The Electronic Trade Documents Act 2023 seeks to modernise the law surrounding electronic trade documents including electronic bills of lading. It adopts an approach which is light on detail and flexible. But is this flexibility achieved at the expense of certainty?
Yesterday, the Electronic Trade Documents Act 2023 received Royal Assent, paving the way for increased use of electronic bills of lading – albeit with the caveat that the courts will still have an important role in determining the full application of this new law.
It is estimated that the international trade industry generates four billion paper documents per year. This is seen as inefficient and environmentally unsound and one of the drivers behind this new legislation, along with the need for English law to formally recognise the possession of electronic documents.
Bills of lading – the functions
In order to understand the potential limitations of this legislation, it is helpful to consider the three primary functions of a bill of lading:
- It acts as evidence of receipt of the goods.
- It acts as evidence of the contract of carriage.
- The bill of lading entitles the holder to demand delivery of the goods.
Functions one and two can be performed by an electronic document as well as a paper document. Of course, there is always the risk of electronic documents being forged or changed, but these risks also arise with paper documents.
It is the third function which causes concern. The importance of releasing goods only against production of an original bill of lading has been made very clear by the English Courts.
If a bill of lading is issued, the goods are not to be released without production of an original copy of the bill. To do so is a breach of the fundamental purpose of the contract. For this reason the courts will, as a matter of construction, be most unwilling to allow a carrier (whether it be a forwarder under a house bill or the issuer of the master bill) to rely on exclusions or limits of liability within the contract terms. A forged bill of lading is a nullity. No matter how good the forgery, delivery against a forged bill of lading is delivery against a worthless piece of paper.
Carriers therefore bear a considerable risk in the event that goods are delivered against any document which is not an original bill of lading.
The new Act
The new Act contains only eight sections. The Law Commission anticipates that much of the detail will be filled in by the courts as various issues are considered in litigation. It is also clear that the Act leaves open the possibility of secondary legislation as a more flexible route by which to deal with specific issues.
Section 1 defines the paper documents covered by the Act and provides a number of examples. These include:
- Bills of exchange.
- Promissory notes.
- Bills of lading.
- Ship's delivery orders.
- Warehouse receipts.
- Mate's receipts.
- Marine insurance policies.
- Cargo insurance certificates.
Section 2 effectively states that anything which can be issued as a paper document can be issued as an electronic document, subject to a number of conditions, one of these conditions being that a “reliable system” must be used to ensure the security of the bill of lading and its use.
Section 2(5) lists the criteria to assist the court in determining whether a system is “reliable”.
Section 3 provides that anything which may be done with a paper document may be done with an electronic document. This includes endorsement, transfer and parting with possession.
Section 4 provides for some limited circumstances in which electronic documents can be transferred to a paper document and vice versa.
Flexibility or uncertainty?
The Act is light on detail and it will be interesting to see how the courts address the requirement of a “reliable system”. Whilst the Law Commission recognised the need for flexibility to adapt to developing technologies, has this come at the expense of certainty for parties?
The criteria in section 2(5) leave a considerable amount of scope for a court to apply at its discretion, but that is not a particularly satisfactory position for parties wishing to use electronic documents. Until a court has decided whether a system is reliable or not, there will be doubt as to whether a system meets this requirement – and thus the parties will not know for sure whether the electronic documents are recognised under the Act or not.
As technology improves and as cyber crime advances, the reliability of a system may change. As such, earlier court decisions endorsing a system may not be a guarantee that the system will be considered reliable in subsequent reviews. It is also unclear how the court will approach a bill of lading transaction if the system is not considered to be reliable upon review by a court.
There is also the issue of whether it will be necessary for all the parties in the chain to agree to the form of the electronic bill of lading and the system in question?
With increasingly long logistics chains (with carriers, cargo owners, forwarders and various providers of ancillary services) it may be difficult to persuade all the parties within that chain to sign up to a single system for the production, trading and handling of electronic bills of lading.
If a system is hacked, thieves may gain access to the bill of lading and procure delivery of the goods. It can be difficult enough for a carrier to identify a forged paper bill. As electronic documents are to have the same effect as paper documents, it seems likely that an English court would adopt a similar approach to delivery of goods against a forged electronic bill of lading. The forged electronic bill of lading is a nullity.
When parties use electronic bills of lading, a number of transactions take place. As well as the sale and carriage of the goods, there may also be service agreements between the users and the providers of the system. These agreements will contain a number of requirements in relation to security, the software and the access and use of the system.
We anticipate that the operators of a system will impose a number of obligations upon users to ensure that an acceptable level of security is maintained. Carriers may also impose obligations in this regard within the contract of carriage. These obligations are likely to be backed by indemnities in the event that a party fails to maintain adequate security.
Security will be one of the major considerations of the system given the opportunity for thieves to steal the goods if they are able to access electronic bill of lading. However, the security of the system is only as good as the parties accessing and operating that system. As a number of recent thefts from ports have shown, such systems are accessed by thieves and it can be very difficult, after the theft has occurred, to establish where the breach in security took place and which party, if any, was to blame.
It is likely that carriers will be revisiting their contracts of carriage to address these points.
It might assist to have a register of systems which will be recognised as reliable so that the parties can know, at the time of using the electronic documents, whether they will be considered to be valid in any subsequent review. Systems which are registered would still need to be audited to maintain their registered status, however, at least the parties will know whether the system meets the legal requirements at the time of issuing the electronic bill of lading.
It might also assist to have a state sponsored system which might overcome the issues created by competing commercial interests in providing reliable systems. However, unless this is governed by an independent and international institution, competing state systems - interested in protecting their own commercial interests - may lead to suspicion between states, and a reluctance to recognise other’s registers and systems.
It is clear that commerce is moving towards electronic documents and the law needs to modernise to keep up with that development. The law often struggles to keep pace with technology. As such, this Act is to be welcomed as a recognition by English law of the need to modernise and adapt to the use of electronic documents. The Act is deliberately light on detail so that the law can develop around a flexible framework.
However, it does raise a number of tricky questions which might have an important effect on the enforceability and use of electronic bills of lading. Whilst flexibility is important, in international trade, commercial certainty can be of equal importance. Until we have more guidance as to how the courts will address the question of a “reliable system”, the approach adopted by the new Act seems to leave a degree of uncertainty around the use of electronic bills.
The Act does include the opportunity for court guidance and for secondary legislation and it is anticipated that as the use of electronic bills of lading develops, many of these questions will be answered using those mechanisms.
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