Electronic bills of lading: New call for evidence looks at practical application

This article originally appeared in Insurance Marine News, July 2024.

Kennedys has responded to the Law Commission’s recent call for evidence on the issues that arise from the use of electronic trade documents, focussing on the use of electronic bills of lading. We welcome this scrutiny around the practical application of the new legislation; if English law is to remain a leading choice for global trade markets - with the consequent revenue generated by insurance and legal services - it is essential that it responds to technological developments and remains relevant to modern practice.

Electronic Trade Documents Act 2023

In July 2023, the Electronic Trade Documents Act 2023 (the 2023 Act), 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.

In order to allow the law to develop around a flexible framework, the 2023 Act is deliberately light on detail. However, this does raise a number of tricky questions which might have an important effect on the enforceability and use of electronic bills of lading, including the requirement of a ‘reliable system’.

The 2023 Act includes the opportunity for court guidance and for secondary legislation and we anticipate that as the use of electronic bills of lading develops, many of these questions will be answered using those mechanisms.

Call for evidence

On 22 February 2024, the Law Commission launched a call for evidence to help them identify the most challenging issues that arise in the context of electronic trade documents, aiming to strike the appropriate balance between the theoretical aspect of the law and its practical application.

Our response focussed on the questions relating to electronic bills of lading. These covered how the 2023 Act will affect market practice; the relationship with electronic bills of lading and the Hague-Visby Rules; and how the platforms and systems supporting the use of electronic bills will need to function.

Next steps

The Law Commission is analysing the responses submitted before making their recommendations to the UK government.

Distributed ledger technologies (DLT)

To achieve the objective of transitioning current paper bills of lading to electronic bills of lading, DLT platforms (the technology that creates blockchains) will need to perform both in practice as well as in law.

In order to perform in practice, DLT platforms will need to gain the confidence of their users. To do so they will need to ensure that the systems in place supporting electronic bills of lading are reliable and secure. Market participants will be reluctant to adopt practices which present increased security risks when compared to paper-based systems.

There may also be a reluctance to adopt practices that do not suit modern day logistics arrangements, or a system where participants can remain largely anonymous. This increases the risk of exposure to fraudulent transactions, unreliable counterparties or even sanctions liabilities.

Considerations for insurers

A user agreement which sets out the terms on which the DLT platform will operate will be essential.

Insurance will play an essential role in the entire process, and insurers will require clear contractual obligations to be set out in such a user agreement. Insurers will expect to be able to understand where liability sits and whether there are any limits or restrictions in such liability. They will also wish to assess the reliability of the system (and thus assess their risk). Without the backing of both cargo and liability insurers, participation could be limited.

Collection of cargo

Electronic bills of lading will need to ensure that they replicate the process of handing over an “original” bill of lading, such that only the party with the right to demand delivery of the cargo at the discharge port (and not an earlier party in the logistics chain who has since transferred that right) can in fact collect the cargo.

In modern practice it is rare for the consignee to actually attend the discharge port with a bill of lading in hand and demand delivery of the cargo themselves. Rather, they normally will have already handed over the bill of lading to the carrier in exchange for a delivery release note and will often appoint a local agent to attend the port and collect the cargo on the consignee’s behalf. In order to collect the cargo, the local agent will normally need to comply with some form of security procedure (such as entering the container number and a pin code), which will allow that person to collect the container.

In practice, we see the highest incidence of fraud occurs at this stage of the chain of carriage.

In the case of electronic bills of lading, where there is no “original” paper bill of lading, careful thought will need to be given to how delivery and collection of the cargo at the discharge port can occur whilst protecting the cargo from fraudulent activity or theft.

Comment

Reforms to English law such as the 2023 Act will undoubtedly have a considerable impact on global trade.

However, universal adoption of electronic bills of lading will be not be possible until all parties to the supply chain have sufficient access to the technology required to access the relevant DLT platforms. We anticipate that certain parties to supply chains, for example local hauliers, may struggle with the technological investment and upskilling required to participate in DLT platforms.

There are myriad ways in which a DLT platform for the issuing of electronic trade documents could be established and we suspect that further market consultation will be required once there is greater clarity on the technological infrastructure surrounding electronic bills of lading.