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Digitalisation has irrevocably transformed global trade in recent years, reshaping international trade practices worldwide. As digital trade continues to gain momentum, there has been a growing commitment to digitising international trade and promoting paperless trade as a viable alternative to traditional physical trade document flow.
Paperless trade has proven to be a highly effective solution for mitigating trade disruptions. This was particularly evident during the COVID-19 pandemic, which further accelerated the adoption of paperless trade during and beyond the crisis.
However, the lack of legal recognition of electronic trade documents (ETDs), primarily electronic bills of lading, in cross-border legal systems is a critical impediment to the transition to paperless trade. The COVID-19 pandemic exacerbated the extent to which paper-based trade processes were disrupted, underscoring the urgent need for digital alternatives.
Accordingly, policymakers are implementing changes in trade practices, including fundamental changes to legal frameworks, to facilitate the evolution of paperless trade and to ensure the acceptance of ETDs as legally valid standards.
At the ICC United Kingdom’s annual conference in partnership with the Centre for Digital Trade and Innovation, Trade Finance Global’s (TFG) Deepesh Patel spoke with Miriam Goldby, Professor of Shipping, Insurance, and Commercial Law at Queen Mary, University of London, to learn more about the adoption of the electronic trade documents bill in the UK, breaking new ground in the transition to paperless trade.
The Possession challenge: Global efforts to tackle the legal barrier to digitalisation
The bill of lading is a document that serves as proof of title of goods under common law and has historically been a physical paper document. Possessing the bill of lading is essentially equivalent to being in possession of the goods themselves, and transferring the document is equivalent to delivering the goods. Consequently, it is one of the most influential documents in global trade.
Nevertheless, in English law, the concept of “possession” solely pertains to tangible assets. As a result, electronic bills of lading are not considered as documents of title. To address this legal barrier, the Electronic Trade Documents Bill (ETDB) was proposed to the UK Parliament.
The Law Commission suggested certain criteria for recognising electronic documents as capable of being possessed under English law. This would allow electronic bills of lading to serve as documents of title in the same manner as the tangible paper bills of lading.
As Goldby explained, “The possession problem is that only tangible things can be possessed, and that is true of the law of many, many jurisdictions. So the bill is there basically to recognise that electronic documents that fulfil certain criteria are capable of being possessed at English law.”
Similar efforts are underway globally to enable the acceptance of electronic trade documents (ETDs).
In April 2020, in response to the pandemic, the International Chamber of Commerce (ICC) urged governments to eliminate the legal requirements for paper documentation, which resulted in several governments adopting the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (2017) (MLETR).
Furthermore, in 2021, several states, including Bahrain, Abu Dhabi Global Market, and Singapore, have implemented the MLETR in their legislation to address the same challenge, and France and Germany are in the process of being passed.
Goldby said, “The Model law was designed to solve precisely the same problem, because as I said, this possession problem is common to many jurisdictions, and it solves it in substantially the same way.”
Indeed, the Model Law adopts a functional equivalent to possession in order to enable electronic transferable records to meet possession requirements in the law.
The ultimate objective is to achieve comprehensive legal reforms that facilitate cross-border electronic trade documents. With increasing recognition from legislators, the acceptance of electronic trade documents is on the rise, indicating a major shift towards new norms in international trade.
The future of electronic trade documents: Setting the standards
In the transition towards regulated electronic trade documents, there are inherent risks that must be addressed. Two key areas of concern that call for further research are cybersecurity and legal risks.
Cybersecurity threats, such as hacking, data breaches, and malware attacks, have the potential to become systemic risks to electronic systems. Inadequate cybersecurity measures could result in significant financial losses, legal liabilities, and reputational damage for businesses and governments. Therefore, it is imperative that governments and international organisations work together to establish cybersecurity standards and regulations for electronic trade documents and ensure reliability across borders.
Goldby pointed out, “Another area which I think is really important to do research in the future would be cyber risk and its potential to become systemic. Essentially, we need to answer questions such as: how can we prepare for a major cyber event, whether it’s a cyber malfunction or cyber attack? How can we best allocate these risks? How do we do it most efficiently? How do we mitigate them?”
Legal risks, on the other hand, refer to the potential for legal disputes that may arise from the use of electronic documents in international trade transactions. To mitigate such risks, substantial legal reforms are required to establish functional equivalence for electronic trade document requirements across different jurisdictions and ensure uniform legal consequences for fulfilling these requirements. Concerted efforts are therefore necessary for effective law reform as well as additional research on the governance mechanisms of digital initiatives.
For example, both the Model Law and the UK Bill include provisions for conversion to paper in cases where the legal effects of electronic documents cannot be achieved in a particular jurisdiction.
Goldby emphasised, “It’s really important that basically, legal risks are minimised by ensuring that the requirements that have to be met in the various parts of the world are substantially the same requirements and that the legal effects of meeting those requirements are substantially the same effects.”
Global collaborative efforts have set the trajectory for the acceptance of electronic trade documents as a legitimate and effective method for conducting international trade. With the implementation of consistent legal frameworks, businesses, and governments are now closer than ever to realising the full benefits of electronic trade documents, such as increased efficiency, reduced costs, and greater resilience in the face of disruptions.