UK & Europe
Trade & Commodities
The recent announcement by the UK Law Commission of a period of consultation on draft proposals for reform of English law relating to the use of electronic documents in trade represents a long awaited and significant step forward in the digitisation of international trade.
Despite major technological innovations over the past few years in both communications, data transmission and logistics, the law relating to the documentation of international trade remains rooted in the days when paper was the only medium in commerce. For example, attempts to recreate electronically the functionality of the bill of lading – for centuries a key component in the financing of international trade – have consistently foundered on the difficulty of overcoming the English law statutory relationship between the bill of lading (as a legal concept) and the physical paper document carrying its terms. The same issue has handicapped those wishing to breathe new life into the use of bills of exchange and promissory notes. At the heart of the problem of digitising either document is the way that possession, control and transfer of both documents is bound up with the concept of physical delivery and wet ink indorsement of a piece of paper. Similar legal hurdles affect progress in the digitisation of trade – and in particular the use of electronic bills of lading - in other jurisdictions1. As a consequence, international trade has largely remained a hostage to the hazards of physical delivery of paper documents, the near inevitability of human error in preparing and sending them and the financial effects of delay in trade financial settlement.
Those problems may soon see a solution. The UK Law Commission‘s draft proposals (Law Commission - Electronic trade documents) would see a stand-alone act of parliament (to be called the Electronic Trade Documents Act 2021) which would give paper and electronic documents equivalence under English law for the purposes of all relevant legislation covering a range of key documents. The legislation would, if enacted, change the law in relation to the practice and use of bills of exchange and promissory notes, bills of lading and ships’ delivery orders, marine insurance policies and cargo insurance certificates and warehouse receipts. The key to legal change would be the recognition that a person who “controls” an electronic document (by whatever technology is used - be that distributed ledger technology or otherwise) would be deemed to possess that document for the purposes of any relevant provision of English law (including law relating to the carriage of goods by sea) and anything done (digitally) to that electronic document by a person controlling it will have the equivalent legal effect as indorsement, delivery, transfer, etc. of the equivalent trade document in its traditional paper form.
The impact for all participants in international trade could be transformative. Increased efficiency, eradication of errors, better transaction security, reduction of fraud, speed of payment would be among the immediate benefits for the wider trading community. Importantly, as the world’s major legal centre (both court and arbitration) for resolving disputes in shipping, international trade, insurance and finance, the UK’s lead in reforming its national law would likely be followed quickly by other major trading nations to revolutionize the practice of international trade on a global scale.
Various market initiatives have been preparing for the day when such legislation would take effect for many years. Recognising the need for national laws to change to allow the benefits of digitisation to be fully enjoyed, UNCITRAL’s Model Law on Electronic Transferable Records sets out a template for individual nation states to adopt as part of their national law in order to effect the same changes (it carries no weight in terms of national law without such adoption). Singapore is the first trading nation of any significance to follow that path. However, the impact of a change in English law will likely reverberate far beyond UK waters given that English law remains the governing law and dispute jurisdiction of choice for many heavily used international trade documents. Parties have come to rely on not only the written meaning of English statute law (some dating back to the reign of Queen Victoria2) but also the vast catalogue of English senior court decisions which help commercial parties interpret them and make their contractual arrangements accordingly.
The Law Commission, a body set up by the UK Parliament to explore potential changes to various areas of law and to recommend legislative change, recognised that any change in English law which appears to undermine that historic wealth of case law precedent (and the commercial practice that has built up around it) would be unwelcome and might adversely affect the global perception of the certainty of English law – and London as the place of resolving English law disputes. Their approach, therefore, has been to introduce electronic “equivalence” to a limited number of paper trade documents which are affected by historic legislation and case law but without any wholesale amendment, repeal, or re-enactment of legislation. The result is a minimalist intervention which preserves existing commercial, maritime and insurance law but demolishes the legal boundaries which previously kept growth in digitisation in check.
If the proposals do become law, they will accelerate a range of digitisation projects which have previously been unable to escape the growth restrictions of the private “club” contractual arrangements now widely used - where the parties rely on their private agreement for the legal effect of the electronic documents created and exchanged rather than the force of national law.
Market participants have been invited to respond to the Law Commission’s consultation paper by 30 July 2021. Comments can be sent via an online form, be email – or by post.
2 Bills of Exchange Act 1882