Going Paperless: The Electronic Trade Documents Bill

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Going Paperless: The Electronic Trade Documents Bill

Key Contact & Author: Tom Hine

Introduction

Notwithstanding the digital revolution of the 21st century, trade documents, such as bills of lading, bills of exchange, and warehouse receipts, are still mainly in paper form. International trade is worth around £1.266 trillion to the UK, and the trade and trade finance market is highly sophisticated, yet transactions are still documented by paper, and a typical trade finance transaction can involve 10-20 paper documents: the net result is that the international trade industry generates around 4 billion paper documents per year.

These inefficiencies were recognised in a UK Law Commission consultation and report in 2021-2022, and the result is that the Electronic Trade Documents Bill was introduced in the House of Lords by Lord Kamall on 12 October 2022. In summary, when enacted, the Bill will give electronic documents the same legal standing as their paper counterparts. The Bill is expected to become law later this year. This article looks at the background of the Bill, its key provisions, its impact, and how Acuity Law can help.

Background

International trade relies on documents that give the holder the right to claim the performance of the obligation recorded in it and to transfer the right by transferring physical possession of the document. So, for example, handing over a bill of lading can be sufficient to give the new holder a right to the goods described in the bill; endorsing a warehouse receipt and handing it over can transfer constructive possession of the goods. These “bearer documents” or “order documents” are premised on the idea that they are physical documents that can be physically held or “possessed”. Possession is important to the law of bailment, and therefore for pledges, which are essential to trade finance. The current law in England and Wales does not recognise the possibility of possessing electronic documents; possession is associated only with tangible assets. The Law Commission, therefore, recommended that a new act be introduced which enables electronic trade documents to operate in the same way as physical paper documents. The Bill sets out the criteria that electronic documents must have in order to be treated as equivalent to paper documents. The Law Commission recognised that these criteria would need to be specified by legislation: relying on the common law would not provide sufficient clarity.

Key Provisions

Electronic documents are equivalent to paper documents

There are three key operative provisions of the Bill:

  • A person may possess, indorse and part with possession of an electronic trade document;
  • An electronic trade document has the same effect as an equivalent paper trade document; and
  • Anything done in relation to an electronic trade document has the same effect (if any) in relation to the document as it would have in relation to an equivalent paper trade document.

If enacted, these provisions would apply unless an intention that they should not apply in relation to an electronic trade document appears in, or can reasonably be inferred from, the document or terms that have effect in relation to the document.

Evidencing equivalence

In order to evidence the equivalence of an electronic document, a reliable system (see below) must be used to:

  1. Identify the document so it can be distinguished from copies;
  2. Protect the document against unauthorized alteration;
  3. Secure that it is not possible for more than one person to exercise control of the document at any one time;
  4. Allow any person who is able to exercise control of the document to demonstrate that the person is able to do so; and
  5. Secure that a transfer of the document has the effect to deprive any person who was able to exercise control of the document immediately before the transfer of the ability to do so (unless the person is able to exercise control by virtue of being a transferee).

How to determine if a system is reliable?

As noted above, a reliable system must be used. The Bill includes some matters to be taken into account in determining whether a system is reliable:

  1. any rules of the system that apply to its operation;
  2. any measures are taken to secure the integrity of information held on the system;
  3. any measures are taken to prevent unauthorised access to and use of the system;
  4. the security of the hardware and software used by the system;
  5. the regularity of and extent of any audit of the system by an independent body;
  6. any assessment of the reliability of the system made by a body with supervisory or regulatory functions;
  7. the provisions of any voluntary scheme or industry standard that apply in relation to the system.

Change of Form from Paper to Electronic

The Bill sets out how a paper trade document may be converted into an electronic trade document and vice versa:

  • a statement that the document has been converted must be included in the document in its new form; and
  • any contractual or other requirements relating to the conversion of the document are complied with.

Where conversion occurs, the document in its old form ceases to have an effect, and (b) all rights and liabilities relating to the document continue to have effect in relation to the document in its new form.

Commentary

The benefits of implementing the Bill are numerous. Dealing with documents digitally would be considerably more efficient (both in terms of efficiency savings and gains), save huge amounts of paper, increase security and transparency, reduce fraud, and provide greater traceability.

It is already possible for parties to trade documents to agree, on a closed system, that a particular action taken over an electronic system will put the transferee in a similar position to that of a holder of a paper trade document. The London Metal Exchange (“LME”), for example, has implemented a contractual framework for transferring possession of warranted metal under the existing law of England and Wales. However, this “closed system” approach requires all relevant parties to sign up for a complex contractual framework. The Bill will facilitate an “open system” approach, where, provided the criteria relating to equivalence and system reliability are met, any person can use electronic documents on a system in the same way as they would use paper documents to facilitate trade. Such electronic documents would be able to be pledged pursuant to English law and therefore used as security for trade finance.

If enacted in law, the Bill will provide development opportunities for multiple parties, including shipping and transportation companies, warehouse companies, trading firms, and technology providers. For anyone designing a system, it would be worth thinking now about the equivalence and reliability criteria set out above.

It should be noted that, if enacted, the Bill will govern contracts and systems which are subject to the law of England and Wales. However, other laws may be relevant. In relation to warehouse receipts for goods stored in a warehouse, for example, the local law of the warehouse may be relevant. Whilst some other jurisdictions have enacted some legislation along the same lines as the Bill (Spain and Singapore, for example), there are already a number of differences in scope. The true benefits for international trade will not be felt unless a harmonised approach can be adopted internationally. The hope is that other jurisdictions will follow the UK’s lead.

How can Acuity help?

The author, Tom Hine, is an expert in commodities, including their storage and transfer (warehouse receipts, warrants, etc). Tom is the ex-General Counsel of the London Metal Exchange and implemented the LME’s closed system referenced above. He has tracked and responded to the Law Commission consultation and the development of the Bill. Acuity can help anyone who is thinking about utilising the Bill when enacted, including helping to design a system that is in compliance with the requirements relating to equivalence and reliability.

For further information please get in touch with Tom Hine directly, or our Commercial and Technology Team.

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