September 20, 2023 is a landmark date for the digitisation of trade. The UK’s Electronic Trade Documents Act is now in effect, giving paperless versions of documents such as bills of lading (BLs) the same legal standing as their physical counterparts.
After decades of slow progress – just 2.1% of BLs and waybills were issued electronically last year in containerised trade – the reforms have been hailed as a transformational opportunity to move away from paper, improve efficiency, cut costs and reduce trade’s carbon footprint.
A survey published this week by the Institute of Export and International Trade (IOE&IT) finds that 75% of businesses surveyed believe the Act will have a positive or very positive impact on their business. None said it would affect them negatively.
Lloyds Bank announced in the early hours of September 20 it had already completed what it believed was the first transaction under the Act, issuing a digital promissory note to retailer Matalan to facilitate the purchase of garments from a supplier.
However, uncertainties remain. The Act is deliberately technologically neutral, and does not offer prescriptive definitions of the systems that can be used to issue electronic trade documents. The IOE&IT finds that a quarter of business owners are concerned about data security, and nearly a third worry about IT skills and implementation.
And despite substantial industry efforts to encourage adoption, the survey finds that 36% of respondents cite the biggest barrier to progress as “ensuring partners are on board”.
GTR has conducted interviews with five experts spanning trade finance, law and technology to discuss the significance of the Act, what areas of uncertainty remain, and what will need to happen next to make the reforms a success.
Contributors:
- Stephanie Betant, head of global trade and receivable finance, HSBC
- Christopher Chatfield, partner, marine insurance, Kennedys
- Gunnar Collin, head of sales, trade finance, Enigio
- Joanne Waters, legal director, international maritime, trade and commodities practice, DAC Beachcroft
- Enno-Burghard Weitzel, senior vice-president of strategy and business development, Surecomp
GTR: What is the significance of these reforms?
Betant: Allowing for electronic trade documents to have the same legal outcome as paper is transformational. There are approximately 20 billion documents exchanged every day in global trade, so if you think about the risks, the costs, the carbon footprint and the processing time associated with that, you’re left with a very inefficient journey for corporates, banks and shipping companies. Fundamentally, needing to have the physical document creates friction and that slows down trade.
This is enormously important from a bank’s perspective. When you have digital documents, you can extract data electronically and process that information much more rapidly. Processing can be done in a matter of seconds, and on top of that, you have more data that has value in itself.
Our customers have been working with electronic BLs over many years, but you have to look at how that was happening. Customers would have to come together in a closed environment, decide with each other to use a particular platform, and reach a contractual agreement around that. The new rules will help create an open system, where anyone can use electronic documents without it being necessary for all parties to agree to use a certain platform or provider.
GTR: Are the benefits of the new law recognised by all parties involved in trade, and how can technology providers help encourage uptake?
Weitzel: The corporates we’ve spoken to clearly see the benefits of going digital. We have taken our proof of concept to the market, and the feedback is that they absolutely appreciate the ability to have this information a lot earlier, compared to paper-based processes. The use case we have to prove now is not just that it can do the work, that it is trustworthy, but that it is actually creating value.
Collin: With our technology, it doesn’t matter whether you’re dealing with a BL, or a bill of exchange, or whatever it might be. It comes into play when you need to create an electronic document that you can possess and transfer freely.
The party creating the document pays a fee, and then the document can live its own life without further charges. In that sense, it’s replicating the way things work with paper. If you want to create a paper document today, in practical terms, the first thing you need to do is buy a piece of paper.
Weitzel: The message to users has to be that you don’t need to worry about the technology here; you don’t need to worry about the mechanics of a blockchain, for example. Your counterpart might receive digital documents issued by a platform that they have not actively signed up to, and they will need to be able to integrate those documents seamlessly into their own workflows.
The reality is that for a large manufacturing company, trade finance is not the core business. It is unlikely that a corporate is going to spend energy on engaging in the legal and technical aspects of making the trade finance process more efficient, if it’s only a tiny piece of the overall environment.
There is a useful analogy here. If you think about sending a letter, the person who pays is the person sending it, not the person receiving it. As an organisation, you might need to update some internal rules or processes, but you don’t need to reinvent the wheel.
GTR: Are we now in a position where parties can issue documents digitally ‘by default’?
Waters: I think that’s a very optimistic view. I would love to see that on September 20, we will all be raring to go and issuing eBLs immediately, but I don’t think it’s going to be that simple.
My experience is that many shipping companies or shipowners are quite conservative and may not have been engaged in eBLs before now, so this will be a major change for a lot of them. The larger shipowners will already have a base level of digitalisation and will have the resources required, but the vast majority of shipowners are SMEs.
It is quite demanding to go from zero to a brand new process, where a third party is involved, where you have to work out any extra costs, and where you have to understand how that fits in with your current processes.
There is also some inertia in this industry, and some shipowners might say paper is working for them, so why would they move to eBLs. I think there’s a lot of work to be done before we see wholesale take-up, just from a psychological perspective.
Chatfield: The Act does not envisage eBLs being issued by default. As their use becomes more prevalent, it is possible that the industry will expect electronic bills to be used. However, at the moment, parties using electronic bills are still exploring the technology and the practices to be employed.
Parties have been issuing ‘express bills’ electronically, but these often resemble sea waybills insofar as they are non-negotiable and delivery is to the named consignee as opposed to delivery against presentation. As such, they avoid many of the difficulties associated with negotiable BLs.
Negotiable bills are often used where finance is needed and where there are multiple parties in the sales process. It is likely to take some time before all of these stakeholders accept electronic bills as a default position.
GTR: The bill does not define certain terms, such as what constitutes a “reliable system” for issuing electronic documents. Is this a matter for secondary legislation or court rulings?
Chatfield: The Act suggests that the validity of an electronic document – in terms of its enforceability under the Act – depends on the reliability of the system under which it is produced and handled. So it all hinges on the system.
However, until the courts have provided guidance as to whether a system is ‘reliable’ or not, there will always remain a doubt as to whether a system meets this requirement and the parties can rely on the documents produced.
Consequently, the parties adopting the electronic documents will not know for sure whether the electronic documents are recognised under the Act at the time of conducting the transaction. Rather, it will require a court review, which may take place many months or even years after the transaction has taken place.
Waters: Court judgements can only take us so far. If we were to have a judgement that approved a system or set up further guidance on what is considered ‘reliable’, I think you would likely see industry players moving towards that standard. But even then, it may not necessarily be conclusive; there would still be so many other operational issues that need to be worked out, that aren’t really for the court to decide on.
Chatfield: The Law Commission anticipates that much of the common law will evolve as the courts consider and decide on various issues concerning electronic documents in litigation. Although the Act leaves open the possibility of secondary legislation as a more flexible route by which to deal with specific issues, at this embryonic stage, we do not anticipate secondary legislation on the areas of uncertainty within the immediate future.
Market practice and industry standards were beginning to form, even before the Act was passed, and it can be expected that these will continue to develop to fill in some of the gaps.
GTR: Could those uncertainties be handled within the industry instead?
Betant: This is really foundational, but now there is work to be done in order to put the bill into practice. One thing that needs to happen now is to have certainty over the reliable systems that parties are going to use. They will need to be agnostic and secure, as well as widely adopted, and that still needs to be developed. There are already many conversations happening around that, such as the International Chamber of Commerce’s (ICC) work on producing practical standards around the systems that will be used.
Weitzel: We are collaborating closely with the ICC on this. There are already industry standards for what is typically required for a platform to be accepted by banks and corporates – ISO 27001 and ISO 20022 cover IT security, data security, internal processes and so on – and that works well. If we end up seeing some sort of rubber stamp for trustworthy platforms, we would be highly supportive of that.
Collin: I suspect the ICC will solve this in record speed. Essentially, they will need a framework whereby they can vet any provider and assess whether they have everything that’s needed. Once we have specific criteria that providers have to meet, it will give a sense of comfort and will smooth out adoption.
It is uncertain what happens if a provider turns out not to be reliable, as you can’t sue the ICC, but ultimately we are commercial enterprises and we deal with uncertainties every day. The UK has handled this really well, because you can’t be overly prescriptive.
Chatfield: It might assist to have a register of systems which will be recognised as reliable so that the parties can know, at the time of using the electronic documents, whether they will be considered to be valid and thus upheld in any subsequent review. Systems which are registered would still need to be audited to maintain their registered status; however, at least the parties will know whether the system meets the legal requirements at the time of issuing the electronic bill of lading.
It might be necessary for any such register (or maybe even the systems) to be state sponsored and this might overcome the issues created by competing commercial interests in providing reliable systems. However, unless this is governed by an independent and international institution, competing state systems and registers – interested in protecting their own commercial interests – may lead to suspicion between states and a reluctance to recognise others’ registers and systems.
GTR: Are there other uncertainties that will need to be resolved before widespread adoption is reached?
Waters: There are also questions around insurance coverage. Shipowners are not going to do anything that jeopardises P&I cover, for example, and we will have to see what the International Group of P&I Clubs’ position is on the Electronic Trade Documents Act, as well as any impacts on cyber-risk from the increased adoption of digital processes.
Chatfield: Cybersecurity is already an issue of concern in the supply chain. Electronic release of documents and goods does occur, from time to time, from ports, warehouses and other terminals. These electronic release systems are vulnerable to cyber attack and we have seen supply chains locked up whilst cyber attacks occur. We have also seen criminals access these systems in order to arrange the theft of goods.
As eBLs are increasingly used and the supply chain increasingly relies on electronic systems, the opportunities for thieves to access the supply chain and to compromise security increases substantially. This is going to require a substantial reliance on security and traceability. Given the liabilities which carriers might incur for wrongfully releasing goods without production of an original bill – whatever that might mean in terms of electronic documents – we can anticipate that carriers would have a particular concern about such security.
Given the number of parties likely to have access to such systems we anticipate that standard contract terms (and particularly those to be found on BLs) will seek to allocate duties and obligations relating to cyber security to cargo interests as far as possible. Accordingly, it would make practical and commercial sense for the parties seeking to use the electronic documentation to agree on obligations and liability in terms of adopting an adequate level of security backed by indemnities in case of failures to comply.
GTR: Trade is of course international by nature. Does it matter that the UK is one of only a handful of nations to have enacted legislation of this type?
Betant: This does rely on other nations adopting this too. If you’re trading with countries that don’t recognise electronic documents as having the same legal standing as in the UK, then that limits the application of this development.
However, passing this into English law is really important because around 60% or 70% of trade documents globally are based on English law. That doesn’t mean every country will immediately recognise the standing of electronic documents in the same way as the UK, but it means there is a pathway there to talk to regulators around the world about the benefits.
Waters: There are only a small number of countries that have passed legislation that sanctions the use of electronic trade documents. Shipping is obviously international, and just because the BL might have been issued under English law, it doesn’t necessarily mean the receiving country will accept that in electronic form. For example, customs authorities might not be ready for digital yet, and demand a paper document, so providers will have to be prepared for that.
Progress is being made, but there is certainly going to be an interim period where there is a patchwork of some countries adopting enabling legislation and others not.
GTR: There are currently several competing technology providers that are likely to be involved in issuing electronic trade documents. Are there concerns around standardisation or interoperability?
Waters: Interoperability is still uncertain. At the moment, there is no single standard for what an eBL should be – what the data elements need to be, what language that data needs to be in, how it is exchanged, and so on. If I’m a shipowner and I’ve adopted system A, and someone else in the chain has adopted system B, I need to have confidence that’s not going to be a sticking point. I’ll need to know my own data and my own systems can be integrated with the systems used across the whole supply chain.
The ICC is taking the lead on this and I think that’s going to prove important, particularly for smaller shipowners that might not have started digitalising yet. However, there could still be an overlap period where people want to use their own systems, and until some of these uncertainties have been worked out there will still be a need for contractual agreements on certain aspects.
This is also where I expect the software providers will play a role. They can say to shipowners that they don’t have to digitalise everything themselves; they will integrate with their systems and processes, and there are very few changes that have to be made. It will be important to publicise the real benefits, make this a priority and move away from that inertia. Emphasising the environmental benefits of moving from paper to data could also be helpful in that respect.
Weitzel: There are multiple solutions, and some of them require every single party to be onboarded, which does increase the barriers to adoption. In our view, the more solutions we can bring to our corporate customers and our banks, the better the value proposition.
From a bank’s point of view, you might be working with thousands of corporates. The chances are they will be working with 10 or 15 different eBL providers. That means you, as a bank, can either individually connect to all 10 or 15, or you ask an aggregator platform to take care of the connectivity side.
GTR: What needs to happen now to make these reforms a success?
Chatfield: If the use of electronic systems increases substantially, then the Act will be important as it formally recognises the use of electronic documents and overcomes some of the technical concerns which parties might otherwise have.
However, if the Act is going to promote the use of electronic bills – rather than taking a reactive role in simply recognising what the market is already achieving – then it will need to introduce far more certainty into the question of whether a system is ‘reliable’ and whether the bills issued by the system will be enforceable under the Act.
Collin: We’ve wanted this for quite some time, and it’s great there is now some political momentum behind it. Now that the law is in place, the industry needs to step up and get going. It’s about making people realise the blockers are gone.
