The Electronic Trade Documents Act 2023 and the broader implementation of electronic bills of lading

Bills of lading have always been an oddity in English law. Not only do they have to fulfil three distinct functions (being evidence of a contract of carriage, a receipt for goods loaded on board a ship, and a document proving title to those goods), but their effect has always depended on someone – a “lawful holder” – having physical “possession” of them. In an age when all trade documents were made of paper, the concept of being a “holder” of a bill of lading and having “possession” of an original, paper bill was not problematic. Paper bills can be endorsed with stamps and signatures and physically handed from one party to another.

In the new age of electronic trade, paper bills of lading seem as outdated as a quill pen. Despite electronic bills having existed for some time, English law has continued to consider physical “possession” of a bill as the key to exercising rights under it. The result has been that paper bills remain the norm in international trade, physically endorsed and passed from one holder to the next.

In the fast-changing world of digital technology, the law was clearly ripe for an update. The Government recognised this and, in April 2021, directed the Law Commission to consider and report on reforms which would allow for legal recognition of trade documents, including bills of lading, in electronic form. The Law Commission subsequently addressed this in its Law Commission Report 2022, which included an appended draft bill. That draft bill has now become law, being passed as legislation in July 2023 and effective from September 2023.

So, what does this mean for international trade?

The aim of the Electronic Trade Documents Act 2023 (the “Act”) is to allow trade documents which previously had to exist in paper form to be reproduced and equally recognised in electronic form. Provided, that is, that certain criteria can be met regarding their verification and security. Until now, this has been the problem: electronic documents have been potentially vulnerable to interference, alteration, or diversion, and were dependent on technical solutions which would have to be controlled by one party. A previous attempt was made in the 1990s to implement electronic documents with the introduction of Project Bolero. This was unsuccessful largely due to the limitations in encryption technology at that time. With the arrival of blockchain technology, these concerns can now be addressed.

Many articles have been written about the effect of the Act. In this article, we try to go further and explain what blockchain technology in particular will do for the electronic bill of lading.

The new age: The electronic bill of lading

The legislation introduces the possibility of possessing and transferring electronic trade documents. So, what is an “electronic trade document”?

Section 2 of the Act provides that information capable of being contained in a paper trade document can now constitute an electronic trade document for the purposes of the Act, subject to certain requirements. These include ensuring “a reliable system is used to” (s2(2)):

• ensure the document is distinguishable from copies;
• protect the document against unauthorised alteration;
• secure the document so it is in the control of only one party at a time;
• allow any person able to exercise control of the document to do so; and
• secure the transfer of the document so that one party is denied control over it before another party gains the ability to control it.

Provided the above conditions are satisfied, an electronic trade document is capable of being possessed, endorsed, and transferred so as to facilitate international trade. The criteria in the Act reflect those set out in the UNCITRAL Model Law, so the English position is in line with widely supported attempts at introducing electronic bills already in existence.

So, how will this operate in practice?

1. The existence of a “reliable system”

It is central to the legislation that a “reliable system” is used. However, this term is not defined in the Act, so it remains to be seen how this is interpreted by the courts as time progresses. At the recent BMLA Seminar in November 2023, Lord Hamblen acknowledged the role the courts may play in assisting the interpretation and application of the new legislation.

In any event, it seems that the legislation may see electronic bills of lading being produced by specific providers or by using a specific platform, of which many different iterations have emerged, and are emerging still. Parties who wish to use an electronic bill of lading via these reliable systems will need to sign up to that provider’s system and will have to agree to the terms of use of that provider. In larger transactions, all parties may need to be signed up to the same provider and to agree to those terms (which may be expensive). This can also have commercial implications and it is not yet obvious how these reliable systems will emerge and develop.

Previously, and prior to the introduction of the Act, closed platforms (like Bolero) operated under memberships already in existence. As technology evolves, the use of blockchain for bills of lading would open up such platforms whilst ensuring that their important security features are maintained.

• What technology exists?

Blockchain has always been the most probable technology to implement electronic bills. It is what is known as “distributed ledger technology” which maintains a continuously growing base of records and information. The main feature of blockchain is the immutability of the data. This means that the way in which it records and stores information makes it impossible – or, at least, incredibly difficult – to change, hack or manipulate this information. Information shared using blockchain is then available to all parties accessing it via the requisite application – the legislation’s “reliable system”.

One concern in shifting towards electronic bills of lading has been the persistent threat that electronic platforms are vulnerable to phishing, hacking, and malicious manipulation. Blockchain should enable parties engaged in international trade to benefit from its auditability and digital security. Instead, transfer of ownership, or of “possession” of an electronic bill, can be simultaneous and is validated via the decentralised verification system.

• What are the benefits of blockchain bills of lading?

Blockchain leaves an immutable audit trail and ensures transparency in business dealings. An electronic bill of lading based on blockchain technology may be able to ensure a level of confidentiality, too.

One major change will be the possible immediacy of transmitting electronic trade documents. Parties may find that they can save time and expense in arranging expensive courier services, often for international delivery, of paper documents. Accompanying this is the reduced risk of any delay as a result of the original documents not being immediately available (thereby leading to a reduced demand for Letters of Indemnity in the context of a missing or delayed bill of lading, which can be tricky to negotiate in the commercial context).

• Widespread adoption?

Whilst English Law has undergone a radical shift in introducing recognition of electronic trade documents, it is difficult to picture a widespread, practical change unless and until such documents start to take over from paper documents on the international trade network. Changes in the law regarding the adoption and recognition of electronic or blockchain bills of lading will not, in themselves, lead to them becoming commonplace. Any change in the use of electronic over paper bills will come about only if international trading parties and the shipping industry find the new technology advantageous and give it momentum.

This is not without its potential problems. What if delivery of the cargo is redirected mid-voyage to a disport which does not recognise the use of electronic bills? The holder of a blockchain bill may have difficulty in taking/demanding delivery of its goods, which in turn could lead to delay and give rise to demurrage or detention costs. The legislation has envisaged this problem arising and therefore contains provisions for the transference of electronic to paper bills, and vice versa. The issue remains, though: what of a bill in a port of a state which does not recognise an electronic document which has been transferred from paper form?

There are international efforts directed towards achieving widespread adoption of electronic bills of lading, which include the launch of the Future International Trade (FIT) Alliance and BIMCO’s release of the eBL Standard. Similarly, the frequency with which English law and jurisdiction is chosen to govern a bill of lading may mean that this legislative shift has wider implications than initially obvious.

Conclusion

The introduction of electronic bills of lading and trade documents has been in consideration for decades already. English law has finally joined these discussions with the introduction of the Electronic Trade Documents Act 2023. As such, the use of electronic bills of lading which can be possessed, endorsed, and transferred throughout international trade is now possible.

The practicality of using an electronic trade document as verified by a “reliable system” is not yet clear, but it is likely that blockchain technology will play its part. Blockchain bills, in theory, would be immune to tampering or manipulation, thereby building confidence and trust in the international use of electronic trade documents. The immediacy and practical ease with which international trade could be done using electronic or blockchain-based bills is undeniably attractive, albeit achievable only if accompanied by all other documentation, such as a letter of credit, in similar electronic form. This may encourage the industry finally to move away from familiar paper bills and towards electronic bills.

At Birketts, we are excited by the modernisation of international trade being introduced and achieved by this major legal shift. We look forward to supporting our clients engaged in international trade where the use of electronic or blockchain bills of lading is now possible.