Electronic Trade Documents Act
The passing of the Electronic Trade Documents Act 2023 (the “Act”) often touted as “game-changing” and “revolutionary” is the UK’s alternative to adopting the UNCITRAL Model Law on Electronic Transferable Records (MLETR) and is highly anticipated by the international trade and trade finance industry. It is expected to receive Royal Assent any day and will come into force two months from that date.
The implementation of this Act has the ability to provide the trade industry and its participants with the opportunity to unlock billions of pounds worth of opportunity and replace vast amounts of paper documents with electronic trade documents, reducing the expense and operational burden for all parties along the trade financing chain. Discussions in Parliament during the last reading of the Bill noted these as part of the commercial and environmental reasons for the Act and how it will enhance trade.
Here, we explain in further detail the key elements of the Act for the trade industry and how it is expected to function in practice.
Electronic trade documents and paper trade documents will have the same legal effect
The Act provides that anything done in relation to a specified list of electronic trade documents will have the same effect as it would in relation to the equivalent paper trade documents.
The very short, simple Act, focuses on two key provisions:
- “A person may possess, indorse or part with possession of an electronic trade document”; and
- “An electronic trade document has the same effect as an equivalent paper trade document”. [1]
These terms will mean that documents familiar to the trade finance industry, used until now in paper form for “trade in or transport of goods, or for financing such trade or transport, and for which possession of the document is required” for a person to claim performance or access to goods, can be used in electronic form and they will be given the recognition and protection in law as ‘electronic trade documents’.[2]
Participants in the trade and trade finance markets can take advantage of the Act by creating certain documents in electronic form, namely: (i) bills of exchange and promissory notes used for financing and payment, (ii) bills of lading, warehouse receipts, mate’s receipts and ship’s delivery orders evidencing and unlocking access to goods and cargo, and (iii) marine insurance policies and cargo insurance certificates, each in their turn benefiting from the same status as their paper equivalents.
What does the Act intend to do?
The Act addresses the English law issue that currently (and until the Act comes into force) an electronic trade document cannot be possessed. By providing that a trade document includes an electronic document[3], the Act extends possession of trade document as a means to claim a right, transfer or indorse an instrument, to trade documents in electronic form.[4]
To provide an electronic trade document with the same treatment as a paper trade document, the Act relies on two fundamental pillars: possession of the document and the use of a reliable system.
To prove possession of a document, a person must be able to exercise control of the electronic trade document, including having the ability to transfer or otherwise dispose of it. The use of a reliable system to fulfil this function is instrumental in proving possession.
For the purposes of the Act, a reliable system should:
- identify the document as an original;
- protect the document from any unauthorised alteration;
- secure that no more than one person can have exclusive control over the document at any one time;
- allow the person (whether an individual or a company or any other entity) to demonstrate that it can exercise control of the electronic document; and
- allow the document to be capable of being transferred to a new holder which then has exclusive control.
Although the Act is technology neutral, it does give some guidance on what to take into account to make a determination on what would be considered to be a reliable system, including:
- any rules of a system;
- measures to secure the integrity of the information being held on the system;
- measures to prevent unauthorised access;
- security for the hardware and software used;
- how often a system would be independently audited;
- any assessment of reliability of a system by a supervisory or regulatory body; and
- any industry standards or voluntary standards that might apply to the system.
Looking to the future
While many breathe a sigh of relief that the law has now caught up with the direction of the trade and trade finance market, some may question whether all market participants are poised to move quickly towards a digital environment. While the market may start to set its own voluntary standards, at the moment each situation will have to be considered on the facts and workings of that particular system.
What are the benefits of the legislation to the trade finance industry?
There are clearly a number of benefits to the implementation of the Act for the trade finance industry and we set out a few here by way of example.
- Speed of business
With systems in place in the ports, and for businesses opting to use electronic trade documents, it will allow transactions to move much faster, in turn leading to enhanced efficiency and reduction in delays.
- Efficiencies
The use of electronic trade documents would lead to administrative efficiency so the transmission of documents between the various parties could become instantaneous, eliminating the requirement, and indeed the need for, and cost of, posting and couriering.
- Increased transparency
As many know, a trade finance deal can potentially involve up to 20+ different parties at various stages of transportation, logistics and finance. The availability of real-time information that comes with electronic trade documents could allow instant access to up-to-date information, enhancing transparency throughout all stages of the supply chain. This will require good network coverage and access to a reliable system for the parties involved.
- Increased access
With the implementation of electronic trade documents, small and medium-sized enterprises have greater potential to access trade finance and may be able to achieve transparency during the life of a supply chain or trade financing transaction.
- Increased use of platforms
Protecting trade documents from fraud is of increasing importance to the industry. The use of electronic trade documents could offer increased security as the movement of documents could be recorded in real time on a shared ledger or distributed ledger technology (DLT). With the trade finance industry embracing technological advancements, reliable systems could assist in safeguarding sensitive information. Various market participants are already trialling this within a contractual framework.
- Flexibility under English law
The Act provides scope for additional documents to qualify as electronic trade documents and fall within the definition set out in the Act.
The Act allows for significant flexibility in practice, with businesses being able to choose their own reliable system (such as a DLT) in which to hold the electronic trade documents. Being ‘technology neutral,’ the Act should be able to accommodate new forms of technology as they are developed without the need for additional legislation (subject to the system meeting the criteria in the Act).
- ESG
The transition to the use of electronic trade documents, will lead to the reduction of the use of paper and any emissions produced from paper, e.g. by printing and couriering. This may help businesses in the trade finance industry move closer to their ESG goals and mitigating their environmental impact.
Implementation
Until now any electronic trade documents have had to be created using a contractual framework. Once the Act comes into force, English law itself will provide the recognition and protection for electronic trade documents if the criteria set out in the Act are met.
The challenge for all in the trade and trade finance industry will be implementing and relying on electronic trade documents, as inevitably, paper documents and electronic documents are likely to co-exist for some time. Businesses will have to assess the business case, the savings and the environmental advantages of moving to electronic form. It is, of course, important that the infrastructure is in place for participants to take advantage of the new rules. The Act has also envisaged that things may take time for the market to adjust and therefore has built in a mechanism by which an electronic trade document could become paper and vice versa!
Granted, the Act does not solve the challenges of jurisdictional differences and fraud, and indeed is not intended to do so, as other pieces of English common law and legislation, already in place will also apply to electronic trade documents. So now that the door is opening to digitalisation of trade it is over to market participants to take advantage of the Act and embrace electronic trade documents and move into the digital era.
