Digitalisation of Documents of Title to Goods
The challenges of digitalisation in trade and electronic Bills of Lading
Digitalisation is the word on everybody's lips. There is almost no area of life which is not significantly changed due to digitalisation. Therefore it is quite surprising that we still seem to be stuck in the past in some aspects of our lives. Today – just like centuries ago – some trade documents are still sent around the world in paper form. This especially is true for documents of title to goods which allow the trading of transported goods.
This article gives an insight into the challenges of transferring a centuries-old system to the digital age. Following a brief introduction on the topic, the legal framework of the applicable law will be outlined. Also, the efforts of private providers to offer digital solutions will be summarized. The subsequent section will give an outlook on future regulatory options.
The Bill of Lading
The document of title to goods used in international sea transports is called Bill of Lading. The Bill of Lading has a variety of functions: first of all it proves that the carrier has taken over the cargo for transport. It has an evidentiary function because it proves that the carrier has taken over the goods the way they are described in the Bill of Lading. It has a legitimacy function, as the law makes the rebuttable presumption (§ 519 section 1 Sentence 2 Handelsgesetzbuch – the German Commercial Code) that the legal owner of the Bill of Lading is entitled to receive the goods. The handing over of the Bill of Lading leads to the transfer of title in the goods. This function is essential as it allows the trading of goods which are still on board of a vessel. Bills of Lading are known and accepted in most countries worldwide and have been in use for centuries.
Legal Situation in Germany
In Germany, the relevant rules governing sea transport can be found in the fifth book of the German Commercial Code. This was amended in 2013 as part of the maritime law reform. Regulations to the Bill of Lading can be found in §§ 513 et seqq. German Commercial Code.
As part of the amendment § 516 German Commercial Code was introduced. According to § 516 Section 1 German Commerical Code the Bill of Lading has to be signed by the carrier – as per the previous law – and a reproduction of the signature can be provided in the form of print or stamp. The formal requirements regarding the issuing of a Bill of Lading are therefore less strict than the written form requirement set up in the Bürgerliches Gesetzbuch (German Civil Code). This seems surprising: Why is the written form required e.g. for the termination of rental agreements, but not when a negotiable Bill of Lading is issued, even though this enables, for example, the transfer of ownership of hundreds of containers loaded onto a container vessel. A simple explanation of the legislator's decision is the mass business of the transport industry. In 2018 approximately 8.7 billion TEU (20-Foot-Standard-Container) were handled in the Port of Hamburg alone. It goes without saying that the digitalisation of Bills of Lading would make the legal communication considerably easier and the transfer of documents faster.
With the introduction of § 516 section 2 German Commerical Code a legal basis for the use of electronic bill of lading was created. According to this section, an electronic Bill of Lading will be treated equally as its paper version "as long as it is guaranteed, that the authenticity and the integrity of the record are secured." The functions of an electronic version of a Bill of Lading remain the same as its paper version: It has the evidential function as well as the title function, the acknowledgement function and the legitimation function.
In § 516 section 3 German Commercial Code the Federal Ministry of Justice and Consumer Protection (BMJV) has been authorized to "regulate the details of issuing, returning and transfering of an electronic Bill of Lading as well as the details of the registration of the electronic Bill of Lading". At this point in time, the BMJV has not issued any regulation. The reason therefore might be that according to the official reasoning of section § 516 German Commercial Code (Deutscher Bundestag Drucksache (BT-Drs.) 17/10309, S. 93) the question to which extent the authorisation from § 516 section 3 German Commerical Code should be made use of shall depend on whether there is a suitable mechanism to deal with electronic Bills of Lading set up in private practise. In other words: The legislator – for the time being – leaves the challenge of finding a practical and legally viable solution for the issuing and transferring of electronic Bill of Ladings to the private sector.
This is not necessarily a bad thing as it not only spurs competition for the best solution, but also avoids the creation of legal regulations that do not meet the requirement of practise. The reluctance of the legislator to find a solution can be explained by the fact that they have been trying to create an appropriate procedure for electronic Bills of Lading for years. The Comité Maritime International (CMI) created a rulebook for the electronic issuing of Bills of Lading (CMI Rules for Electronic Bills of Lading) in the 1990s. In the meantime there are private providers that offer the use of electronic Bills of Lading in the framework of a closed system. Exemplary would be the BOLERO (Bill of Lading Registry Organisation) System (www.bolero.net) as well as the ESS (Electronic Shipping Solutions) Databridge System (www.essdocs.com). Bolero and ESS have their own rules – the Bolero Rulebook and the ESS-Databridge Services and Users Agreement. As a consequence, the parties involved in maritime trade have to enter a contract with the mentioned private companies to use their systems.
The rulebooks, some of which have around 50 pages, are very complex. They are subject to English law. This poses the question whether the rules and regulations of the above-mentioned providers meet the requirements of the transfer of a bill of lading under German law. For instance, the legal position is not clear with respect to an order bill of lading, which is often issued in practice. According to
§ 519 section 3 German Commercial Code the owner of the Bill of Lading is only entitled to claim the handover of the goods if he can supply a complete series of indorsements. The indorsement is a note of the back of the Bill of Lading where the current owner (endorser) transfers his ownership of the paper with the connected rights to the endorsee which is mentioned in the Bill of Lading. Under the Bolero System the transfer happens by way of novation. The legal consequence of a novation is that the former legal relation of the Bill of Lading ends and a new legal relation with identical rights and obligations is created. A novation does not fulfil the requirement of a transfer of an order Bill of Lading under German law due to the fact that a complete series of indorsements is missing.
Due to the legal uncertainty and the seemingly complex contractual terms involved, many parties in maritime trade do not feel comfortable using these private systems.
Against this background it is interesting to note that a cooperative project, under the management of the Centre of Law of the Information Society of the University Oldenburg is currently examines how electronic Bills of Lading could function under German. The project is funded by the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie [BMWi]). The goal is to create a software that is compliant to the German Law. Technically the idea is to create a Blockchain-Bill of Lading. The carrier creates a token and then gives an order to the electronic system to receive the relevant information in accordence with § 515 section 1 HGB. The result would be that the information would be inextricably linked with the token which then can be issued directly to the entitled consignee under the Bill of Lading. For the transfer of goods for which a token has been created it would suffice to transaction the token to the Buyer via blockchain.
Unlike private vendors, the research project of the University of Oldenburg has a neutral approach. It is not profit oriented. Not only with respect to data protection issues, this seems to be a good approach. (For further information please visit: www.uol.de/privatrecht/projekt -hapik)
Summary and outlook
It remains to be seen whether the intended Blockchain system for the creation of an electronic document will fulfil the requirements of § 516 Section 2 German Commercial Code. Until a suitable solution has been found, it is not possible to use electronic Bills of Lading under German Law. .
About the author
Dr. Tim Schommer LL.M is a Partner at international law firm Clyde & Co, which opened an office in Hamburg in 2019. He is a lecturer at the Bucerius Law School and has been active for almost 15 years in commercial law, Maritime Law and Commercial Arbitration. Another focus of Tim is the law of digitalisation.
Original article published in German for ICC Germany Magazine in October 2019 (see PDF below)