Legal recognition of electronic trade documents: UK joins global initiative to digitalise trade

Julian Clark

Ince & Co, London

JulianClark@incegd.com

Reema Shour

Ince & Co, London

ReemaShour@incegd.com

On 16 March 2022, following a consultation with key stakeholders in the shipping, trade, finance and legal industries, the UK Law Commission published its detailed report on the proposed reform of English law to allow for the legal recognition of electronic trade documents (ETDs). It undertook this project at the request of the UK government and as part of its wider work on legislative changes required to deal with emerging technology, including crypto and other digital assets, as well as smart contracts.

Among those who participated in the consultation process were the International Group (IG) of P & I Clubs, the International Chamber of Commerce (ICC) Maritime Bureau, the British Insurance Law Association, the London Maritime Arbitrators Association, the Digital Container Shipping Association (DCSA), the UK Chamber of Shipping and the Global Shippers Forum.

This article discusses why the proposed reforms are considered necessary, highlights some other industry and international initiatives to digitalise trade that are underway or have already come into effect, summarises what the Law Commission has recommended and considers what happens next.

The context

International trade is estimated to be worth around £1.266tn to the UK. However, the international transportation of goods requires a number of different transport, insurance, finance and logistics services and generates a significant amount of documentation. These industries traditionally rely on paper documentation, with the average trade finance transaction resulting in over 100 pages of paper documents. Global container shipping is estimated to generate billions of documents a year; according to the DCSA, over 16 million original bills of lading were issued in 2020 and 99 per cent of them were paper bills.

The paper system can be inefficient because the preparation, transmission and checking of documents takes time and generates costs. There is also the risk of documentary error as well as forgery. The much-publicised recent cases of forged warehouse receipts in Asia are a good example of the types of problem that can arise. The frequency with which cargo misdelivery claims are made is a further illustration of the risks of fraud. In an increasingly environmentally aware global community, the amount of paper generated by trade transactions has become an anomaly. The Covid-19 pandemic also highlighted the potentially catastrophic impact any restrictions on travel and free movement can have on international trade and the importance of digital commerce to the global economy.

The ICC has estimated that digitalising trade documents could generate £25bn in new economic growth by 2024, and free up £224bn in efficiency savings. Indeed, emerging technologies such as distributed ledger technology (DLT) have made trade based on electronic documents increasingly possible. However, technological advancements require changes in the law as well as new industry working practices to accommodate them.

By way of example, English law provides significant rights and entitlements to an entity that is the ‘holder’ or has ‘possession’ of a trade document but does not allow an electronic document to be possessed for these purposes. Hence the ongoing reliance on paper documents. This is significant beyond the UK because English law is the express governing law of a large number of international commercial contracts and English common law is the most widespread legal system in the world. It also influences the jurisprudence of many other jurisdictions. Indeed, feedback received by the Law Commission suggested that other jurisdictions were watching developments in the UK closely with a view to enacting similar changes to their own laws.

Current English law

The status of a bill of lading as a document of title, and the concept of transfer of rights to allow a consignee or endorsee to sue the carrier for loss or damage to the cargo, was recognised by the Bills of Lading Act 1855, which was subsequently replaced by the English Carriage of Goods by Sea Act 1992. Under English law, paper documents are capable of ‘possession’ because they are tangible assets. As a result, bills of lading provide a number of legal rights and remedies, such as being able to demand delivery of the goods, having title to sue, enforcing a lien or rights of bailment over the goods or claiming for conversion of the goods.

However, English law does not currently recognise electronic documents as being capable of ‘possession’ because they are intangible assets. Therefore, the holder of an electronic bill of lading cannot enforce a right to demand delivery of the goods in question in the same way that the holder of a paper bill would be able to do. While some electronic bills of lading systems involve the parties entering into an ad hoc contractual arrangement that allows the electronic bill holder to have similar rights to a paper bill holder, such contractual workarounds have not yet been legally tested in the English courts. They also only bind the parties to the agreement, while a paper bill holder will have proprietary rights against third parties. In 2017, in Glencore International v MSC Shipping, the English Court of Appeal expressed its view that if modern technological solutions were to be used in place of paper, then this had to be provided for by statute or expressly agreed in contract. In that case, the Court of Appeal rejected the argument that an electronic release system, which operated on the basis of a unique PIN for each container, was the functional equivalent of delivery of goods. The carrier was consequently held liable for the loss of two containers.

The Rotterdam Rules, adopted in December 2008, recognised that the existing legal regime governing the international carriage of goods by sea did not adequately take into account modern transport practices, including the use of electronic transport documents. However, the Rules have not come into force.

International digitalisation of trade

Some of the more noteworthy initiatives to digitalise international trade include the following:

• The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR), adopted in July 2017. MLETR can be used as a basis for domestic legislation. It aims to enable the legal use of electronic transferable records both domestically and across borders if they are functionally equivalent to transferable (ie, paper-based) documents or instruments (eg, bills of lading, bills of exchange, promissory notes and warehouse receipts).
• The ICC’s Uniform Rules for Digital Trade Transactions, published in October 2021.
• A G7 framework agreement in April 2021 to promote the adoption of MLETR.
• The G7 Trade Ministers’ Digital Trade Principles, published in October 2021, encouraging governments and industry to promote the digitalisation of trade-related documents.
• The International Trade and Forfaiting Association’s Digital Negotiable Instrument Initiative, launched in April 2020. This proposes specifications for electronic documents that would create functionally equivalent electronic negotiable documents operating in the same way as paper bills of exchange or promissory notes.
• The Future International Trade Alliance, formed in February 2022 by the DCSA, the International Association of Freight Forwarders Association, the Baltic and International Maritime Council, ICC and SWIFT, that focuses on standardising digitalisation of international trade.

Notwithstanding these various initiatives and encouragement from the G7 and the ICC for governments and industry to adopt MLETR, as of July 2022, MLETR had so far only been adopted by six states.

However, BIMCO has an Electronic Bills of Lading Clause which gives charterparties that have been signed electronically the same legal effect as paper bills. In addition, in July 2022, BIMCO announced that it had developed and published an electronic bill of lading standard for the bulk shipping sector. Its stated aim was to help accelerate the digitalisation process by establishing common industry standards for e-bills.

ETD systems

In simple terms, there are registry systems which are administered centrally and involve multipartite contractual arrangements. Users access their accounts with a password or some other security code or arrangement.

Alternatively, there are decentralised systems, where documents can be transferred between participants and the transfers are recorded on a secure ledger that is for all practical purposes permanent. The data recorded on the ledger is said to be ‘immutable’. Decentralised systems are based on digital ledger technology (DLT – blockchain is a form of DLT). Users access documents with a ‘private key’.

Due to legal uncertainty surrounding the status of ETDs, as well as concerns about how ETD systems will be adopted by various participants in different jurisdictions with divergent laws, uptake has so far been limited. Additionally, potential participants need to be confident that ETDs can be transferred safely and securely and that any costs implications are justified by the benefits that the technology offers.

Encouragingly, since February 2010, the IG P&I Clubs have formally recognised and approved a number of ETD systems and have amended their Rules so that the usual P&I liabilities will be covered bar exclusions. As oft July 2022, eight systems have been approved: essDOCS, Bolero, E-Title, edoxOnline, CargoX, WAVE, TradeLens and IQAX eBL.

The Law Commission’s report

The Law Commission decided that possession should be the operative concept and that

ETDs should be capable of being possessed and should be subject to the same laws and practices as paper documents if they meet specific criteria. This would achieve functional equivalence between paper and electronic documents.

However, the Law Commission did not define possession for these purposes, possession being a common law concept and both flexible and fact specific. In the Commission’s view, the English courts, assisted by the case law, could decide whether there was possession in any given case. The courts should also decide whether and when the transfer of possession took place as this could depend on the system used and the contractual arrangements between the parties.

The Law Commission identified seven specific types of trade document that should be covered by the proposed legislation:

• Bills of exchange;
• Promissory notes;
• Bills of lading;
• Ship’s delivery orders;
• Warehouse receipts;
• Marine insurance policies; and
• Cargo insurance certificates.

However, it added that the legislation should allow for other types of trade documents (with certain exclusions) to be in electronic form where possession was relevant for a person to claim performance of an obligation.

In summary, the ‘gateway’ criteria are the following:

1. The electronic document should contain the same information as a paper trade document.
2. It should be stored on a reliable system that meets certain standards in the way that it operates. The Law Commission did not, however, recommend any particular system or technology, thus allowing for future emerging technologies and systems.
3. The document must be adequately protected against unauthorised interference and alteration.
4. Although multiple parties might have access and control over the document, it should not be possible for more than one person to exercise control over the document.
5. A transfer of the document must transfer both the document itself and the ability to control the document, so that any person who was able to exercise control prior to the transfer can no longer do so after the transfer.
6. It must be possible to distinguish the original document from any copies and other documents.
7. As well as being able to identify the original document, it should also be possible to identify those who are able to exercise control over it.

The Law Commission recognised the potential issues arising out of a cross-border transaction involving different jurisdictions with divergent laws on the validity of ETDs. It, therefore, recommended that it should be possible for an ETD to be converted into a paper document where necessary. It also indicated that it would address the private international law aspects of digital assets in a forthcoming consultation on conflict of laws and emerging technologies.

Comment

The UK Government announced on 10 May 2022 that an electronic trade documentation bill was part of its legislative agenda for the 2022-2023 parliamentary session. It is not currently expected that a change in leadership should affect the progress of this legislation.

Nonetheless, and irrespective of legal reform, ETDs will only become standard practice when other jurisdictions similarly reform their laws and the international shipping and trade industries commit to wider adoption of ETDs. There are also practical considerations, for example making different ETD platforms interoperable and standardised so far as possible. Ultimately, however, the future is digital.