Charles Darwin had a point. It was not, he said, the strongest of the species that survived, nor the most intelligent, but that most adaptable to change. So too with law and digital transformation. The government recognises this well. As G7 President, the UK has been actively leading the process to achieve the legal environment for the full digitisation of trade documents. It has now put its money where its mouth is, with its swift introduction in the Lords (on 12 October, only five months after it appeared) of the Law Commission’s draft Electronic Trade Documents Bill.
The Bill is the outcome of consultations and a later report on how to achieve the digitisation of trade documents and thereby enhance paperless commerce. It aims to cement the legal recognition of electronic trade documents, including most importantly bills of lading, mate’s receipts, ship’s delivery orders, warehouse receipts, marine insurance policies and cargo insurance certificates. (It also includes provisions dealing with commercial paper such as bills of exchange and promissory notes, though these today are a good deal less important.)
Quite right too. Digitisation is an inevitable part of today’s global economy, with big data and cloud-based computing the driving force of industry and its supply chains and the smooth running of trade dependent not only on commercial operations but also to a great extent on the instantaneous turnaround and exchange of the relevant documents. Yet a huge number of the underlying processes and operations still rely “on practices developed by merchants hundreds of years ago.” This matters for us: under the latest statistics from the Department of Trade, international trade is worth around £1.266 trillion annually to the UK.
The problem arises in particular with the paper documentation traditionally used for proving shipment of the goods and their quality, and for their handover while in transit. Pre-eminent among these are bills of lading which not only act as receipts and furnish parties with significant data about the goods, but also serve as documents of title. The problem is a big one: the Digital Container Shipping Association has estimated that ocean carriers issued 16 million original bills of lading in 2020, more than 99% in paper form, quite apart from the myriad other documents that accompany goods in transit. The exercise in paper-shuffling that this involves is mind-blowing; its threat to the smooth operation of commerce was thrown into stark relief by COVID-19 lockdowns that forced the paper-shufflers to be sent home. No wonder this accelerated digitisation across the world. As the Law Commission observed, it was partly in response to the complexities brought by the pandemic that the International Chamber of Commerce asked governments to take immediate steps remove legal requirements for hard-copy trade documentation, and to consider longer-term plans for establishing legal frameworks applicable to electronic documents.
The Bill is commendably brief, consisting of only seven clauses. It starts (cl.1) with definitions of “paper trade document” and “qualifying electronic document” before presenting a non-exhaustive list of trade documents affected by it (excluding some more exotic instruments subject to the Uncertificated Securities Regulations 2001, and curiosities such as bearer bonds). Further provisions relate to what is to be regarded as possession, transfer and indorsement of electronic documents (cl.3), and deal with the change of a paper form to an electronic one or vice versa (cl.4).
The nub of the problem is, of course, possession: in English law you cannot in any real sense “possess” a mere stream of electrons. Therefore, in order for an electronic trade document to have similar effects and functionality as its paper equivalent, the Bill in cl.2 lays down gateway criteria. These consist of content requirements, and stipulations about the reliability of the underlying digital system, the “integrity” of an electronic trade document as regards originality and authenticity, the possibility of exclusive control, divestibility of that control, and the reliable identification of the persons in control of a document at any time.
The Commission were rightly aware of the possible impact of the latest innovations and emergent technologies brought by the fourth industrial revolution. In Appendix 6 to its report, it assessed the use of distributed ledger technology (“DLT”) to support trade documents in electronic form. Indeed, it points out that DLT, involving distribution of data among nodes accessible only by secured keys in order to render it effectively tamper-proof, offers very significant possibilities for the acceptance, validity, and functionality of electronic documents in international trade equivalent to that accorded to their paper counterparts.
These reforms can only be welcomed. If passed, the Bill will undoubtedly facilitate cross-border commerce by cutting unnecessary costs and reducing processing times and delays. Digitising documentation also contributes to sustainability, eco-efficiency, and environmental values by mitigating harmful carbon emissions, quite apart from boost the UK’s reputation as a global centre for international commerce and trade.
If there is a criticism of the Bill, it is its lack of detail. It does not contain any provisions on the procedural aspects of digitisation of documents, the use and exploitation of digitised documentation, or the mechanics of changing its form. In addition, the effectiveness of the gateway criteria might be achieved only upon the adoption of the specific protocols regarding the digital systems, their control mechanisms, and accreditation standards. One suspects in practice that if the bill becomes law, a detailed commentary will become essential for its practical application. This matters: unless such matters are satisfactorily sorted out, an electronic trade document that is effective in one jurisdiction might not be treated in the same way in another.
Moreover, while trade documents are being transferred across borders, cross-border disputes are at least to some extent inevitable. This means that we will need to give attention to the private international law rules specific to such documents: even if they contain an English choice-of-law clause, this will not necessarily ensure the application of English law to all their aspects. The Law Commission, to its credit, has recognised this. It has already launched a follow-up project on the Conflict of laws and emerging technology to ensure the rules of applicable law and jurisdiction in an increasingly digitised world. This issue is still at the pre-consultation stage – this might mean that unless private international law rules applicable to the related matters are achieved, the current Bill might not be operable or practically effective.
Some other tidying up may also be necessary. There may be a need, for example, to clarify matters by a few further amendments to the Carriage of Goods by Sea Act 1992 and the Bills of Exchange Act 1882 over and above those in cl.6 of the Bill. which are not in line with the latest technological and legal developments and in particular, the new Bill. But even if there is some way to go the Bill is a very important development. We, for one, welcome it.
Professor Andrew Tettenborn
Dr Aygun Mammadzada
4 thoughts on “PAPERLESS TRADE: ANOTHER STEP FURTHER”
Well written. So far bills of lading are concerned, it can hardly prove the “quality” of the cargo, but a good piece of evidence to show its “condition”.
For further details of the Bill see our post 24 August 2022 https://iistl.blog/2022/08/24/coming-soon-legal-equivalence-for-electronic-trade-documents-in-england-and-wales/
Annex 3 to the Law Commission’s Report (very appropriately) distinguishes between the different types of blockchains (public/private, permissioned/permissionless), but then lumps everything together again in the section on the potential benefits of DLT. The first two benefits identified (security, immutability) only apply to public, permissionless blockchains with many active nodes (such as Bitcoin).
Quick quiz: how many nodes does the IBM/Maersk TradeLens system have, and how many (computer) resources would it take to successfully attack this system?
The third benefit (efficiency) MAY (but does not necessarily) apply to private, permissioned blockchains. In any case, the question is not whether such a blockchain is “efficient” when looked at in isolation, the question is whether this blockchain is more efficient than a solution based on a traditional database.
The three musketeers lived in a pre-digital era, and their ‘one for all, all for one’ motto does not apply to blockchains. What is true for one type of blockchain is not necessarily – and even often not – true for other types of blockchains.
Moreover, ‘blockchain’ is a concept. It has to be implemented by a (group of) programmer(s) somewhere. A car is a car, but you might find that it does make a difference whether your particular car has been built by Lada or by Ferrari. The same goes for the myriad of blockchain implementations.
The bill initially proposed in the Law Commission’s report in March this year was limited to England and Wales. That has been changed to England and Wales, Northern Ireland and Scotland in the bill introduced into the House of Lords. Section 3(4) provides “An electronic trade document is to be treated as corporeal moveable property
for the purposes of any Act of the Scottish Parliament relating to the creation
of a security in the form of a pledge over moveable property” and applies only to Scotland.