With the in-person review of the billions of documents that cross the trading system on any given day now jeopardised by stay-at-home orders around the world, banks are facing increased difficulties processing trade finance transactions. The only way to fully mitigate the potential implications will be swift and effective government intervention. So says the International Chamber of Commerce (ICC), which has called on governments to enable an “immediate transition” to paperless trading.
In a direct call to action, the ICC has requested governments and central banks to take emergency measures to void all existing legal prohibitions on the use of electronic trade documentation, removing requirements for key trade documents such as bills of lading, bills of exchange, promissory notes and commercial invoices to be presented in paper format.
The ICC has also encouraged governments to adopt the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records. Despite extensive negotiation and unanimous adoption of the instrument by the United Nations General Assembly – and associated discussions in the World Trade Organization – the model law, adopted by UNCITRAL in 2017, has thus far only been enacted in Bahrain. Discussions have been held at the ministerial level in Singapore, Czechia and Slovenia, although these countries are yet to implement the legislation into their national law.
Important provisions of the model law include that an electronic transfer record “shall not be denied legal effect, validity or enforceability on the sole ground that it is in electronic form”; that electronic and manual records are “functionally equivalent”; as well as general reliability standards for verifying signatures, integrity and other aspects of electronic records. If adopted, the legal standard would enable banks worldwide to accept electronic documents and signatures, expediting the financing of trade transactions and the release of goods.
“With many banks unable to handle trade finance paper documents in person due to Covid-19, there is a growing risk that the underlying trade in goods could be disrupted,” says Olivier Paul, director of finance for development at the ICC. “ICC and its members are taking unprecedented steps to limit potential disruption to the processing of trade finance transactions – yet, with the use of electronic trade documents in many jurisdictions either prohibited, or their legal status unclear, urgent government intervention is also required.”
English law the first target
In an open letter to UK secretary of state for justice Robert Buckland, Chris Southworth, secretary general of the ICC’s UK chapter, has requested a reform of two pieces of legislation in order to enable digital trade at least as long as the pandemic continues. “The Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act 1992 both require physical signatures and can be updated through secondary legislation using the Electronic Communications Act 2000,” Southworth said in the letter, adding that doing so “will also make an important statement of intent that the UK is serious about promoting paperless trade.”
“The suggestion that has been made to the UK government is, bearing in mind that English law is one of the pre-eminent laws, if you show how it could be done and do it, perhaps others would do so likewise,” says Geoffrey Wynne, partner and head of the trade and export finance group at international law firm Sullivan.
“What we are saying to governments, who may be reluctant to move, is to do it on a temporary basis, for the duration of this current crisis. Set it on whatever limited basis you want,” Wynne tells GTR. “It so happens that the model law has some good wording, which saves on having to work out how to write it. If you want to make it subject to some other consent, do so, but recognise that by doing something you will be facilitating trade finance, which is very important.”
Industry can’t go it alone
Recent weeks have seen a raft of innovation from exporters and financiers alike, as they find new ways to keep trade moving even as the physical signing and in many cases sending of documents has been brought to a halt by confinement measures.
Earlier this month, commodity trader Glencore refinanced and extended its revolving credit facilities using a signing process organised by Clifford Chance, which enabled parties to sign various documents implementing a wide range of electronic signing methods, including electronic signing platforms and digital signatures, in order to comply with differing legal stances in various jurisdictions. This deal demonstrated that a complex transaction with parties from multiple countries can be successfully completed, in spite of the restrictions on movement that are currently in force.
Overcoming legal limitations to digital trade isn’t a new idea. The electronic bill of lading (eBL), while not recognised in most of the world’s jurisdictions, has been brought to market by companies such as Bolero and essDocs, who lean on contract law to create a club of players who all commit to recognising the eBL’s validity. However, solving an issue as big as the digitisation of all trade documents can’t be done through legal finagling, says Wynne. “If you’re in the club, you can all agree that black is white. That is fine, until somebody outside the club says, no it’s not, it’s black. And so the problem you have got is that even within the club, unless you get every shipowner, every customs authority to agree to accept, for example, the electronic bill of lading, it still doesn’t work.”
In addition, bringing all actors in the world’s supply chains together to agree on the validity of electronic documents simply isn’t feasible. “The idea of companies and banks trying to sort it out themselves is a wonderful one, but in practice, what tends to happen when there are two or more parties is that one party wants to exploit what they perceive as their position and would not necessarily want to sit down with other parties,” says Wynne.
An immediate need
Transforming the paper-heavy world of trade into a sleek, digital affair has been the dream of banks and traders alike for several years. But it is not until now, with a pandemic keeping people out of the office, that the mission has taken on a sense of urgency, and governments are being called upon to act now in order to avoid further disruption to global trade.
“We all thought that the electronic document world was five years away,” says Wynne. “This situation has now brought us to an immediacy, and this is governments’ chance to make life possible. It’s not so much to make it easier; it’s to make it possible. This is urgent.”