Squire Patton Boggs is a full service law firm with over 40 offices across four continents and is a leader in advising both companies and financial institutions on the practical implementation of electronic trading and security issues. Robert Parson, Partner (London), and Jessica Kenworthy, Partner (Singapore), at Squire Patton Boggs share their insights on the new Electronic Trade Documents Bill.

The UK government has adopted draft legislation put forward by the Law Commission of England and Wales which will for the first time give legal recognition to the creation and transfer in electronic form of a number of important trade documents.

 

Existing legislation and the case for reform

Key components of English law which govern the creation and use of bills of lading, bills of exchange and other trade documents in everyday use are based on practices developed by merchants hundreds of years ago, and in many cases made the subject of legislation during Queen Victoria’s reign. The result is that existing English legislation does not recognise the possibility of ‘possessing’ an electronic document as opposed to a paper document.

Contractual workarounds to this legal problem have concentrated on providing an electronic alternative to the paper bill of lading – a major cause of inefficiency and fraud in international trade, not to mention the environmental cost of millions of pieces of paper in circulation. The problem with these innovative solutions is that because an electronic bill of lading does not exist as a matter of general law in England and Wales, they require extensive multilateral contract terms and conditions which can ultimately only bind the immediate parties to the platform while in electronic form. Typically those conditions of issuance will allow for a paper document to be issued once the bill of lading needs to pass into the hands of parties which are not parties to the platform’s contract terms. Adoption rates for these platforms, while steadily increasing, still result in less than 1% of all bills of lading issued annually being in electronic form.

The introduction of new English law which underpins the legality of this type of arrangement is expected to be a significant boost to an industry which Bolero, essDocs and other electronic trade document providers have worked hard to build up over many years.

 

The new legislation

The Electronic Trade Documents Bill, which it is hoped will be enacted by early 2023, initially seeks to change the law in relation to a limited category of documents:

  1. Bills of exchange
  2. Promissory notes
  3. Bills of lading
  4. Ship’s delivery orders
  5. Marine insurance policies
  6. Cargo insurance certificates
  7. Warehouse receipts

The new law will treat exclusive control over an electronic record containing the same bundle of contractual rights that exist in a bill of lading and other selected documents as equivalent to ‘possession’ under English law. It is a small but very neat way to permit electronic trade documents without disrupting hundreds of years of legal precedent and associated commercial practice which depends on it.

 

Legal reforms outside the UK – the GCC and Singapore

While the introduction of legislation in the UK will be of great significance given the widespread use of English law in maritime and trading contracts, it is not the first jurisdiction to travel this road.

When proposing the changes in English law, the Law Commission of England and Wales has been conscious of the importance of international compatibility, notably with the Model Law on Electronic Transferable Records (MLETR) published by UNCITRAL which has already been adopted by a number of jurisdictions including Singapore, Bahrain and Abu Dhabi Global Market.

MLETR provides a prototype for law reform at national level and aims to enable use of electronically transferable records by establishing legal equivalence between ‘control’ of an electronic transferable record and ‘possession’ of a paper document. The Law Commission’s approach and legislation proposal align with the aims and policy of MLETR.

There is already considerable effort being applied to join the dots of those countries with existing or (in the case of the UK) proposed electronic trade documents laws which will enable greater digital trade opportunities to be explored between the countries with aligned legislation.

Initial areas of cooperation can likely include areas of most pressing concern to exporters and importers, such as customs delays, where the deluge of paper and administration time spent clearing goods has been an additional irritant during the logistical problems which have affected supply chains since Covid. Any administrative function which currently relies upon verification or handling of original bills of lading stands to benefit in terms of time and cost efficiencies from the new legislation.

 

A game changer for digital trade?

The availability of fully enforceable electronic trade documents recognised by the most commonly used jurisdiction for trade, English law, will be significant in itself. The potential for other Commonwealth countries to follow soon is also a real prospect. Other non-Commonwealth jurisdictions and more GCC countries are likely to see the commercial benefits of keeping pace with the forerunners in adoption of similar legislation in what will be an increasingly competitive race to be at the forefront of the technological revolution in international trade.

Current electronic trade document providers expect the publicity related to the UK government move to act as an influencer in the approach of both corporates and financiers to digital trade solutions.

 

Implications for security in trade transactions and regulatory treatment of trade finance

Trade finance suffered some bad press during 2019 and 2020 following a number of well-publicised defaults, suspected frauds and double financings and, in some cases, a failure to take proper security over goods. To exacerbate a difficult situation for bruised trade finance banks, capital relief afforded to security over commodities – even when achieved – is currently set at derisory levels.

While legislation to recognise electronic trade documents will not usher in an overnight change in financier confidence, it will likely do so in the medium term. Some commentators also speculate that it may yet encourage the authorities who determine the capital relief levels for security over commodities and other trade collateral to recognise a much greater value in that security. That could make a significant difference to the economics and therefore the availability of trade finance.