BT: The brave new world of electronic transferable trade documents

The wheels of international trade have turned on paper documents for centuries. While physical commodities move from producer to consumer, it is the transfer of paper trade documents such as bills of lading that represent the transfer of possession, as goods are bought, sold, pledged or collateralised. Billions of dollars change hands annually off the back of these documents – but they are also the Achilles heel of international trade, as recent cases have demonstrated the ease with which they can be manipulated, doctored or even photocopied to create the appearance of a trade. A transition from paper to electronic documents would go a long way to reducing such problems, yet the adoption of private electronic systems has been patchy. This is in part because of uncertainty around the legal status of electronic documents such as electronic bills of lading (EBLs). Singapore has sought to address that market reluctance headfirst by amending its laws to give certain transferable documents like EBLs the same legal status as their paper counterparts. With the United Kingdom in the process of adopting similar laws, are we finally at the cusp of change of the centuries-old mercantile practice of exchanging paper documents?

The problems with paper Bills of Lading

The use of paper bills of lading has featured so prominently in international trade because rights are contained within the document itself, making physical possession tantamount to performance. Tied to the possession of the original paper document are rights dealing with delivery, payment, performance and even rights to sue the shipowner, leading to its description as a “document of title”. In law, the concept of possession turns very much on tangible assets such as goods represented by paper bills of lading and not electronic versions which are seen as intangible assets. The result is that much remains in hard copy. The Digital Container Shipping Association estimates that 16 million original bills of lading were issued by ocean carriers in 2020, with more than 99 per cent in paper form. A key advantage of electronic bills, apart from cost savings, is the speed of transmission. In international shipments, paper documents can take weeks to reach the discharge port. This results in the unsatisfactory practice of obtaining letters of indemnity, designed to facilitate discharge of goods at destination ports without original bills of lading to avoid charges payable to the shipowner. However, the use of letters of indemnity re-introduces a credit risk on the buyer in transactions which are designed to avoid that very risk. The numerous litigation cases involving misdelivery and letter of indemnity claims are testament to its nature as an unsatisfactory compromise for 21st century international trade.

More importantly, EBLs are far less susceptible to fraud, forgery, loss or other forms of human error. With electronic bills of lading, cases such as Zenrock and Hin Leong, where multiple financing was raised on the same cargo, would likely become things of the past as electronic systems would provide much-needed transparency in the fragmented world of international trade. Electronic systems should also guard against the trend of using photocopied bills of lading to give the appearance of possession. Given the compelling case for the use of electronic documents, the question remains as to why the use of paper documents persists despite the existence of least half a dozen EBL systems, some of which have been in operation for decades. All existing EBL systems essentially require their users to sign up to a multi-party contract, creating a contractual framework in which all parties agree to treat the EBLs as documents replicating the functional equivalence of paper bills. The use, transmission and authentication of EBLs are conducted within or through that particular electronic system, meaning that the status of these electronic documents does not extend outside their systems and to third parties.

As with so many digital initiatives in international trade, interoperability has yet to be satisfactorily addressed, leaving an archipelago of islands of EBL systems with siloed groups of trade parties. The result is that commercial parties are compelled to use multiple EBL solutions depending on what their counterparties have adopted – in container shipping, for example, the 6 biggest companies reportedly support 5 different EBL systems. The inability of EBLs to transcend systems has meant that paper remains king.

Democratising electronic Bills of Lading

In short, the EBL needs to be democratised: its status as a document of title and ability to transfer rights in electronic form should not be confined to users of private platforms, but recognised as a matter of national law. Singapore is one of a handful of countries to do so by changing its laws to put electronic bills on the same footing as paper counterparts. In March 2021, Singapore passed the Electronic Transactions (Amendment) Act, based on UNCITRAL Model Law for Electronic Transferable Records 2017 (“MLETR”), giving recognition to certain electronic documents such as bills of lading. The legal change is nuanced: it does not elevate the nature of trade documents, but is revolutionary in its ability to change how international trade is carried out. By translating possession of a paper document into a unique electronic transferable record, the law has deftly preserved hundreds of years of mercantile case law that will continue to apply to EBLs.

Following Singapore’s implementation, the UK recently introduced the Electronic Trade Documents Bill. While the UK’s position is not identical to Singapore’s, both countries have similar requirements as to what constitutes an EBL in order for it to be deemed legally equivalent to its paper form, which may be broadly summarised as follows:

(a) It contains the information that must be contained in a paper bill of lading; and

(b) A reliable system or method is used to:

     (i) identify the document so that it can be distinguished from any copies;

    (ii) protect the document against unauthorised alteration and retain its integrity;

   (iii) secure and render it subject to exclusive control from its creation until it ceases to have any effect or validity, so that that it is not possible for more than one person to exercise control of the document at             any point in time, and for control of the transferor to be fully divested on transfer of the document to the transferee.

Reliability is the obvious touchstone, particularly with concerns over multi-financing, and the MLETR provides a list of factors to guide that assessment.

What is needed for the new world of EBLs?

But recognising an electronic document is not an overnight panacea, particularly for trade fraud cases. As with any digital technology, the system is only as good as the information put in. Until and unless the shipowners who produce bills of lading are involved, there remains a gap in the trail of provenance. For EBLs to truly replace their paper counterparts, there must be mass adoption, where each contracting party in the trade chain and the law of their respective jurisdictions recognise and give effect to EBLs.

The changes made in the laws of the trading hub of Singapore, and the imminent changes expected in the laws of the UK which dominate trading contracts, would serve as pacemakers to change mindsets in the trading community. However, the EBL is a dynamic document, involving not just the shipowner, seller and buyer but numerous actors in many jurisdictions that may or may not recognise EBLs. This raises complex issues of private international law when trying to determine the law applicable to electronic documents held by different parties in different jurisdictions at different points of time. But national laws are just one side of the coin in democratising EBLs. Adoption also hinges on interoperability between different EBL platforms. Standards are being developed by industry groups to facilitate interoperability, but Singapore’s TradeTrust has sought to free the EBL from the shackles of competing electronic systems by creating an interoperable framework using open-source code.

Any interested participant can download the TradeTrust source code for free and integrate it into their digital solution or platform to initiate transactions on the public blockchain. By leveraging on distributed ledger technology and offering its source code for free, TradeTrust aims to be a decentralised bridging network between various existing electronic systems. With laws and practical issues surrounding interoperability of electronic documents now in place, what remains is for foreign courts to recognise documents such as the Singapore EBLs, which would give much confidence in the future of EBLs as global trade documents.

* This article was first published in The Singapore Business Times on 28 July 2022.

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