Summary
The Electronic Trade Documents Act received royal assent on 20 July 2023 (the Act). Despite its succinct form (comprising only eight sections) and relatively simple premise, the Act has the potential to transform shipping and international trade.
The fundamental legal change brought about by the Act is that electronic trade documents can now be “possessed”, something that was not previously possible as a matter of English law. This change opens the way for the rights that accompany the possession of paper trade documents, such as bills of lading, to be exercised in the same way by holders of electronic trade documents. The majority of the Act therefore concerns the requirements for an electronic trade document to have the same legal status as a paper trade document – in particular that electronic trade documents be held on a “reliable system”, so that their authenticity, singularity and integrity can be verified.
This simple but fundamental change in English law, which forms part of a much wider legislative shift in the recognition of trade documents in electronic form (such as Singapore’s adoption of the UNCITRAL Model Law on Electronic Transferable Records), is expected to have far-reaching consequences for shipping, international trade and trade finance. The International Chamber of Commerce (ICC) estimated that digitalising trade documents could generate £25 billion in new economic growth by 2024 and free up £224 billion in efficiency savings. The UK government estimates that the Act could generate a net benefit of £1.14 billion in the British economy over the next decade for UK businesses trading across the world.
However, practical questions remain as to how quickly market participants will adopt digital processes. Paper documents and electronic documents are therefore likely to co-exist for some time.
This client alert examines the scope and implications of the Act.
Why is the Act important?
The ICC estimates that 80% of all bills of lading, as well as a majority of trade documents generally, operate under English law.
Current international trade and trade finance practices therefore reflect in many ways the traditional English law position that physical possession of certain paper trade documents, such as bills of lading, generally determines who is legally able to exercise the rights and obligations the document grants.
This legal position, and the obvious lack of speed it entails, has often been at odds with the practical challenges of physical possession in international trade and trade finance transactions. This conflict exposes market participants to additional risks when workarounds – such as requiring a letter of indemnity to release goods when the original bills of lading are not available or use of electronic trade technology systems1 – are developed to compensate for these practical challenges. Even with the increasing development of blockchain technology, when the Digital Container Shipping Association (DCSA) said, in February 2023, that “nine major ocean carriers had committed to issuing half of bills of lading electronically within five years and 100% in ten years”, it admitted that “at the moment electronic bills of lading account for only about 1.5% of all bills of lading that are issued”.
Although a reliance on paper documents might seem outdated, it has remained necessary under English law: until the Act, it was not possible for an electronic trade document to be “possessed”, because such a document is intangible. An electronic trade document therefore could not have the same legal status as a paper trade document: an electronic bill of lading was not recognised as a document of title.
Key provisions of the Act
The Act:
- gives electronic trade documents the same legal effect as equivalent paper trade documents, so that they can be “possessed”;
- requires that electronic trade documents be held on a “reliable system”;
- allows electronic trade documents to be subject to a pledge or lien as a form of security; and
- allows for the conversion of a paper trade document into an electronic trade document and vice versa.
1. Electronic trade documents
The Act deliberately avoids a restrictive and prescriptive list of types of document that are capable of being a trade document. Instead, a trade document is a document (i) commonly used in connection with the trade in, or transport of, goods or for financing such trade or transport and (ii) possession of which is required as a matter of law or commercial custom, usage or practice for a person to claim performance of an obligation. The Act lists (by way of example only) documents such as bills of exchange, promissory notes, bills of lading, ship delivery orders, warehouse receipts and marine insurance policies as trade documents.
2. Reliable systems
Under the Act, electronic trade documents must be held on a “reliable system” so that their authenticity, singularity and integrity can be verified. Although the Act does not outline the particular requirements for a reliable system, it does provide a non-exhaustive list of factors that English courts may take into account when assessing the reliability of a particular system.
This approach means the Act can be effective while industry standards for such systems are developed alongside digital technology trends, with the goal of eventually achieving industry-wide consensus in respect of the systems to be used. Although no particular technology is prescribed in the Act, distributed ledger technology (including blockchain) is tipped to be used widely, in particular, because of its ability to ensure exclusive control and transfer. Distributed ledger technology can be used to record securely data regarding sources of goods, prices, insurance, shipping and settlement, and this information is easily available to all parties.
This is particularly relevant against the backdrop of increasing trade finance related fraud in recent years, with fraudsters faking, cloning and/or duplicating bills of lading in order to obtain multiple financings against the same cargo. The expectation is that electronic bills of lading will provide for greater transparency and traceability such that it will be more difficult for certain types of trade finance related fraud to be carried out without detection.
At least in the short term, however, it may be challenging for interested parties to determine whether the legal threshold under the Act for the reliability of any given system is met, and the risks of relying on electronic trade documents when the threshold is not met. However, guidelines on the reliability of electronic trade systems already exist, such as the DCSA’s standards for an Electronic Bill of Lading, the ICC’s Digital Standards Initiative, guidance from the Future International Trade Alliance and the Uniform Rules for Digital Trade Transactions. In combination, the Act complements the rules and guidelines currently available as part of a wider framework for the digitalisation of trade.
Nonetheless, it remains to be seen to what extent trade participants making use of electronic documents will seek to include protective provisions regarding system reliability in the underlying contracts themselves, such as in their sale and carriage of goods contracts, as well as any related services agreements, including with the providers of the system itself. For example, parties may seek to incorporate indemnities into their agreements, in case the system’s security fails.
3. Security
The Act allows electronic trade documents that are capable of being possessed (such as bills of lading) to be subject to a pledge or lien as a form of security. The ability for an electronic trade document to be validly pledged is likely to be appealing both to (i) financiers wishing to benefit from security over the assets to be financed by them and (ii) borrowers, by increasing access to a greater range of trade finance structures and potentially financiers.
4. Conversion
The Act allows for the conversion of a paper trade document into an electronic trade document and vice versa provided that: (i) the newly converted document includes a statement that the document has been converted and (ii) any contractual and other requirements related to the conversion of the document are complied with. This feature gives trade participants flexibility in respect of the form of trade document they wish to use and reassurance in the event that, for practical or jurisdictional reasons, they decide to change the form of such trade document.
Concluding remarks
The commercial benefits that the switch to electronic trade documents can bring are well documented. The UK government has said that the switch can reduce processing times from seven days to 10 minutes. Systems such as distributed ledger technology are expected to increase transparency significantly, which can help to avoid costly mistakes and, potentially, fraud. Access to reliable real-time information, available in one place for all parties, should increase efficiency and productivity, leading to operational costs savings. Common issues that market participants encounter now – such as shipments arriving before their necessary documentation and the need to issue risky letters of indemnity to release goods – are expected to become more easily avoidable, reducing the risk of wrongful delivery claims. By increasing visibility of supply chain cash flow, it is expected that for small and medium sized enterprises access to trade finance will increase and there will be a reduction in barriers to trade. The predicted savings are therefore significant, and the potential economic impact and environmental benefits are substantial.
However, questions remain as to how quickly market participants will adopt digital processes. It will take time to build confidence in the infrastructure necessary to make digital international trade operate smoothy. Paper trade documents have developed a significant degree of standardisation, which many parties, particularly financiers, take comfort from and will continue to insist upon.
Legislatures are often criticised for failing to keep up with technological advances, but, in this case, the Act appears to be a timely intervention which will encourage parties to adopt new technologies and eventually make it a commercial necessity to do so. That said, we anticipate that paper documents and electronic documents are likely to co-exist for a considerable period of time.
- This is a contractual “workaround” to the intangibles “possession” issue, and electronic trade technology systems such as Bolero and essDOCS have been in use for many years. These contractual arrangements and “multiparty rulebooks” are limited to creating rights between the parties to them, meaning that an enforcing party can claim for contractual damages but can rarely enforce actual property rights by claiming possession of the goods. There are also a number of newer blockchain based electronic bill of lading solutions that have been developed.
In-depth 2023-199
