Law Commission issues report on electronic trade documents

Report contains draft legislation to allow for the legal recognition of trade documents such as bills of lading and bills of exchange in electronic form.

The Law Commission has published a report with draft legislation which would implement its recommendations to allow for the legal recognition of trade documents such as bills of lading and bills of exchange in electronic form.

Context

International trade is worth around £1.266 trillion to the UK. The process of moving goods across borders involves a range of actors including transportation, insurance, finance and logistics service providers. The Commission has estimated that global container shipping generates billions of paper documents a year. Across so many documents, the potential positive impacts of using electronic trade documents – including financial and efficiency gains, and environmental benefits – are vast. The International Chamber of Commerce has estimated that digitalising trade documents could generate £25 billion in new economic growth by 2024, and free up £224 billion in efficiency savings.

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, under the current law of England and Wales, being the “holder” or having “possession” of a trade document has special significance. However, the law does not allow an electronic document to be possessed. As a result, nearly all documents used in international trade are still in paper form.

Over the past decade, the development of technologies such as distributed ledger technology has made trade based on electronic documents increasingly feasible. According to the Commission, without reform, the law will continue to lag behind, hindering the adoption of electronic trade documents and the significant associated benefits from being achieved.

Recommendations

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 relevant features of paper trade documents and include the following:

  • The electronic document should be susceptible to exclusive control. 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. The Commission also recommends 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.

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

This project is linked to the Law Commission’s wider work on cryptoassets and other digital assets, on which it plans publish a consultation paper with provisional proposals for reform in summer 2022. The Law Commission has also agreed with the UK government that it will undertake a new project looking at the rules relating to conflict of laws as they apply to emerging technology and consider whether reform is required. It plans to start this work in mid-2022.

Published: 2022-03-18T08:00:00

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