Which law decides if your electronic trade document is legal?

The 2017 adoption of the Model Law on Electronic Transferable Records (MLETR) by the United Nations Commission on International Trade Law (UNCITRAL) has provided a legislative template for the use of negotiable instruments and documents, such as bills of lading (BLs), bills of exchange, and promissory notes, in electronic form. 

Based on the principles of non-discrimination of the use of electronic means, technology neutrality, and functional equivalence, the MLETR provides a comprehensive and efficient legal framework for electronic transferable records – also known as electronic trade documents – that does not alter existing law. 

For this reason, the adoption of the MLETR is gaining momentum, having already been enacted by major players such as China, France, Singapore, and the UK. Actual use of electronic documents is also increasing, supported by the engagement of the private sector and the increasing availability of technical standards.

Some electronic transferable records, such as BLs, are inherently used across borders. It is therefore necessary to ensure that their legal validity and effect is recognised and enforced in every relevant jurisdiction. This is done by resorting to special rules, found in a dedicated branch of international law titled ‘private international law’, also known as ‘conflict of laws’.

MLETR and private international law

Private international law helps identify which law applies to a specific legal issue – in this case, an electronic transferable record – and, if the parties have chosen none, which forum has competence to hear a dispute. It also helps recognise and enforce a judgment or an arbitral award in a jurisdiction other than that of origin.

Article 19 MLETR deals with private international law, but contains only two rules of negative content. The first rule indicates that the foreign origin or use of an electronic transferable record alone should not impede legal recognition and effect of that record, provided that the record complies with other legal requirements. 

The second rule clarifies that adoption of the MLETR does not affect pre-existing private international law. 

The mandate of UNCITRAL is to harmonise and modernise commercial law, but it does not extend to private international law. 

Another intergovernmental organisation, the Hague Conference on Private International Law (HCCH), deals globally with private international law matters. As the use of electronic transferable records across borders requires additional legal clarity and guidance, the emerging work on this topic doesn’t come as a surprise. 

The HCCH Experts’ Group on Digital Tokens carries out that work in parallel with a workstream on the use and transfer of tokens in digitally-mediated environments. 

The work of the Experts Group on electronic transferable records is oriented towards preparing a private international law instrument aligned with the MLETR. 

The resulting legal text aims to facilitate recognition of electronic transferable records in all jurisdictions: those that have already adopted laws based on the MLETR, those that have adopted other laws on electronic transferable records, and those that have no legislation in this area. This instrument could thus achieve broader recognition and use of electronic transferable records globally. 

Ideally, the promotion and implementation of this future instrument will be coordinated with that of the MLETR and related texts. 

The HCCH project does not come in a vacuum: private international law rules for transferable documents and instruments already exist; however, these rules may not always be fit for an electronic environment. 

Moreover, existing rules are not uniformly applicable to all electronic transferable records, and even the rules applicable to each document may differ in the various jurisdictions, as they may originate from different times and sources.

Public policy: A friend or foe to digital trade?

Generally speaking, party autonomy – the ability of parties of a transaction to choose the law applicable to their relationship – is a fundamental principle of modern international business law. 

However, many national laws make the operation of party autonomy conditional to the respect of the principle of public policy, or ‘ordre public’. Unfortunately, the content of public policy is often not detailed in the law and is defined over time through judicial precedent. 

In the case of electronic transferable records, this exposes the recognition of foreign records to possible objections based on the electronic form of the document, especially in smaller jurisdictions that have not yet adopted the MLETR and that are not very familiar with private international law issues. In this sense, public policy can become an enemy of trade digitalisation. 

On the other hand, public policy may also become a booster of trade digitalisation. This may happen in jurisdictions that are openly supportive of the use of technology in commerce. In these jurisdictions, foreign electronic transferable records will be legally assessed without discrimination and could be enforced if they meet minimal legislative standards.

A legal step-by-step

The recognition and enforcement process under private international law rules requires a multi-step approach. The first step is the identification of the type of document, so as to determine which rules of private international law may apply. 

The second step is the identification of applicable law, which may be the law chosen by the parties, or the law of the court, called ‘lex fori’. Applicable law differs with the type of document: BLs are subject to a dedicated set of international conventions, complemented by terms and conditions, while the applicable law is totally different, for instance, for promissory notes and bills of exchange. 

The third step is the verification of the legal validity and effect of the document under applicable law. It is at this stage that an objection based on violation of public policy, due to form requirements or other, may arise. 

An additional step applies only to documents in electronic form and regards data quality assurance. A document typically needs to be signed. The signature may be affixed on paper with different techniques. 

However, the electronic signature is a trust service that provides assurance of the origin of the electronic record and, in some cases, of its integrity. The law may set out the requirements to be met for the electronic signature to be valid. The issue is that the electronic signature may comply with the law of the jurisdiction where the electronic transferable records were issued, but not with the law of the jurisdiction where recognition and enforcement of its legal effect is being sought. 

In other words, an electronic signature may exist, but it may not be considered reliable enough. Here, public policy comes back: for instance, a judge may decide that an electronic signature is not reliable even if the parties have agreed so by subscribing to the terms and conditions of a rulebook subject to foreign law.

Cross-border legal recognition of data quality assurance may be addressed in different manners. One is to give ample powers to the judge, who often decides based not only on technical standards, but also on other evidence. 

Another is to set up a mechanism that operates before the trust service is used and that gives the same legal effect to all participating trust services.

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The solution to the challenge of cross-border recognition of electronic transferable records is made of multiple elements: broader MLETR adoption; comprehensive and enforceable contractual frameworks; uniform technical standards; and a common understanding of legal, technical, and operational issues, despite differences in legal traditions and economic development levels. 

The work of the HCCH may provide a significant contribution to a field that is highly specialised, thus clarifying a matter critical for the overall success of electronic transferable records.