Proposals to allow electronic documents would revolutionise trade
The Law Commission has announced a consultation on proposals to allow for the legal recognition of electronic versions of documents such as bills of lading and bills of exchange.
If implemented, the reforms could revolutionise global trade and bring the processes into the 21st Century. We are also considering reform of the legal treatment of cryptoassets and digital assets and today published a call for evidence as part of that process (see below).
International trade is worth more than £1 trillion to the UK and plays a vital role in the health of the domestic economy. However, due to legal requirements, trade still relies on the use of billions of paper documents which is costly, inefficient and a risk during global crises such as the coronavirus pandemic.
The Law Commission’s proposals, that are now being consulted on, highlight three criteria that electronic trade documents would need to meet so that they can be possessed in the eyes of the law and therefore used for global trade as an alternative to paper versions.
If implemented, this change would increase efficiency and reduce the operating costs of trade whilst also enhancing English’s law reputation as the go-to system for global trade. The International Chamber of Commerce has estimated that digitalising these documents could generate £25 billion in new global economic growth by 2024, and free up £224 billion in efficiency savings.
Professor Sarah Green, Commercial and Common Law Commissioner said:
“Electronic documents have the potential to make global trade more efficient, cheaper and more secure. Until the law catches up with the relevant technology, however, these benefits – worth billions every year – will not be realised.
“Our proposals would bring the law and global trade into the 21st century, generating benefits on an international scale.”
Media and Data Minister John Whittingdale said:
"Digital technology has the potential to boost global trade and so we have asked the Law Commission to see how we can use it to help make outdated trading methods fit for the digital age.
"This week we also used our presidency of the G7 to agree an ambitious vision for technology with new agreements on a number of areas including digital trade."
International trade and the use of trade documents
International trade is worth £1.153 trillion to the UK. The process of moving goods across borders involves a range of actors including transportation, insurance, finance and logistics service providers.
One transaction can require between 10 and 20 paper documents, totalling over 100 pages with global container shipping estimated to generate 28.5 billion paper documents a year. Across so many documents, the potential positive impacts of using electronic trade documents – including significant financial and efficiency gains, and environmental benefits – should not be underestimated.
Despite the size and sophistication of this market, many of its processes, and the laws underlying them, are based on practices developed by merchants hundreds of years ago. In particular, international trade still relies on a category of documents called “documentary intangibles”. The act of transferring possession of a documentary intangible can transfer the obligations which the document embodies, for example the obligation to pay money or an obligation to deliver goods. For example, simply handing over a bill of lading can be sufficient to give the new holder a right to the goods described in the bill.
These rules are based on the idea that the trade documents can be physically held or “possessed”. However, under English law, possession is only associated with tangible assets, and the law does not therefore recognise the possibility of possessing electronic documents.
Over the past decade, the development of technologies such as distributed ledger technology has made trade based on electronic documents increasingly feasible. Without reform, the law will continue to lag behind technology, hindering the adoption of electronic trade documents and the significant associated benefits from being achieved.
The Law Commission’s proposals for reform
For electronic documents to be widely adopted for trade, they must be capable of being possessed in the eyes of the law. The Law Commission proposes that an electronic trade document should be “possessable” provided that:
- The document is a trade document of the kind listed in our draft legislation. The documents we have identified are bills of lading; bills of exchange; promissory notes; ships’ delivery orders; warehouse receipts; marine insurance policies; cargo insurance certificates; and warehouse receipts.
- The electronic document is capable of exclusive control. That is, the electronic trade document must be on a system that ensures that only one person (or group) has control of the electronic document at any one time.
- The electronic document must be fully divested on transfer. If Person A transfers the electronic document to Person B, Person A must no longer be able to control the document.
Benefits of reform
Potential benefits from reforming the law to allow electronic trade documents include:
- Increases in efficiency and lower operating costs: processing electronic documents can be quicker and cheaper to do.
- Increased security and compliance: electronic documents offer transparency and traceability whilst the DLT technology provides greater security. The cases of non-compliant documents commonly caused by human error is also reduced.
- Environmental benefits: largely from the reduced use of paper required during the trade process
- Maintaining English law’s leading role in governing global transactions and helping to promote Britain’s role in the global world.
Whilst there are bound to be some costs involved in transitioning to a new paperless system, these will be dwarfed by the benefits such a change will bring.
Next steps
The Law Commission is consulting on the proposed changes, including draft legislation to implement them, until 30 July 2021. The responses will help the Law Commission to develop final recommendations for reform, and a final draft Bill. We are aiming to publish those in early 2022.
Call for evidence on cryptoassets and other digital assets
The Law Commission has also launched a call for evidence on cryptoassets and other digital assets. The call for evidence seeks information from stakeholders and market participants on how such assets are being used and dealt with and about how the law might accommodate them now and in the future. We also ask where the law might be inhibiting particular use cases, innovation or development. Our work recognises the importance of property to modern social, economic and legal systems and will seek to ensure that property rights in digital assets receive full and consistent recognition and protection under the law.
Following the call for evidence, which also closes on 30 July 2021, our aim is to publish a consultation paper in which we expect to make proposals for law reform to make certain digital assets possessable.
