Reed Smith Client Alerts

Introduction Electronic trading systems (‘ETS’’) are online platforms by which electronic bills of lading (‘e-bills’) can be created and traded. It is crucial to the use of e-bills within the shipping industry that they behave similarly to their paper counterparts and that their electronic nature does not deprive carriers of their insurances and, in particular, their P&I cover.

Until recently only two ETS (Bolero International Ltd and essDOCS Exchange Ltd) had obtained approval and confirmation of cover from the International Group of P&I Clubs (the ‘International Group’). However, in October 2015, the Clubs in the International Group informed their members of the approval of a third ETS called ‘e-Titletm’.

This latest approval demonstrates slow but significant development in this area and this client alert seeks to provide a timely overview of the development of the current ETS and e-bills, a recap of their advantages and disadvantages and the current outlook.

Slow to catch on! Electronic communications are widely used within the shipping industry (e.g. for export and by customs) and it is estimated that around 47% of the global tanker fleet and 31% of the global bulker fleet have moved to electronic documentation for most or all of their trade and finance operations.

Despite this trend (which is obviously not limited to the shipping industry), the use of e-bills has lagged behind, and paper bills have remained the preferred sea carriage document. This is probably due to the uncertainty of whether e-bills can comprehensively mirror and replicate the highly evolved and complex matrix of contractual rights, responsibilities and obligations inherent in paper bills of lading.

Advantages / Disadvantages in a modern world That said, as in any other area of modern life, the advantages of electronic communications are substantial and varied and, notwithstanding the concerns above, those advantages demand progression. Some of these advantages are set out below.

Fraud Since e-bills are held centrally and securely, and are only accessible by the lawful holder at any one time, e-bills are much less prone to fraud than paper bills. This is because paper bills can be copied or switched and thereafter fraudulently pledged or presented by persons improperly holding themselves out as the lawful holder.

Administrative management and cost Paper bills are expensive to manage, largely as a result of having to be physically couriered to receivers at discharge ports, but also because they can be lost. Conversely, e-bills allow trading parties with an internet connection (probably even only with dial up!) instantaneous access anywhere in the world. This e.g. allow banks to centrally review, finalise and pre-approve draft e-bills before they are issued.

Time Just as paper bills are expensive to courier to the world’s discharge ports, they are also slow, particularly where a cargo is traded numerous times whilst at sea. This gives rise to a host of issues (most of which result in increased expense) including either delay to the vessel or the carrier being required to discharge against e.g. LOI’s.

The mechanics Unlike paper bills (governed by indorsement and lawful possession) e-bills require all parties to a trade to be signed up to the relevant ETS in advance so that the e-bill can be transferred and traded between them. This necessarily means that that the free trade enjoyed by paper bills (i.e. to any party anywhere) is somewhat fettered.

ETS and e-bills seek to replicate the existing legal framework of paper bills by express contractual agreement. Where parties to a trade have agreed to use e-bills, all of those parties sign up to the relevant ETS’ user agreement, which implements as between all of them the rights and obligations associated with paper bills.

Each of these ETS has their own user agreement, but there are some common features. In particular, e-bills:

a. Visually replicate paper bills, preserving the often industry / custom specific layout;

b. Replicate the function of paper bills, including a party’s ability to issue, indorse, recut or surrender the e-bill;

c. Replicate the physical transfer of paper bills and, whilst all parties can view an e-bill (in copy form), the trading platform restricts access and indorsement to the current lawful holder (by way of fob and access code) as the e-bills securely move from one party to the next; and

d. Can be converted into paper bills, allowing them to be finally traded with parties which have not signed up to the ETS platform. However, it is notable that paper bills cannot be converted into e-bills since none of the ETS would be prepared to investigate and effectively warrant the provenance of paper bills and the physical cargo they represent.

Legal enforcement Although the ETS (and the user agreements to which the trade parties are obliged to agree) contractually seek to replicate the contractual matrix as between the parties to a trade, one area of concern arises out of how e-bills are likely to be viewed by a court or tribunal where the e-bill become the subject of legal proceedings. By way of example, might a Court in Indonesia or PRC refuse to acknowledge an e-bill as a binding contract.

These types of difficulties have not yet been tested in court, probably because to date the use of e-bills has been restricted to trading intra-group or between trusted counterparties (for the reasons noted above), and disputes seldom arise and almost certainly never become the subject of formal legal proceedings.

Institutional support for e-bills BIMCO and the International Group continue to support the use of e-bills, and this support is reflected in their policies. In November 2014 BIMCO introduced a new standard charterparty clause addressing the use of e-bills:

a. “At the Charterers’ option, bills of lading, waybills and delivery orders referred to in this Charterparty shall be issued, signed and transmitted in electronic form with the same effect as their paper equivalent.

b. For the purpose of Sub-clause (a) the Owners shall subscribe to and use Electronic (Paperless) Trading Systems as directed by the Charterers, provided such systems are approved by the International Group of P&I Clubs. Any fees incurred in subscribing to or for using such systems shall be for the Charterers’ account.

c. The Charterers agree to hold the Owners harmless in respect of any additional liability arising from the use of the systems referred to in Sub-clause (b), to the extent that such liability does not arise from Owners’ negligence.”

In February 2010, the International Group Clubs informed their members that the use of e-bills would be covered by P&I insurance in the same way as paper bills, providing that the electronic trading platform was approved.

It is notable that the use of e-bills assumes additional cyber-style risks (e.g. viruses or hacking) which fall outside traditional P&I cover (as non-marine risks) but can be covered by traditional business insurance. Parties signing up to ETS will therefore incur obligations similar to those contained in software agreements, such as to maintaining IT standards, confidentiality and data protection undertakings.

Going forward Despite the clear advantages of instantaneous communication (a developing trend in the modern world), paper bills are proving resilient to change. This has probably less to do with the traditional and conservative nature of the shipping and trade industry, but probably more to do with concerns as to their ability to comprehensively mirror the evolved nature of paper bills which are so fundamental to e.g. the financing of international trade. It remains to be seen if and when the carriage of goods by sea will enter into a brave new completely paperless world!


Client Alert 2016-005