Electronic bills of lading seek to improve upon many of the historic issues that plague the paper-based model, but uncertainty surrounding their legal security is holding back widespread adoption. Drew Nicol examines the industry’s concerns.
On a balmy July afternoon in 1786, Captain Holmes was standing on the harbour of the thriving Dutch trading hub of Middelburg to oversee the loading of goods bound for Liverpool, England and completely unaware that he was about to become part of history.
Holmes, as master of the ship, was handed a stack of documents to sign that would verify the quality and quantity of the various cargo being heaved aboard his trading vessel, the Endeavour. Some months later, it would emerge that one of the buyers, a Mr Freemen, who was expected to claim a shipment of corn onboard the vessel, had gone bankrupt before the sellers, Turing & Son, had been paid. Upon arriving in Liverpool, Holmes was approached by Turing’s agent, a Mr Mason, who presented him with a copy of the bill of lading to collect the goods back on Turing’s behalf, which he did. However, Freeman had already sold the goods on to a Mr Lickbarrow, who, upon discovering the goods had been reclaimed, sued Mason for theft. In the ensuing legal battle, the jury found in favour of Lickbarrow, who successfully argued that his bill of lading from his deal with Freeman trumped the rights of Mason to take back the goods for the original seller.
The example of Lickbarrow v Mason has since become a classic case study in maritime law as one of the first recorded instances where a bill of lading was argued to represent a transfer of rights to goods in transit that would be upheld in court in the event of the buyer’s insolvency; and thus, the modern legal interpretation of a bill of lading was born.
Fast forward to 2019 and the trade industry is now embracing the next chapter in its story: an electronic bill of lading (eBL). essDocs’ co-CEO and COO Marina Comninos, who was brought onboard in 2006 to work on the legal framework for the company’s eBL product, describes the eBL as “the Holy Grail of digitisation of shipping documentation”. “If you can digitise the bill then the rest should flow quite easily,” she says.
Using an eBL offers several advantages that improve upon the current paper-based system, including significantly faster document transfers, which in turn leads to a shorter payment cycle, explains Paul Mallon, head of customer engagement and legal at Bolero International, another provider of eBLs. Mallon adds that an eBL is also far less likely to be susceptible to forgery, fraud, loss or other forms of human error.
However, despite progress on the technology front, the transition to digital has faced myriad challenges, not least the construction of a sound legal framework that effectively mirrors existing rights and obligations under traditional bills. For some, the comfort of the more than 300 years of legal precedent that supports a paper bill is hard to give up in favour of a digital replica that’s yet to have its day in court.
Sam Mathew, global head of documentary trade at Standard Chartered, tells GTR that the legal issue is part of the reason why the volume of demand for eBLs has been quite static and has not grown much beyond the level he saw two years ago.
“Most of the demand we have seen for eBLs comes from our large commodity clients handling bulk cargoes. On the commercial container traffic, demand has been muted,” he says. Mathew explains that some of the main challenges to demand growth for eBLs are related to a lack of global standards, interoperability and legal aspects. He notes that, while the UN Commission on International Trade Law (UNCITRAL) has created a model law on electronic transferable records, it has not been adopted in state legislation by many markets.
“As a result, whichever eBL solution you’re looking at is a ‘digital island’ hinging on contract law,” he says. “The technology definitely works, but to build scale a few things need to happen. First is the need for interoperability between the solutions out there. Secondly, the evolution of a global standard to define what an eBL should look like and which multiple parties could adopt. Thirdly, any legal framework for an eBL must be admissible in any court of law on par with the physical BLs.”
In 2018, law firm Clyde & Co was commissioned by the International Chamber of Commerce (ICC) to review the legal status of eBLs and the subsequent report highlighted a familiar issue. Much like the 18th century court case, the report raised concerns around whether a bank’s rights, as a holder of an eBL, to the relevant goods could be contested by third parties in the instance of the bankruptcy of the buyer. Today, legal opinions on this issue remain divided.
In the face of these uncertainties, GTR speaks to essDocs’ Comninos and Bolero’s Mallon to set the record straight.
GTR: Legally speaking, is an eBL technically a digital bill of lading?
Comninos: From a legal purist point of view, none of the solutions that are out there today create an electronic ‘bill of lading’. A purist would argue that what we offer is not a bill of lading, it’s a ‘contractual construct’. We can call it a bill of lading but it’s not recognised as one in law. The question is, does it do what people need it to? Does it give the holder the same rights and obligation as they would have if they had a paper bill?
Building a legal framework with a contractual nexus is currently the only way to achieve functional equivalency, by which I mean parties having the same rights and obligations under an eBL as they do with a paper bill.
GTR: What must this contractual nexus mimic from the existing legislation?
Comninos: You need to make sure your negotiable eBL recreates the three functions of a paper bill – as a receipt, as containing or evidencing the contract of carriage and as a document of title. The first two functions can be done quite simply.
The challenge around electronic bills is to recreate its function as a ‘document of title’, passing rights and obligations through a trade chain: for example, how do I, as a buyer of the goods at the end of the chain, get the right to sue the carrier if the goods are damaged, or to claim delivery of the goods as a holder of an electronic bill, because the various pieces of legislation worldwide governing that bit don’t tend to recognise electronic bills.
GTR: If the rights afforded by an eBL rely solely on contractual law, is there a potential risk if a third party makes a claim on the goods, as mentioned in the Clyde & Co report?
Mallon: There are some issues, in the same way there are some issues with ordinary bills of lading – for example what happens if the bank is holding an letter of intent in lieu of a bill? When it comes to the rights of third parties to a bill of lading transaction, the only part the Clyde & Co report was worried about was the insolvency of the buyer. This is in the fine print of insolvency law, but the question is how a bank can ensure it has the ability to take delivery of the relevant goods in preference to the liquidator?
The answer is uncertain even with a paper bill in certain jurisdictions. If, for example, the government at the discharge port is owed money by the buyer then a foreign bank may have a very difficult time claiming those goods. But how often does this scenario arise? The answer is: hardly ever. The 2017 ICC Trade Register showed the risk of default, of which default because of bankruptcy is a sub-set, is very low indeed; a small fraction of a percentage point.
Comninos: The bank that is holding an eBL should be able to claim possession of the goods; the contractual framework is based on legal principles which are widely recognised in a number of maritime jurisdictions. But, there is always a risk that, if you’re in a court in a country that doesn’t recognise eBLs as part of its local law, then the bank may be denied its claim.
However, my view is that this risk is overstated: it assumes that the bank, which can evidence that it has paid for the goods, cannot exercise any equitable principles to overcome the challenge from a third party. Given that the bank would be able to show the transfer of the electronic bill through the chain and payments being triggered as a result, if it could not exercise rights over the goods, it would almost be tantamount to theft. Also, in cases of insolvency, the rights of a bank will often depend on whether property in the goods has passed from the seller to the buyer – this in turn depends on the contract of sale, and so the bank is exposed to the same risks whether it is holding a paper or an electronic bill.
GTR: Has any progress been made in international eBL legislation?
Comninos: The first attempt to legitimise eBLs at an international level was the Rotterdam rules. They were pushed by the US and after a lot of negotiation they were signed into convention in 2009. The rules need 20 states to sign them in order for them to be ratified. Today there are only four signatories, so we are very far from seeing them come into force. One of the key reasons why I don’t think we will ever see them come into force is that the Americans were the driving force behind them and they have not been proactive on this for some time.
The second attempt was by the UNCITRAL, which developed legislation for electronic transferable records, that was much broader than Rotterdam’s eBL rules. The model law was released for signing by UN members in 2017. Since then only Bahrain has enacted it.
It would therefore be a mistake to think that just because the model law is out there you can wait for that to fall into place so that eBLs are ‘risk free’. To do so would assume that every maritime nation where you may end up holding an eBL and wishing to exercise your rights under it has adopted the model law. You could base an eBL on the law of a country which recognises the UNCITRAL model law but if you’re in a court that has not signed up to it then you’re at risk of your eBL being rejected much like you would basing an eBL on the local law of one country.
GTR: Could, and should, a risk-averse bank wait until international legislation exists to cover the use of eBLs?
Comninos: There have been several attempts at an international level to recognise an eBL, of which two key examples are the Rotterdam rules and the UNCITRAL model law on electronic Transferable Records, but these require wide adoption for people to be able to rely on them. If Singapore, which is strongly in favour of promoting eBL use, were to adopt this law and an eBL were to be created in Singaporean law, it’s unclear how effective that would be in a court outside of that country. In this instance, you would need the contractual nexus to fall back on in order to avoid this risk.
Some people think you could just have one country adopt local law that would recognise eBLs, such as the US uniform commercial code, and then have all your bills subject to that law as a way of getting around other countries’ lack of local eBL laws. I would be surprised if that worked: if that were the case, the US Uniform Commercial Code would have solved the issue almost 20 years ago, when it explicitly recognised electronic bills of lading. However, it is certainly a route that should be explored.
As for risk averse banks waiting for international legislation, it could be a long wait. It has been over 10 years since the Rotterdam rules were adopted and we are far from them coming into force. Commerce moves faster than the pace of legal change, particularly in the context of international trade. It is more likely that the law will play catch-up to reflect what the industry is doing, than the industry waiting for the perfect legal climate in which to digitise.
GTR: What are the next steps for eBLs to gain mainstream acceptance?
Comninos: On the legal side, I don’t think there’s going to be a ‘big bang’ that’s going to make everyone feel comfortable with eBLs overnight. It’s going to be a collection of small steps that each make people slightly more comfortable. Corporates and banks will continue to digitise and take the perceived risks and the industry as a whole will slowly accept eBLs as time goes on, making it industry practice. A big step would also be for a major maritime nation, such as Singapore, Hong Kong or the UK to adopt the UNCITRAL model law.
The UK could extend current legislation relating to paper bills to eBLs very simply if the Secretary of State passes a statutory instrument under the current 1992 Carriage Of Goods By Sea Act, which would extend it to include eBLs. However, I think the next major adopter will be Singapore. It has a strong maritime tradition and is very digitisation focused. Singapore’s adoption of the model law would be a major win given its position as a leading maritime nation.
eBL initiatives to keep an eye on
Bolero and essDocs, founded in 1998 and 2005 respectively, are the market’s two leading providers of digital trade documents, including electronic bills of lading. While their products are non-blockchain-based, both are experimenting with this new technology. For example, the two companies are both working with the Voltron consortium to provide eBLs on its blockchain-based letter of credit application, with Bolero having already completed a few live pilots.
While established players are slowly exploring the blockchain use case, other startups are seeking to use the strength of the technology to bring completely new and more efficient solutions to market. Slovenia-based CargoX, for one, announced in November that its blockchain-based bill of lading platform is now commercially available. It targets freight forwarders and NVOCCs (non-vessel operating common carriers), which will then be able to offer the solution to their customers.
Wave, meanwhile, released the commercial version of its digital trade solution in June 2018 and is now working to go into production with ZIM and one of the world’s largest shipping companies. The tech startup has also been piloting with banks, including Barclays in 2016 (in what was claimed to be the first-ever live trade transaction using blockchain technology) and BBVA in a pilot in late 2017. While its first focus has been on the bill of lading, the company has since expanded to facilitate other trade documents digitally, including certificates of origin, certificates of inspection and bills of exchange.
Other initiatives could well see more eBL solutions emerge in the future. TradeLens, for example, a blockchain-based platform for global trade developed by Maersk and IBM, currently provides a medium for firms to share and access real-time shipping data, but the intention is that it will also support the exchange of digital trade documentation, such as the bill of lading.