What matters are currently excluded from the scope of the Electronic Transactions Act?

The ETA currently contains a list of matters that are excluded from its scope and in respect of which the ETA does not provide any comfort as to the legal effect of documents, records, information or signatures in electronic form. The excluded matters likely to be of most relevance to the finance sector are:

• negotiable instruments, documents of title, bills of exchange, promissory notes, consignment notes, bills of lading, warehouse receipts or any transferable document or instrument that entitles the bearer or beneficiary to claim the delivery of goods or the payment of a sum of money;
• the creation, performance or enforcement of an indenture, declaration of trust or power of attorney, with the exception of implied, constructive and resulting trusts; and
• any contract for the sale or other disposition of immovable property, or any interest in such property.

In June 2019, following a comprehensive review of the ETA by numerous government ministries and agencies, the Infocomm Media Development Authority (IMDA) issued a consultation paper on the ETA aimed at seeking opinions on whether to remove some or all of these excluded matters from the ETA. The Bill reflects the outcome of this consultation process in relation to trade-related electronic transferable records.

What amendments to the Electronic Transactions Act are reflected in the Bill?

The Bill adopts the UNCITRAL Model Law on Electronic Transferable Records by removing the exclusion of transferable documents and instruments from the scope of the ETA and incorporating provisions into the ETA specific to them. These changes account for the structural shifts in the information technology landscape and the proliferation of electronic transactions that have occurred in Singapore and more widely in the trade sector, and the fact that electronic transferable records have now become a viable alternative to paper documentation in this sector.

If amended, the ETA would include provisions for the recognition of any “document or instrument issued on paper that entitles the holder to claim the performance of the obligation indicated in the document or instrument and to transfer the right to performance of the obligation indicated in the document or instrument through the transfer of that document or instrument” in electronic form. The definition of “transferable documents and instruments” in the Bill expressly includes within its scope (a) bills of exchange, (b) promissory notes and (c) bills of lading.

An electronic record of a transferable document or instrument will be recognised as an “electronic transferable record” for the purposes of the ETA if it contains the same information and a reliable method is used to (i) identify it as the authoritative electronic record constituting the electronic transferable record; (ii) render it capable of being subject to control from its creation until it ceases to have any effect or validity; and (iii) retain its integrity.

The provisions relating to electronic transferable records intended to be incorporated into the ETA by the Bill have the aim of facilitating the replacement of physical transferable documents by recognising the functional equivalence and unique characteristics of electronic transferable records. These provisions can be split into two main categories:

• Provisions on functional equivalence: These provisions, some of which are similar to those already contained in the ETA, provide for the following, provided that certain requirements set out in the ETA are satisfied:

• Enforceability: The legal effectiveness, validity or enforceability of electronic transferable records, including those issued or used outside Singapore.
• Writing: That the requirement for information to be written, in writing or to be presented in writing can be satisfied by an electronic transferable record.
• Signatures: That the requirement for a signature on a transferable document or instrument can be satisfied for an electronic transferable record.
• Possession: That the requirement for possession of a transferable document or instrument can be satisfied for an electronic transferable record if a reliable method is used to establish exclusive control and identify the person in control, with the same principles applying to a transfer of possession.

• Provisions on the use of electronic transferable records: These provisions, which cater for the unique nature of electronic transferable records, provide for the following with respect to electronic transferable records:

• Indication of time or place: The requirements for an indication of time or place may be satisfied if a reliable method is used to indicate such time or place.
• Indorsements: The requirements for an indorsement may be satisfied if the information required for the indorsement is included in the electronic transferable record.
• Amendments: The requirements for an amendment may be satisfied if a reliable method is used so that the amended information is identified as such.
• Change of medium: Such electronic transferable records may replace a physical transferable document or instrument (or vice versa) if a reliable method for the change of medium is used (namely the new medium must accurately reproduce the information and contain a statement indicating the change in medium) and in those circumstances, the previous form of the transferable document or instrument or electronic transferable record (as applicable) will cease to have any effect or validity and must be made inoperative.

• The concept of a ‘reliable method’ is further expanded on in the Bill by listing certain non-prescriptive matters that may aid reliability and providing for a presumption of reliability in any proceedings involving an electronic transferable record in the case of any accredited electronic transferable records management system provided by a provider that is registered, licensed, accredited or recognised in accordance with any future regulations.

The Bill also provides for powers of the minister to make further regulations focused on the regulation and recognition, including on a cross-border basis, of the electronic transferable records management systems and their providers.

When will these amendments to the Electronic Transactions Act become effective?

The Bill had its first reading in parliament on 4 January 2021. The Bill must now run through the parliamentary process and be passed into law to become effective.

What are the implications of these amendments to the Electronic Transactions Act for the trade and commodities finance sector?

The amendments to the ETA contemplated by the Bill would be a positive development for the trade and commodities finance sector. The recognition of electronic versions of transferable documents and instruments as equivalent to their paper counterparts may lead to their greater use in a number of areas. Areas that may be of particular interest to you are as follows:

• Bills of exchange and promissory notes: We have seen an increasing use of bills of exchange and promissory notes in receivables purchase transactions in recent years. These instruments constitute a simple unconditional debt obligation payable on the relevant due date, are negotiable and under Singapore law are governed by the Bills of Exchange Act (Cap. 23). If you are a purchaser of receivables, receipt of such an instrument eliminates some of the risks that you would otherwise be exposed to, such as the existence of a dispute or a right of set-off or counterclaim in respect of the underlying receivable.

As bills of exchange and promissory notes are bearer instruments, you would need to physically hold an original in order to be able to present it for payment. This creates challenges when structuring transactions and often involves powers of attorney to enable you to execute the instrument on behalf of the drawer and/or drawee and so hold the original instrument or be in control of the creation of the original instrument at the time of purchase of the receivable. There are also security concerns when holding original negotiable bearer instruments such as these. The ability for bills of exchange and promissory notes to be signed and held electronically results in opportunities to simplify structures and logistics for these forfaiting transactions and to explore the use of these instruments on electronic platforms for the sale and purchase of receivables.

• Bills of lading: Subject to the caveat below, there would be a number of potential benefits to the trade and commodities finance sector if electronic bills of lading were to be given equivalent status to paper bills of lading. In particular, the speed at which electronic bills of lading could be reviewed, approved and transmitted would allow for more financings pursuant to which, if you were the financier, you could take actual possession of the bills of lading prior to the discharge of the goods and, as the original bill of lading gives the holder a right of possession of the goods, take a pledge over those goods. This could:

• reduce the structural risk of these transactions;
• result in better regulatory capital treatment for you if you are a regulated financial institution; and
• facilitate your compliance with the Code of Best Practices – Commodity Financing (the Code), which was recently published by the Association of Banks in Singapore, with the support of the Monetary Authority of Singapore, Enterprise Singapore and the Accounting and Corporate Regulatory Authority. The Code requires lenders to adopt and/or impose measures to ensure sufficient control over transactions and the underlying goods that are subject to finance. A more detailed guide to the implications of the Code can be found in our recent article on the subject: “Banks publish new “code of practice” for commodity financing in Singapore”

In addition, there were several high-profile fraud cases in 2020 involving Singapore-based trading companies that affected the commodities finance industry. It is generally accepted that the use of electronic bills of lading, if issued through an appropriate platform, would result in greater transparency and traceability, which can reduce the risk of bills of lading fraud (i.e., the issuance of fake duplicates) and the need for letters of indemnity.

However, the challenge to achieving widespread use of electronic bills of lading lies in the international nature of trade and the number of interested parties in any one transaction. A cargo represented by a bill of lading is likely to travel internationally and the various parties involved in the shipping, sale and purchase, financing and insuring of that cargo may all be located in different jurisdictions. In order for the parties to a trade to be comfortable with the use of electronic bills of lading, they are likely to want to know that such instruments are legally valid, binding and enforceable in electronic form in all relevant jurisdictions in which they may wish to enforce their rights.

To date, only Bahrain has adopted the UNCITRAL Model Law on Electronic Transferable Records. Its adoption by Singapore will be a significant step in the right direction, but much more widespread adoption by states is likely to be required before we see common usage of electronic bills of lading outside of the platforms that have been set up by a number of organisations that seek to replicate the effects of a bill of lading through a contractual framework with a governing law that has been agreed to by all of the parties using the platform.

What are the implications of using distributed ledger technology (DLT), smart contracts and biometrics?

The Bill does not specifically address the legal implications of the use of DLT (e.g., blockchain), smart contracts (i.e., pieces of code which execute tasks upon defined conditions being met) or biometrics. DLT and smart contracts, in particular, have become highly relevant to the trade and commodities finance and fintech sectors in the recent past with the development of various electronic platforms that rely on this technology to enhance the speed, efficiency and transparency of the trade and financing process, typically by integrating digital representations of negotiable instruments such as bills of lading or warehouse receipts. As noted in the IMDA’s June 2019 consultation paper, the ETA is technology-neutral and focuses on functional equivalence, and consistent with this approach, it appears that no amendments to the ETA have been deemed necessary at this stage to address the implications of specific types of technology being applied to facilitate the use of electronic transferable records.

Helpfully, the IMDA’s June 2019 consultation paper did itself confirm that the ETA does not prevent the adoption of DLT by the industry and stakeholders, and more specifically, that data on a blockchain may be consistent with the concepts of ‘in writing’, ‘electronic record’, ‘electronic signature’, ‘secure electronic record’ and ‘secure electronic signature’. The paper also suggested that the ETA should not prevent the use and formation of contracts by means of smart contracts, and likened these to contracts formed via automated message systems, which may be valid and enforceable both under the ETA and pursuant to the jurisprudence of the Singapore courts. As concerns biometrics, the paper took the view that this technology alone is unlikely to be understood as a “secure electronic procedure” as defined in the ETA, although the ETA should permit biometrics to be deployed as a supporting technology for authentication purposes.

Are there likely to be any future amendments to the Electronic Transactions Act?

Whilst the consultation paper issued by the IMDA canvassed views on the removal of all of the exclusions from the scope of the ETA, the Bill only seeks to remove from the ETA the exclusion of “negotiable instruments, documents of title, bills of exchange, promissory notes, consignment notes, bills of lading, warehouse receipts or any transferable document or instrument that entitles the bearer or beneficiary to claim the delivery of goods or the payment of a sum of money”. The other exclusions will remain for now, but the explanatory statement in the Bill notes that this is part of a wider and ongoing initiative by the government to review and support the electronisation of various types of instruments or transactions, including these other matters, and that these other items will be deleted when the legislative and administrative frameworks supporting the electronisation of them are ready to be enacted and implemented.

One exclusion that is problematic for the trade and commodities finance industry relates to declarations of trust and powers of attorney, because:

(a) security documents will typically include a power of attorney to allow the beneficiary of the security to step into the shoes of the security provider on enforcement in order to take certain perfection steps, send out notices and take certain other actions in the name of the chargor; and

(b) receivables purchase arrangements will often include (i) a power of attorney to allow the purchaser to conduct any claim or other matter in relation to the purchased receivables and carry out any obligations of the seller that have not been performed by the seller for any reason; and (ii) a declaration of trust from the seller over any amounts received by the seller in respect of any purchased receivable, prior to payment of that purchased receivable into an account of the buyer.

Until further amendments are made to the ETA, it may not be appropriate to use electronic signatures when executing these documents.

In addition, whilst not a specific exclusion from the scope of the ETA, it is not yet clear whether the use of electronic signatures for the signing of deeds would be recognised under Singapore law.

In-depth 2021-015