The Law Commission for England and Wales recently published “Digital assets and ETDs in private international law: which court, which law? Call for evidence” ("Call for Evidence"). At the same time, it also published a short consultation and a draft Property (Digital Assets etc) Bill (“draft Bill”) which, if enacted, would introduce into English law a new category of property, "digital assets."

Jacqueline Cook, Of Counsel at Sullivan & Worcester UK LLP, considers the Call for Evidence and draft Bill, both published in late February 2024, highlighting the core considerations for electronic trade documents (ETDs) and digital assets when many or indeed no clear jurisdiction is involved, or where no specific governing law applies[1].

Core issue

Following on from the implementation of the Electronic Trade Documents Act 2023 (“ETDA”), the Law Commission is considering what options are available or what could be developed in national or international legal systems to support the protection and enforcement of ETDs and digital assets. These points of private international law affect both ETDs and digital assets, such as cryptoassets, and trade finance documents[2] and practice.

So, why is this issue so particular to ETDs and digital assets, and is this not already part of the legal due diligence which financiers, shippers, suppliers, buyers and lawyers consider on every financing transaction? The big challenges, according to the Law Commission, are “three technological trends that have been increasingly posing problems for private international law over the past three decades; digitisation, the internet and distributed ledger technology.”

Under English law, one of the usual methods for determining which governing law should apply, is to look to the law of the place where the relevant asset is located. Other rules which may apply are, for example, in relation to contract, the law of the place where the contract was made or is to be performed, or for tort, where the damage or harm occurred. Alternatively, the rules may look for the ‘connecting factors’ to either the persons, the asset, the contract or situation to see if there are particular features which connect to a particular legal system and national law.

Of course, much of this relates to geography and territorial coverage of a legal system. In the current world of the internet, blockchain, electronic platforms, cryptocurrencies and ETDs (such as electronic bills of lading, e-promissory notes and e-bills of exchange), national jurisdictional borders do not have the same meaning and effect as they do in the physical world. Documentation already being used within electronic platforms and for digital assets is being used globally and may, or may not, relate to goods crossing international and intercontinental borders during their journey from initial seller to final buyer.

The market practice with some trade documents is not to include a governing law provision at all. Accordingly, where a dispute arises and proceedings are started in the English courts, the courts would look to the English law principles of private international law to determine the relevant governing law, and whether those courts would have jurisdiction to hear a case or not.

English law already has well-established rules relating to conflict of laws for contract, tort, property rights and the like. However there is now an opportunity to tackle the digital world and bring some clarity to which law would apply and which court would govern disputes in that arena.

Questions and suggestions

Various suggestions have been voiced on how to deal with these questions of private international law, digital trade and digital assets.

As many in the trade finance industry know, e-platforms use a contractual framework, where there is usually a user agreement setting out the governing law and chosen courts as agreed between the parties. This gets trickier with decentralised finance where there is no central body organising the arrangement between parties. For example, what would happen with a blockchain where nodes are global and with no central point?

What would happen with ETDs which do not state a governing law and in respect of which the parties are in different locations? Should the answer lie in a particular factor connecting to a particular jurisdiction?

One question is whether there should there be rules connecting ETDs and digital assets to a geographic location or a particular territory, even though there may be a number of relevant territories. The global virtual world, of course, means that certain ETDs and digital assets could be ‘omni-territorial’!

One suggestion could be for cloud-based ETDs and digital assets to be connected to where the cloud data provider is based or has its seat or central place of management. If so, would it be realistic in the physical world to be able to find out where that would be and if there were more than one location, which law and courts of which jurisdiction would be applied. In addition, what if the cloud data provider changed its location?

The Cape Town Convention on Mobile Assets, and its related protocols for (i) aircraft, (ii) rail, (iii) mining agricultural and construction machinery, and (iv) space assets, is a supranational treaty in relation to the movement of physical assets and creation and protection of security of such assets across many international borders, including into space. It requires states to sign up to and ratify the treaty before judgments of the contracting states are recognised and enforceable in other contracting states. In light of this, could, as the Law Commission suggests, an international treaty along these lines be an option to govern and protect digital assets and ETDs and provide more certainty?

Or should English law develop the seat of the operator of a ‘reliable system’ (as defined within the ETDA) as the ‘connecting factor’ for ETDs and digital assets to determine the law to be applied and which court would have jurisdiction to hear a dispute?

Draft Bill on digital assets

The draft Bill, once enacted, would introduce into English law a new category of property, “digital assets.”

In its current form, the Bill says that a “thing that is digital or electronic in nature” can be an object of personal property even though it is not a “thing in possession nor a thing in action.” The very wide category could catch private permissioned blockchain systems, voluntary carbon credits, ETDs, cryptocurrencies and other cryptoassets, non-fungible tokens and, possibly, digital files but probably not information, email accounts and domain names.

The Law Commission’s proposal suggests that the advantage of creating this new category of property is clarity on the rights in that asset[3], which are more than rights relating to it[4] under contract law. However, the draft Bill does not provide a list of digital assets covered by it, nor even a list of examples, in the same way as the ETDA listed examples of ETDs. This means that development of what should or could be covered will be left to the common law. In reality, this means waiting for disputes to arise where parties are willing to invest the time and expense to litigate and, on the assumption that an English court accepts and retains jurisdiction, that the court has the expertise to develop the common law on ETDs and digital assets for the benefit of the industry. This, of course, could take quite a few years!

What could we, in the trade and trade finance industry, do now?

While this topic may seem quite technical, the reality is that this uncertainty costs time and money, both as part of the legal due diligence at the outset of a transaction and where a dispute arises. This is a chance for the trade and trade finance industry to have a say about what would work in practice to bring more clarity to the law and accessibility to the courts which are adequately placed and qualified to hear such disputes on ETDs and digital assets.