A prominent point of discussion at the International Trade and Forfaiting Association’s (ITFA) 48th Annual International Trade and Forfaiting Conference in Porto has been the digitisation of trade finance––particularly after the challenges COVID-19 caused for a largely paper-based industry. 

One thing is clear; the industry is ready, the technology is ready, but the law is not. 

To better understand the legal environment surrounding trade digitalisation both in England and around the world, Trade Finance Global’s (TFG) Deepesh Patel sat down with Catherine Lang-Anderson, a partner in the banking and finance team at Allen & Overy. 

As it stands right now, the legal environment in the UK and most other jurisdictions around the world is not set up to properly facilitate digital trade.

One of the main reasons for this is the issue of possession.

Many of the documents that are used in trade, from warehouse receipts to promissory notes, have the right to require performance actually embedded in the document itself.  

Contrary to other legal documents, like a standard contract, a contract, in a legal capacity, is simply a document that evidences the contractual agreement between two parties.

Trade documents have the ability to require performance based on what is included in the document itself.

With this type of document, then, there are a whole host of additional rights that become activated the moment someone is deemed to have possession of it legally.

The problem is that English law, as well as the law from many other jurisdictions, is not set up for intangible objects––such as a digital computer file––to be possessed, only tangible objects––like paper.

This is unsurprising given the long history attached to these laws, with many of them having roots dating back to medieval times.

In England and Wales, the courts have examined whether they could simply take the law as it is and extrapolate these doctrines to digital trade files in a computer-based system, and they have decided that this is a step too far. 

Therefore, officials have decided to change the law around by statute.

Recent developments

In England, there is an Electronic Trade Documents Bill that is expected to go through parliament during this session, as announced during the Queen’s speech in May.

Experts expect that there will be very little opposition to the bill––partly because of the law commission’s thorough work consulting industry players during its creation and partly because it has been drafted in a clear and simple manner.

From an international perspective, there is the Model Law on Electronic Transferrable Records (MLETR) that some other countries––such as Bahrain and Singapore––have adopted to provide a framework for using digital trade documents in practice.

As more countries adapt their laws to be in alignment with the new digital reality, the pace of legal digitalisation is expected to continually increase as other nations do not want to be left behind.

The key, however, is going to be for the disparate jurisdictions around the world to have a standardised approach so that it is easy for a trader to conduct business from one country to the next.

Practical implications for trade

Passing this bill into law will have practical implications for businesses and commerce in the UK.

A major blocker for trade digitalisation is removed, which frees the technology firms and innovators to begin delivering their services to clients. This will only foster further development, progress, and innovation down the road.

There is also hope that this will help to unlock trade finance for small- and medium-sized enterprises (SMEs).

This is because by doing more digitally, there will be increased efficiencies that lead to decreases in costs, thus benefiting SMEs.

Banks will also have much more comfort and legal certainty around what they are able to do in a digital sense, further driving efficiency and potentially unlocking risk appetite in other areas.

Realistically, however, in the medium term, it is important to remain cautious since these changes will only be made within the context of the English legal system. Even if passed through parliament, there is still much to be done on the global stage.

Hopefully, however, English law will serve as an enticing example for other jurisdictions to follow suit.