, issued by warehouse operators to the depositors of stored goods. Warehouse receipts plays a crucial role in international trade for several reasons including:
- collateral for financing: warehouse receipts can be used as collateral for securing loans or financing. Financial institutions may accept the receipt as security because it represents tangible goods that can be sold if the loan is not repaid;
- facilitating trade: in international trade, goods are often stored in warehouses before being shipped to the buyer. Warehouse receipts may be used by the seller to prove that the goods exist and are ready for delivery, which is essential for the execution of contracts; and
- risk management: warehouse receipts also play a role in managing risks associated with the storage of goods. They usually include details of the condition and quantity of the goods, which helps both parties in the transaction verify that the goods meet the agreed specifications.
In addition, warehouse receipts can be negotiable or non-negotiable. If a warehouse receipt is negotiable, it may be transferred to another party by endorsement, allowing the transfer of a claim to the goods, without the need to move the physical goods themselves.
Fraud involving warehouse receipts in recent years
In recent years, warehouse receipts have featured in several high-profile fraud cases, typically involving their duplication, with such duplicates pledged with multiple financial institutions, or the issuance of warehouse receipts for non-existent quantities of goods. Notably:
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"Warehouse receipts are typically acknowledgements, in hard-copy or electronic form, issued by warehouse operators to the depositors of stored goods."
1. The Qingdao metals scandal was exposed in 2014. This involved a warehouse duplicating certificates to pledge metal as collateral for several bank loans.
In the case,¹ 27 warehouse receipts were issued to a bank’s order to evidence ownership and possessory right over aluminium and copper stored in warehouses in Qingdao. The parties were under an agreement to sell and buy certain quantities of metal, which would continue to be stored at the warehouses. It was later discovered that a significant quantity of the metals was missing from the warehouses. The issue of “multiple pledging” came to light, wherein the same lot of metal had been used as the subject matter for different transactions.
This fraud revolved around in-warehouse transfers, which did not require any confirmation of delivery from the operator of the warehouse facility. It was suggested in arguments before the court that delivery under the agreement took place only by way of delivery of documents (deemed delivery), rather than there being a requirement for actual delivery of metals (since the agreement did not call for confirmation from the warehouse operator to confirm delivery).
However, the court rejected the ‘deemed delivery’ argument on the basis that it was against the commercial scheme of the transactions. It was held that, in the absence of an attornment from the warehouse operator, there was no delivery of metals that took place under the agreement.
2. Natixis v Marex and Access World,² concerning nickel stored at warehouses and ‘transferrable’ warehouse receipts given to the buyer.
In this case, the warehouse receipts were discovered to be forged and the claims between the parties involved issues of fundamental mistake and breach of duty of care. However, the court took the opportunity to review the legal status of warehouse receipts.
The court confirmed that: (i) warehouse receipts are not documents of title under English law (unlike bills of lading which are documents of title to the goods they represent), and only give the holder a right to possession of the goods; and (ii) the nature of the relationship between the warehouse operator and the original depositor is one of contractual bailment.
Stakeholders in the current system were able to continue this fraud over several years due to a lack of formal systems of checks to ensure inspection at every stage and within separate jurisdictions.
"The primary objective of the Model Law is to harmonise the disparate legal regimes currently governing warehouse receipts."
Key objectives and benefits of the Model Law
The primary objective of the Model Law is to harmonise the disparate legal regimes currently governing warehouse receipts. Whilst several countries have recently initiated legislative reforms to modernise their national legal frameworks and accommodate the use of new technology (e.g. electronic documents), no intergovernmental organisation has yet adopted a model law on warehouse receipts that would assist states in undertaking reforms on warehouse receipts.
Accordingly, by creating a standardised set of rules, the Model Law aims to:
- enhance legal certainty by establishing a set of clear and consistent guidelines for the issuance and transfer of warehouse receipts;
- facilitate trade financing by enabling businesses to use warehouse receipts as collateral for obtaining financing, thereby increasing access to credit; and
- boost economic efficiency by streamlining procedures related to the storage and movement of goods, reducing transaction costs and improving the overall efficiency of supply chains.
Core provisions
The Model Law as presently drafted covers several aspects of the warehouse receipt regime. These include:
- Issuance of Warehouse Receipts (Chapter II) which covers every aspect of the issuance of warehouse receipts, including the format and information to be included therein, representations made by the depositor and the assessment of sealed good. Furthermore, it deals with situations where warehouse receipts may be altered, lost, or destructed;
- Transfer and Negotiation (Chapter III) which codifies a mechanism for transfer of warehouse receipts and the nature of rights that are carried by the possessor. Additionally, it aims to codify the rights available against third parties and the means through which they may be effectuated;
- Rights and Obligations of the Warehouse Operator (Chapter IV): in addition to rights of the title holder of the warehouse receipt, the Model Law also aims to set out the rights and obligations that bind warehouse operators. This section lays out the standard of the duty of care required to be undertaken thereby, along with the nature of the rights of lien available over the goods stored within their premises. Furthermore, this section lays out the procedure for delivery or partial delivery of goods, as the case may be; and
- Pledge Bonds (Chapter V) is an optional chapter intended to be adopted by enacting states that wish to adopt a dual warehouse receipt system. In such a system, a warehouse operator issues a receipt and a pledge bond which grants its holder a security right over the goods covered in the receipt and the rights of the warehouse receipt holder are subject to the rights of the pledge bond holder.³
"The adoption of the Model Law is expected to streamline international trade practices and reduce the legal complexities associated with the use of warehouse receipts."
Implementation of the Model Law
Per Article 35 of the Model Law, enacting states must determine the date when the law concerning warehouse receipts will be implemented within their jurisdictions. Such date of implementation is required to be communicated to all stakeholders with certain period to allow them to familiarise themselves and to prepare for compliance with the new law on warehouse receipts. Notably, application of the new law is only to warehouse receipts issued post-implementation of the same.⁴
Conclusion
The adoption of the Model Law is expected to streamline international trade practices and reduce the legal complexities associated with the use of warehouse receipts.
States implementing the Model Law should expect to benefit from improved trade financing opportunities and greater integration into the global trading system. In previous years, frauds have been able to perpetuate the warehousing system due to a lack of thorough checks and requirements relating to the issuance of warehouse receipts.
The Model Law seeks to deal with these issues to prevent parties taking undue advantage of the system and represents a welcome step forward in the security of global trade transactions.
Please do get in touch if you would like to discuss any of the issues traversed in this article or have a question in relation to warehouse receipts.
Footnotes
[1] [2015] EWHC 1481 (Comm)
[2] [2019] EWHC 2549 (Comm)
[3] Draft guide to enactment of the UNCITRAL/UNIDRIOT model law on warehouse receipts, Section D. Page No. 8, 9 February 2024: https://documents.un.org/doc/undoc/ltd/v23/087/34/pdf/v2308734.pdf?token=DVnipkcbdXMLOovsuk&fe=true
[4] Draft guide to enactment of the UNCITRAL/UNIDRIOT model law on warehouse receipts, Section III. Page No. 34
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