News / 09-05-2022 / London

The Law Commission of England and Wales has now published its final report on electronic trade documents, together with draft legislation for intended presentation to Parliament by May 2022.

Purpose

The current law of England & Wales attaches particular importance to the physical possession of certain trade documents e.g. bills of lading, and does not recognise the possession of electronic documents.

However, the emergence of a basket of technologies makes digitalisation far more financially feasible. There are also a number of advantages (both environmental and financial) associated with the increased use of electronic trade documents, which we discussed in our previous article “The Law Commission’s final say on Electronic Trade Documents".

The publication of this report and draft Bill represent the Law Commission’s final recommendations on how the law should be updated to facilitate the use of electronic trade documents across the global shipping industry.   

Suggested solution

The Law Commission proposes criteria which, if fulfilled, would afford legal efficacy to the possession of an electronic trade document (ETD).

(Electronic) trade documents

The draft Bill is specifically concerned with trade documents, i.e. documents commonly used in trade which, when issued in paper form, function on the basis of possession. A number of examples are listed at Clause 1(2)(1) of the draft Bill which include bills of lading, bills of exchange and warehouse receipts.

In order to fall within the scope of the Bill, an electronic document must contain information that would normally make it a trade document if issued in paper form. Where it does, it will be a “qualifying electronic document”.

Qualifying electronic document      

Section 2 of the proposed Bill sets out the criteria that a qualifying electronic document will need to satisfy to reach ETD status:

“(1) A qualifying electronic document is an “electronic trade document” for the purposes of this Act if a reliable system is used to:

1. Identify the document so that it can be distinguished from any copies;
2. Protect the document against unauthorised 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 effect to deprive any person who was able to exercise control of the document immediately before the transfer of the ability to do so (except to the extent that the person is able to exercise control by virtue of being a transferee).”

These criteria aim to replicate the effects of possessing an original paper trade document. The elements of physical possession that the Law Commission has tried to mirror are discussed at Chapter 6 of the accompanying report and include the following:

• Integrity of the document – Establishing the authenticity of a document and its protection against unauthorised interference or alteration. (See 2(1) (a) & (b)).
   
• Exclusive control – Only one party exercising control over a document at one time; as would be the case with a physical trade document – (see Clause 2(1) (c)). Clause 2 of the draft Bill defines the exercise of control over a document to be the using, transferring or otherwise disposing of the document whether or not there is a legal right to do so. Therefore, simply reading or viewing the document would be insufficient. 
   
• Divestibility – Where the transfer of a document involves the transferor being deprived of it. This prevents an electronic document from being transferred more than once by the same party and/or simultaneous possession by two or more parties. (See 2(1) (c) & (e)).
   
• Identification of the document – Protection against the use of copies of electronic documents in the place of the original.
   
• Identification of those who can exercise control – Recognition of the entity in possession of the document.

Where a document fulfils all of the criteria in Section 2, it becomes an ETD capable of being possessed, indorsed and transferred - in exactly the same way as its paper equivalent.

Comment

The draft Bill does not deal with the recognition of electronic trade documents in other jurisdictions. At present, trade documents such as bills of lading are generally treated in the same way across the world in their paper form only. If English law is willing to embrace the use of ETDs, this may encourage other jurisdictions to do the same. However, unless there is global uptake, there remains the risk of inconsistent treatment of ETDs such that trade continues on paper out of an abundance of caution.

Clause 4 of the draft Bill is intended to deal with situations where the holder of an ETD is uncertain about the rights afforded to them. Specifically, it permits a party to request a change in form of the document (i.e. from electronic to hard copy), to safeguard legal rights. The Law Commission also intends to conduct a separate consultation on the issue of conflict of laws.

Whilst the Law Commission intends that ETDs are created by a ‘reliable’ electronic system meeting certain standards of operation, it does not specify what constitutes a “reliable system”. Instead, the Law Commission appears content to leave that question open to the interpretation and application of recent case law (see for instance the 2019 decision in Bates v Post Office Ltd).