Law Commission consults on international trade and the use of trade documents

May 5, 2021

The Law Commission of England and Wales is consulting on proposals to allow for the legal recognition of electronic versions of documents such as bills of lading and bills of exchange. The aim of the reforms would be to increase efficiency and reduce the operating costs of 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.

International trade is worth £1.153 trillion to the UK. The process of moving goods across borders involves a range of organisations 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 effects of using electronic trade documents include significant financial and efficiency gains, and environmental benefits.

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 rely 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 therefore, the law does not 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 the Law Commission’s draft legislation. The documents it has 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.

The 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 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, the Law Commission says that these will be dwarfed by the benefits such a change will bring.

Next steps

The consultation ends on 30 July 2021. The Commission plans to develop final recommendations for reform, and a final draft Bill, due in early 2022.

This consultation sits alongside the Law Commission’s consultation on digital assets.