Recommendations to allow electronic documents would revolutionise trade

The Law Commission has today published its recommendations and draft legislation to allow for the legal recognition of electronic versions of trade 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. Parties would be able to conduct trade using electronic versions of the documents with which they are familiar without the need to enter into contractual workarounds.

International trade is worth around £1.266 trillion to the UK and plays a vital role in 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 recommendations identify criteria that trade documents in electronic form would need to meet so that they can fulfil the same functions as paper documents. The aim of the recommendations is to enable electronic trade documents to be used as alternatives to, and be treated in law in the same way as, their paper counterparts.

If implemented, this change would increase efficiency and reduce the operating costs of trade whilst also enhancing the reputation of the law of England and Wales as the go-to choice of law for global trade contracts, and maintain England and Wales as a pre-eminent jurisdiction for the resolution of disputes. The International Chamber of Commerce has estimated that digitalising these documents could generate £25 billion in new 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, secure and resilient to the impact of unexpected international events such as pandemics. The digitalisation of trade documents also promises cost savings in the billions.

Despite technological advances, the law continues to lag behind, preventing a convenient switch to electronic documents.

Our recommendations would bring the law into the 21st century, streamlining global trade and generating benefits on an international scale.”

Chris Philp, Minister for Tech and Digital Economy, said:

“Digitising trade documents has huge potential to transform millions of international transactions every year. We welcome the Law Commission’s proposals to update rules for the modern age and make it easier, cheaper and greener for UK businesses to trade around the world.”

International trade and the use of trade documents

The process of moving goods across borders involves a range of actors including transportation, insurance, finance and logistics service providers. In a transaction covered by a bill of lading, for example, it is common to find 50 sheets of paper in a package of shipping documents that must be exchanged between as many as 30 different parties. Moreover, one trade finance transaction can require between 10 and 20 paper documents, totalling over 100 pages. We have estimated that global container shipping generates billions of 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 special category of document that entitles the holder to claim performance of the obligation recorded in the document, and to transfer the right to claim performance of that obligation by transferring (physical) possession of the document. The obligation may be to deliver goods or to pay money, and the document is said to “embody” the obligation. 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 legal rules are based on the idea that these trade documents can be physically held or “possessed”. However, under the law of England and Wales, possession is only associated with tangible assets. The law does not recognise the possibility of possessing electronic documents.

The emergence over the past two decades of central registry systems and more recently 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, hindering the adoption of electronic trade documents and the significant associated benefits from being achieved.

The Law Commission’s recommendations for reform

The Law Commission has published its recommendations with a draft Bill to allow for the legal recognition of electronic trade documents. The Law Commission recommends that a trade document in electronic form should be capable of being possessed provided that certain criteria are met. These criteria are designed to replicate the salient features of paper trade documents and include the following:

• The electronic document should be susceptible to exclusive control. In order to prevent double spending, only one person (or persons acting jointly) must be able to exercise control of the document in electronic form at any one time.
• The electronic document should be fully divested on transfer. The transferor should no longer be able to exercise control of the document when it is transferred.
• A reliable system should be used to ensure that the criteria are satisfied. The underlying system whereby the document meets the criteria must be reliable. We further recommend that the Bill should contain a list of factors which may be taken into account when assessing whether a system is reliable.

The recommendations apply to documents that rely on possession for their functionality as a matter of law or commercial practice, with specific exclusions for bearer bonds and uncertificated securities under the Uncertificated Securities Regulations 2001.

Benefits of reform

Potential benefits of reforming the law to allow for 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 greater transparency and traceability whilst technology can provide greater security. The cases of non-compliant documents commonly caused by human error can also be reduced.
• Environmental benefits: electronic documents offer environmental benefits largely due to the reduced use of paper and couriers during the trade process.
• Maintaining English law’s leading role: allowing for the legal recognition of electronic trade documents promotes the role of English law in governing global transactions and promotes Britain’s role in the global commercial environment.

Whilst there are bound to be some costs involved in making the transition to a new paperless system, these will be dwarfed by the benefits such a change will bring.

Next steps

The report has been laid before Parliament. It will be for Government to decide whether to implement the recommendations. The Government has however already indicated that it intends to introduce relevant legislation when parliamentary time allows.

Read more about the project here.