18
Examination of witnesses
Professor Sarah Green and Lord Parkinson of Whitley Bay.
Q1 The Chair: Welcome to the first evidence session of the Electronic Trade Documents Bill Special Public Bill Committee. This is a hybrid session in the sense that two of the members of the committee are attending from their own locations over the internet and the rest of us are present.
I welcome the Minister, who, although he is a member of the committee, gives evidence in accordance with our traditions and customs, and Professor Sarah Green, who is the law commissioner responsible for the huge amount of work that has gone into this Bill, for which I thank her. I also welcome those who have accompanied them.
Each of us intends to ask a number of questions about what may seem to some a very esoteric and somewhat complex subject. Before asking the first question, may I declare that I have some interests in this area of the law? I am president of the London Shipping Law Centre. I am also vice-president of the British Maritime Law Association, which is the UK branch of the Comité Maritime International, and I am chair of the London Financial Markets Law Committee and chair of the Standing International Forum of Commercial Courts. I also do some arbitration in this area of the law.
The first question is primarily for the Minister. Could you help us, and the public, by explaining the reasoning behind the Bill, the problems it is intended to address, and how it does so?
Lord Parkinson of Whitley Bay: Thank you. We are updating an in-part Victorian law that applies in this area. To a very large extent, international trade still relies on a special category of documents whose function depends on them being physically possessed. These documents entitle the holder to claim performance of the obligation that is recorded in the document, and to transfer that right to claim performance to others by transferring the physical possession of the document.
The law in the UK does not currently recognise the possibility of possessing these documents electronically because possession is limited to tangible things, which means that the companies to which this law applies are prevented by law from moving to a fully paperless model, if that is what they wish to do, which, in the modern world of commerce, many do. It is costly, it is inefficient, and it is wholly unsuited to the operation of their businesses in a digital world, so we are enabling them to do this if they wish.
The Chair: Thank you very much indeed, Minister. Did you want to add anything to that, Professor Green?
Professor Sarah Green: No, not really. I think that sets it out very clearly. As Lord Parkinson says, it is really just a question of removing this current legal blocker. In that sense, the Bill attempts to do a very narrow thing: to reach a situation where the law treats paper and electronic trade documents in the same way.
The Chair: Thank you very much.
Q2 Lord Davies of Brixton: That is clear and helpful. As you say, it is a narrow objective. There is a widespread switch to electronic documents. In what sense is this outside the general move that is happening anyway? What is specific about this that requires this legislation? There must be legislation more generally about electronic documents. In what way is this special or different?
Professor Sarah Green: If you mean the types of documents, the particular focus of this Bill is documents that have a very particular legal function that depends on their characteristics. To give you an example, as Lord Parkinson has already said, the documents that are the focus of this Bill have a sort of legal alchemy attached to them. At the moment, if you hold—in the standard, physical sense—a piece of paper that records the contents of a particular contract, say, it is just evidence of your particular right.
The biggest example, in volume terms, of the type of document we are talking about today is probably bills of lading. Bills of lading refer to, say, goods ownership, and by holding the bill of lading you get the right to those goods. As I said, it is a sort of legal alchemy that gives you not just evidence of the right but the actual right itself, and you get that through having possession of that document.
The problem at the moment is if that document takes an electronic form, it cannot be possessed, and there are all the legal implications that flow from that. Imbuing you with the right cannot follow if that document is electronic. That is the blocker which this Bill is trying to get around.
You are absolutely right: where an electronic document is not intended to function in that way and functions simply as evidence of something else, it does not really matter whether it is possessable or not. Where it brings with it this concrete set of obligations is where we need to change the law.
Lord Davies of Brixton: I am still struggling a little, because that need must arise in relation to other contracts.
Professor Sarah Green: I do not think it really does. Obviously, if you have a legal contract, you have legal rights as a result, but those rights are not dependent on you holding a piece of paper. It is a legal fiction: if I hold this piece of paper and it has all the bill of lading information on it, I then have what we call constructive possession of the goods. They might be in the middle of the Atlantic Ocean, or whatever, but I have constructive possession simply by holding that piece of paper.
In a standard contractual set-up, you do not need this. By virtue of the legal system, you have a contract, and if either of the contractual parties was to dispute that before a court, having it on paper would be really helpful to the court because it would give you evidence of those rights, but it is not the actual physical thing that gives you those rights in the way a trade document does. They are a very particular, very specific class of thing.
The Chair: Maybe, Professor Green, you could explain how a bill of lading comes to be issued, what happens to it, and why this matters so much in the practical way in which merchants conduct their business. That may help to clarify this.
Professor Sarah Green: Yes, of course. In law, it is called a document of title. As I have said, if you have that piece of paper, you then have title to the goods, which gives you protection over your interest in those goods. One reason why they are used is in contrast to your standard face-to-face situation: for example, you go into a shop and buy a pint of milk, you pay for the milk, they hand you the milk and you walk away. That is all very simple. The logistics of international trade, however, are a lot more complicated, apart from anything else there will be quite a large temporal divide between the time when you make the contract and the time when you receive the goods. In fact, in international trade, the person or the organisation that receives those goods is not necessarily the one that originally bought them.
The bill of lading is issued when those goods are dispatched, and it will have a parallel journey to those goods. The goods are put on a ship and taken from one place to another, and the bill of lading, which goes alongside, goes from hand to hand and links those goods with the legal interest to whoever has the bill of lading, for all sorts of reasons—banks, for instance, use them to advance money on the goods to which they relate—and when you hold that bill of lading, you then have the valuable interest in those goods.
In the simplest scenario, when the goods reach their destination, that bill of lading then has to be surrendered in order to get the goods, because that is what proves that you are the one who is entitled to receive those goods. At the moment, in some situations the bill of lading has to go all the way around the planet in paper form before those goods can be passed on.
This is the problem that seems quite strange, particularly to non-lawyers, I suspect. As you might imagine, parties really want to do that in electronic form now. It is easier, it is quicker, it is more efficient. That bill of lading is less likely to get lost, it is less likely to get destroyed, it is certainly harder to forge. Yet, at the moment, those commercial parties are not able to do that; they still have to send a piece of paper to the other side of the world. I can see that is a frustration for non-lawyers, and hopefully I have made clear what the legal barrier is to conducting that trade in a way that seems far more fitting to the 21st century and to the technology we now have available.
Q3 Lord Harlech: Minister, what do you hope will be the benefits of the Bill?
Lord Parkinson of Whitley Bay: As Professor Green said, these are more efficient, more secure, and quicker. By allowing companies to do this—if they wish, and we know that many do—we will help to boost the UK's international trade, which is already worth more than £1.4 trillion.
As stated in the impact assessment to the Bill, we think the benefits to UK businesses over the next decade are £1.1 billion. There are benefits that include cost savings, both in resourcing the documents and in the operational costs, reducing delays, increasing efficiency and information management, as well as in security, for greater resilience. We have just come out of the Covid-19 pandemic in which a lot of organisations and businesses shifted the way they do things digitally. We are still doing this in a hybrid form today, so it makes sense to provide for companies to go digital in this area if they wish.
The Chair: We now turn from the more general questions to questions of international interoperability.
Q4 Lord Lansley: Thank you. We are not alone in trying to move to the use of electronic trade documents. We will talk later about the particular UNCITRAL model law example and the relationship with that.
I will start by focusing on one question. Professor Green, the Law Commission looked at whether possession and control could be regarded as simply equivalent, so control would be the issue. Reading this—I am not a lawyer, so forgive me if I trespass on legal concepts—it struck me that the question was not control but exclusive control. The original consultation might have said, “Can we substitute exclusive control for possession?” Then I looked at what possession means. Tell me if I am right about this, but it means both control and intention. It seemed to me that, in this context and in the way you described it, intention is not necessarily significant, because if you have a bill of lading and you have exclusive control of it, you have possession.
Why is the common law approach being stuck to for this purpose? What is the thinking that convinced you that you had to stick with the common law concept?
Professor Sarah Green: I think it is fair to say that this is one of the more interesting elements of the Bill. You are absolutely right in saying that the Bill does not attempt to set out a statutory definition of possession. That is very deliberate, for a number of reasons, one of which is that it would be incredibly difficult to try to provide a statutory definition of possession, whether you are a lawyer or a non-lawyer. Far better and far more eminent lawyers than I have tried to do this over a couple of centuries, and nobody ever seems to be able to do it. That is a good thing, because it means that it is being left to the common law, and the beauty of the common law is that it is responsive and sensitive to different factual scenarios, which is absolutely what we need.
If you asked any lawyer what possession is, they would struggle to give you a short and snappy, or maybe even lengthy, definition, but they would know it when they saw it. That is really important here, and the common law can do that; it does it all the time and has done for a very long time. That explains why you can, at law, possess both something that is tiny, like a gemstone that you can barely see, and an ocean liner.
Of course, factually, the possession of those two things looks very different, but they both have salient legal characteristics and salient legal features in common, and that is what the common law can recognise. If you tried to state in a statute exactly what possession is, you would struggle to set that out, and you would enshrine features that will change over time, as the technologies are now demonstrating.
Lord Lansley: An alternative approach would have been for the statute to define exclusive control as distinct from possession. I am reaching for why that was not the route taken, because we pass a statute that more or less says, “This is how it works”, and, over time, courts determine what it means in all the practical circumstances, which we will not necessarily determine in the statute, whereas with exclusive control we would potentially create a more defined structure.
As our Chair said, this is a kind of international interoperability. Do you feel that there is a reliance here on everybody using electronic trade documents that interact with our system understanding the common law system? Many of them will not have the common law system; they will have a statutory system, or a code system, or whatever it might be. Would we not be better putting something that was more directly understood by those who do not use common law processes?
Professor Sarah Green: By drawing out the legally salient features that I talked about—what is important about things that we possess—the Bill sets out what is important about exclusive control and so what features of these documents are important if they are to perform the function that I mentioned at the very beginning: the legal alchemy that, if I have this document, I have this right.
In the Bill, we set out exactly the principles of your rights and exclusive control. To have exclusive control, for instance, the document needs to be in a form in which, as it says in the Bill, only one party can use it, change it, interact with it, at a given time. Once it is transferred to another party, the party that had it originally loses control. That is to distinguish it from other electronic documents; if I have a Word document and I email it to you, I can keep a copy of it very easily and then we both have exactly the same document. That is no good for a document of title, because then we can both claim these rights.
What the Bill does about exclusive control is really important and not jurisdiction-specific. We are setting out what is particular about paper and what we can replicate in the electronic sphere. An electronic document over which I have exclusive control has to have characteristics whereby only I can alter it and actively interact with it at any one time, and when I pass it on to another party I no longer have control. As I said, all we are trying to do is make it behave in the same way as paper.
Lord Lansley: It feels to me that the model law is the next issue, because the model law talks about singularity and control, not possession. The uncontrolled model law basically says, “Look, it is about singularity and control”. What you have just described is singularity and control. We understand which document gives the right to performance of obligations to the exclusion of anything else, and we want to know who has exclusive control of it. Fine, so why not put that in statute?
I am still trying to find out what it is. When you read the Bill as a layman, you get to Clause 3, which suddenly starts talking about possession. You think to yourself, “Hang on a minute. At this point, I’ve understood that this document, at any given moment, has to be in the exclusive control of one person”—or one person acting jointly with others. Then suddenly I’m told that possession’s the issue. Is there not a risk of confusion arising between the concept of possession and the concept of exclusive control?
I come back to the original question: the issue of intention. Is that relevant because it is part of possession? If it is not relevant, why do we need possession as a concept distinct from exclusive control?
Professor Sarah Green: This is Section 2 of the Bill, which sets out what an electronic trade document is. As I know you know, it is a gateway provision. Only documents that can be subject to exclusive control, as set out in Section 2, which describes the criteria for that, get through that gateway and become an electronic trade document. That is the factual set of characteristics that they have, and they are the ones this Bill is concerned with.
Again, you are right that possession takes that factual situation and, as a common law concept, brings in/adds to the notion of intention. The way the Bill does this is not substantively different from what we see in the model law. Article 11 of the model law in MLETR, as it is often referred to, deals with exclusive control and possession. I think they do the same thing. This is no surprise, by the way, because we have kept MLETR very much at the forefront of our minds as we have formulated this, and we have liaised quite closely with those who drafted that. We certainly did not put our Bill together in any way that was adversarial or in conflict with MLETR—quite the reverse. With MLETR we said, “How can we make sure that this fits with English and Welsh law in the best way we can?”
They pretty much do the same thing. Article 11 of MLETR says that possession is really important for trade documents; it uses that word. Then it uses exclusive control as a gateway criterion. It says that where possession is required for this legal alchemy to happen, exclusive control will be a functional equivalent. In the Bill, we said that if it is amenable to exclusive control, it gets through our gateway, gets within the remit of the Bill, and then the Bill says that it is possible for those things to be possessed.
Why have we done it that way? It is partly what I said earlier; that possession is such a fantastic common law concept that we really did not want to interfere with it, because it does the best job it can as a flexible, responsive common law thing. I do not think any statutory drafting could achieve or rival that.
I cannot see a huge difference in substance between what the two things do. They both say that possession is really important to this couple of centuries of commercial law, which is so valuable. Once you can possess something, it gives you all sorts of valuable rights. What we are trying to do, and what MLETR was trying to do, is take these electronic trade documents with certain characteristics and slot them into all that and give them the benefit of all that reasoning and history.
In that sense, possession is key to that, and Article 11 of MLETR and Sections 2 and 3 of the Bill say that possession is super-important and that exclusive control is a necessary, if not sufficient, criterion for possession. Paragraph 107 of the Explanatory Notes to MLTER makes this reference to possession clear. I hear quite often that MLETR does not really work with possession, but it absolutely does; it is mentioned explicitly in Article 11, as I said.
We have used slightly different language and tailored it to what I think will be most palatable for the common law and that will enable the common law to do its job in the best way, because of course the model law is just that. It was formulated with a view to guiding several different jurisdictions, all of which have their own peculiarities and characteristics, and it was intended for jurisdictions to take it away and plug it into their own systems in the most effective way.
The Chair: Thank you very much indeed.
Q5 Lord Bassam of Brighton: I am interested in the practical application of the law and interoperability. Most countries do not yet recognise electronic trade documents. What does this mean in practice, for example for businesses that start to use electronic documents? Where does this leave us, as a trading nation, with other jurisdictions? Are we likely to be waiting for them to play catch-up?
I have read paragraph 15 of your evidence, and it seems that some may well be some way behind us. Will we simply be a field leader that others follow, or will we be an outlier? Those questions are quite important, not least because we have on our doorstep a major trading bloc in Europe; we have an important relationship one way or another. Will those jurisdictions all be coming along in the same way?
The Chair: The Minister can of course respond, but it is more of a technical, legal question.
Professor Sarah Green: Yes. In this context, what is more important than most is that, by definition, this is a cross-jurisdictional issue, and there are a few points to make in that regard.
First, I do not know how widely known this is amongst non-lawyers, but in commercial terms English law is hugely important across the world and is used to govern by far the majority of commercial transactions. We are a significant jurisdiction in commercial terms, and when putting this Bill together and doing this project we very much had in mind making sure that this jurisdiction was a leader in those terms.
You are absolutely right to say that it is not done universally, certainly not yet. Electronic trade documents are definitely not yet recognised by many jurisdictions around the world. So there is a dual purpose in what we are doing. First, as I said, we want to be at the vanguard of that movement. We talked to stakeholders from across the globe, and there was definitely a sense of anticipation and waiting to see what English law was going to do, given that it is such an important jurisdiction for commercial transactions. It almost felt like a bit of a responsibility for us to do this soon and to do it well. Of course, as the Law Commission of England and Wales, we can make recommendations only for England and Wales, but if we took the view that maybe we should hold back on this because not all the jurisdictions have yet done it, all jurisdictions might take a similar view.
Somebody has to take the lead. Somebody has to grasp the nettle. My very real sense from speaking to stakeholders from different jurisdictions is that, once we move, it will set off a snowball effect. There will certainly be an increased incentive for other jurisdictions to follow suit, not only in terms of the efficiency that can be achieved globally but because they will also have a substantive example from which they can draw.
Lord Parkinson of Whitley Bay: As Professor Green says, people are looking to us as a leading jurisdiction in this area. The Government have been taking the lead on these issues through our G7 presidency, and we have been promoting the digitisation of trade documents through the trade agreements that we are signing at the World Trade Organization. It is our intention to take a lead with this Bill.
Lord Bassam of Brighton: Do we anticipate that moving to more electronic documentation will significantly reduce burdens on business, bring savings to trade, and make it easier to facilitate trade?
Lord Parkinson of Whitley Bay: I did not quite catch the beginning of the question.
Lord Bassam of Brighton: I am just interested to know whether we think there will be significant cost savings to UK businesses from the creation of more electronic trade documentation, and whether this will reduce burdens on business as well, because we are always looking to do that.
Lord Parkinson of Whitley Bay: Yes, we do. It is quicker and more secure. The documents do not become tired and tatty, in banal terms, but they are also much more secure because they are harder to forge. That has great importance for companies, so we do think there are significant benefits to accrue.
Professor Sarah Green: Yes, we do. I do not have the figures on me, but we have them and the savings—the numbers are huge—are significant. I can certainly submit those if you have not seen them. In future, you will be speaking to panels of people who might have those numbers at their fingertips, but we can certainly let you have them. As Lord Parkinson said, the short answer is most definitely yes. There are also the environmental benefits of not producing trillions of pieces of paper every year.
The Chair: Before we leave this question, do you think you could explain—again, it is a more technical, legal issue—the position of the way in which documents are dealt with when the goods and the documents move to a different jurisdiction? You very helpfully explained at the outset a bill of lading being issued in country A, going to a bank in country B, and then coming to country C. It would be helpful if you were to explain which is the relevant law that governs the ownership and possession as the goods move around, because that is key to interoperability.
Professor Sarah Green: Yes. It is fair to say that it is dependent on particular factual circumstances and contracts. As I have already mentioned, parties can choose to a certain extent which law governs those contracts and where any dispute is heard. For instance, just because a seller or an issuer is based in a certain jurisdiction, it does not necessarily follow that the law that is applicable to that transaction, or indeed to any dispute that arises, will also be linked to that jurisdiction.
The Chair: Let us assume a very simple transaction. Country A is the country where the goods are shipped, and its law is said to govern the bill of lading. The documents are then taken to country B and pledged to a bank. The law of country B is different. Then they are delivered in country C, where the law is different to country A. Could you just explain the way in which the law of country A, the law of country B, and the law of country C operate, or would it be helpful if you were to do that for us in writing?
Professor Sarah Green: Probably the latter.
The Chair: Of course. It is important that we all understand this quite complicated interrelationship of the law of contract and the law of the situs of the property. Maybe it is better that we have it in writing.
Professor Sarah Green: Yes, it is, and not least because it is a very complicated issue. One of my reasons for hesitation is that at the Law Commission we have a separate project looking not at the generic rules you just mentioned but, separately, at the interaction of those laws, specifically in relation to digital assets, which of course include electronic documents. I am hesitating partly because the project is at a nascent stage, and we do not have any conclusions as yet. I am also quite conscious of the fact that we deliberately did not address it in the Bill.
The Chair: It goes to interoperability, because you need to know whether the documents are pledged to a bank or held by the bank of security. I think everyone knows what the law is under a paper system, but it would be helpful if you could explain that to us, and how it will work electronically. It just goes to the issue of interoperability.
Professor Sarah Green: Yes, we will do that.
The Chair: Sorry to interrupt. I did not want to unduly burden you by these rather complicated technical questions. From interoperability, we go to the practical implications of using electronic trade documents.
Lord Clement-Jones: First, I declare an interest as a consultant to DLA Piper on AI policy and regulation. Professor Green, you have been extremely clear, and I must say that it has been a great way of brushing up on my commercial law. Perhaps I might have learned a bit more 50 years ago if I had listened to you or your colleagues a bit more closely.
I want to ask another practical question to do with the use of documents. In practical terms, when someone receives an electronic trade document, how will they verify that they are receiving the document that is capable of being possessed and not a copy?
Another question that follows very closely is: how will they know that the person they have received the document from is the only person who has control? We have had the exclusive control discussion earlier.
Professor Sarah Green: I need to begin by saying that, in practical and technological terms, in detail, that will depend very much on the particular platform that is used. During the Law Commission’s consultation we spoke to a number of developers and platform providers in the area, partly because we wanted to know what was possible in a technological and factual sense. I say partly, but actually that was entirely why we spoke to them, because of course there would be no point in our making recommendations if it was not technologically achievable.
I am very happy to give a visual illustration of the way in which technology could achieve that—how it can happen in technological terms—but we deliberately excluded enshrining that in the Bill because we wanted to be as sure as we could that the Bill would be future-proof. For instance, at the moment, electronic trade documents closely replicate the functions of paper through hashing algorithms and public-private key cryptography: the contents of a document are put through a hashing algorithm that provides a unique specific identifier. Just in case you do not know how that technology works, if you change even one figure in that document—remove even one letter, one full stop, anything—and try to rehash it, you will get a totally different specific ID.
Coupled with that, access to that information is restricted to the holder of a private key, in the same way that a piece of paper could be locked in a drawer and somebody has a key to that drawer. That is the analogy at the moment. In the most part, that is how, in technological terms, we identify that a document is amenable to exclusive control: i.e. if I have the private key, somebody who does not have that private key cannot do anything with the document. The way most of these technologies work is that when a document is transferred to another party, the private key will also change on transfer, which means that the previous holder, the transferer, can no longer access it. This is exactly what we want. We want it to be fully divertible on transfer. Sorry, is that what you meant?
Lord Clement-Jones: This is really helpful, because what you are saying is that it is not a free-for-all. It is not just like handing over a written paper document; there will have to be trusted accredited services where people have these keys provided, services that really understand what could be on the blockchain, as well as the hashing or whatever it may be. What you are really saying is that a trader will not be dependent on their own interpretation of possession. There will be services that make it absolutely clear when both exclusive control and possession actually change.
Professor Sarah Green: Exactly. All this magic will go on behind the scenes. All that traders will have to deal with is the electronic version of what they currently deal with. At the moment, that will probably be in the form of a private key, and they will not even have to give a second thought to whether it is control or possession. It will function as they want it to function, because it will give them access to that document and allow them to do what they might want to do to that document, whether it is to pledge it with a bank or relinquish it in exchange for goods. All that other legal stuff will be going on behind the scenes.
Lord Clement-Jones: But these accredited services will have to interpret the law for themselves, will they not? I fully understand why you have not defined possession in the Bill; I am sure that would be an absolute nightmare. Nevertheless, the accredited services will have to take a view about that, because they will have to be able to provide that kind of service, that kind of assurance, to those who use their services. That certainty is there, surely.
Professor Sarah Green: Yes. I am not even sure that they will necessarily have to concern themselves with the P word, but we will have to make sure that the services they provide will satisfy Section 2 of the Bill on exclusive control.
Lord Clement-Jones: The gateway.
Professor Sarah Green: The gateway, exactly. They will just need to make sure—they are already thinking about this, if they have not already done it—that the documents and the services they provide will get through the gateway. Absolutely.
Lord Clement-Jones: Sorry, but why will they not have to concern themselves with possession?
Professor Sarah Green: Because, as far as they are concerned, once these documents get through the gateway, it is up to the parties that use them to concern themselves with possession.
Lord Clement-Jones: If you are an ordinary trader, say an SME, and you have gone through the accredited service—we know there are lots of services like that in existence already, which is great—how will you know that you qualify under the Act unless the accredited service provider gives the assurance that you have gone through the gateway and you qualify? Joe Public can easily pick up a bill of lading and it is absolutely obvious what they are doing. Do not get me wrong; I am an enthusiast for digital trade. But we may need a little more assistance in getting through this process.
Professor Sarah Green: Of course. What the providers are most directly concerned with is providing things that can get through the gateway and therefore come under Section 3 of our Bill, which enables users to be possessors. I suppose that indirectly they will care about possession. In factual day-to-day transactions, I am not sure that commercial parties give a huge amount of thought to the legal concept of possession. It is not something they are concerned with until there is a dispute. Then, of course, they care very much about it.
Lord Clement-Jones: Because it is so straightforward.
Professor Sarah Green: Most of the time they would presume that if they had exclusive control of this document, if they could divest it on transfer, if they were the only ones who could interact with it at any given time and they had the relevant intention—“This is my document”, or, “This is our document”—which presumably they nearly always will have, that gives them possession.
What I really meant was that, unless you are a lawyer, you probably do not think too much about possession on a day-to-day basis, and it is only when it comes to a dispute that Section 3 of the Bill will kick in. What those platform providers are concerned about is getting through this gateway. The possession point is determined, or certainly influenced, by the interaction between users and contracting parties.
Lord Clement-Jones: I am in danger of agreeing with Lord Lansley here, if we are not too careful.
Q6 Lord Davies of Brixton: Professor Green, in your evidence you say that the technological question lies out of the purview of the Bill. The Bill hinges on the technology. The thing about a dog-eared piece of paper, for example, is that, 800 years later, we know that this is a copy of Magna Carta. With an electronic document, I would not be confident that you could read the thing in eight years’ time. We do not have any evidence about the technology. Both witnesses have said that it is harder to forge an electronic document, but we have no evidence to that effect. You are asserting that, but how do we know this? With developments in code breaking and so on, certainly over a 10 or 20-year timescale this is an open question.
Professor Sarah Green: That is absolutely right, and it is exactly why we do not want to put anything about particular technologies in the Bill. The Bill draws out what is legally salient and legally relevant and distances itself from the factually fashionable, which is where the common law comes in. The common law can provide the bridge between what a statute says is legally important—divestability, singularity of interaction. That is exactly what you get with paper and tangible things. That remains important, and the Bill is saying that there is no reason why, where the same characteristics are attributable to an electronic thing, the same legal result cannot result.
Lord Davies of Brixton: You have put some emphasis on immutability. There is a question mark about that. There must be.
Professor Sarah Green: You mean in the sense that immutability might not always be a feature.
Lord Davies of Brixton: Of an electronic document.
Professor Sarah Green: Yes, although I would venture to suggest that these systems will not become less secure. They are more likely to become more secure as technologists become more au fait with what is required. But I absolutely agree with you; I do not think anybody has any idea of what these technological systems will look like in a decade. Once we have quantum computing, everything will change. That is exactly why this Bill sticks to the legally salient characteristics and leaves the factual fashions to the technology of the time.
The late 19th century Sale of Goods Act referred to goods having to be in a deliverable state. At the time, in 1893, that was about potatoes being put in bags ready to be delivered. These days, it is a slightly different incarnation, but the requirement is exactly the same as in the Sale of Goods Act 1979: goods have to be in a deliverable state. That might mean that it is a piece of software on a USB drive that has been debugged. They are absolutely different factual things, but the legally relevant characteristics, or the legally relevant interests, are still the same. So something that was formulated in 1893 is still of use today, and that is what we are aiming for. I absolutely agree with you, but that explains why we did not want to put anything technologically specific in the Bill, because my view is that if we did that, it would be obsolete within a decade.
Q7 Lord Lansley: I neglected to say before that I am a vice-chair of the All Party Parliamentary Group for International Trade & Investment, which has a secretariat supported by the International Chamber of Commerce. I am also a former deputy director-general of the British Chambers of Commerce, just to declare my interest in these matters.
Sticking with the practical issues, in our Second Reading committee I harped on a bit about the question of time and place. We have had some very useful material in your evidence and in Lord Parkinson's letter. I can see the point that time and place are not required for the gateway criteria; that establishing what is an electronic trade document does not require it to have time and place.
I do think there is an issue, because often we are looking at a paper document that is transferred to an electronic document. Unless I am missing something, time and place are an essential feature of paper documents, so why does there not have to be a criterion that time and place feature in the electronic trade document and refer back to the original paper document? Otherwise, it could be something different.
Professor Sarah Green: It is almost always a requirement of these documents, but it is not always universally and completely part of them, so we did not want to throw things out at the gateway stage that, for other reasons, we might want the Bill to cover.
I think your concern is dealt with by the all-encompassing clause saying that any information contained in the relevant paper trade document is also required for its electronic counterpart. We do it that way. So where time and place are essential in paper form, they will also be essential in electronic form. What we do not want to do is make the electronic trade document treatment narrower than paper trade documents. If it is not a requirement for a paper trade document, we do not want to make it a requirement for an electronic trade document in any more general sense. We have done it that way so that the gateway is left broad, but where you are dealing with an electronic trade document that is a counterpart of a paper trade document, and where that is a requirement of the paper, it will also be a requirement of the electronic.
Q8 Lord Bassam of Brighton: I have a simple question. You referred to an option to opt out of the possessory regime, which obviously seems very important. Could you explain how this would work, and perhaps you could give us a flavour of any technology that would lie behind that?
Professor Sarah Green: Yes, of course. One of the many important things about the Bill—something we had very much in mind at the start of the project and that was brought home to us as being very important during the consultation phase—was that this is very much a facilitative Bill, not a mandatory one. We definitely do not want to impose this on any parties that do not want to use electronic trade documents or that, for various reasons, do not want their documents to be possessable.
For the parties we have been talking about so far, for international trade it is very much in their interest to be able to plug into this possessory regime in the common law, but there are some uses of documents where that might be counterproductive. For instance, you could have a document that represents a right, but it is understood by all parties that that right accrues to the person whose name is on a register. Rather than the piece of paper being transferred by the transferer to the bearer, the priority in terms of title or rights is recorded in a register somewhere. If we then imposed this possessory alchemy on these documents, it would override the register and undermine certainty in scenarios where, for a very long time, people have based their expectations and relied on the register being the important thing.
For the avoidance of doubt and to make it very clear, the obvious way to deal with this was to allow parties to opt out of this where they thought it might interfere with established practices. As you can see from the Bill, they can do that expressly—obviously it would be very good idea if they did—but they do not have to do it expressly if it is clear from the circumstances of the interaction that that was not their intention.
Even without the opt-out, it is unlikely to have been a huge issue, given the gateway criteria. A lot of the documents we are talking about in financial markets would probably not fulfil the gateway criteria anyway, because in a lot of cases there is no point in the parties going to the trouble of ticking all these boxes for exclusive control where title is recorded extrinsically in a register anyway.
Q9 Lord Holmes of Richmond: I declare an interest as a member of the advisory board of Circulor, a supply chain traceability business.
Professor Green, what steps have you taken to ensure that the Bill will work with future technologies?
Professor Sarah Green: We have endeavoured to leave out any mention of a particular technology platform or technology provider in order to make it as technology-neutral as possible, partly because we do not want this legislation to become obsolete for a very long time, but also because that would inevitably lead to the stifling of innovation. Whatever the next technological solution to exclusive control of full divestability on transfer is, those boxes can be ticked in a way that is most efficient or that suits the technology. Technology providers should be able to innovate and to do so in such a way that they are not unduly restrained by a prescriptive legal regime.
Lord Holmes of Richmond: You clearly have confidence in the technology that currently exists to achieve the means in the Bill. How confident are you that that will continue to be the case? How much concern do you have about changes in new technologies potentially undermining the Bill?
Professor Sarah Green: I am very optimistic about the technological development side. As part of this project we spoke to technology providers. There is a huge amount of enthusiasm, initiative and ideas, some of which have already come to fruition. But providers and platform developers are unlikely to pour resources into these services until they know that they will be legally effective and that gateway criteria will be met. Once that happens, there are several who will jump at the chance to provide legally valid documents in as fast and efficient a way as possible. It is a hugely valuable market. So yes, I am very optimistic about the technological development side.
Lord Holmes of Richmond: Thank you. Minister, what is the Government's point of view?
Lord Parkinson of Whitley Bay: I know that your Lordships take a particular interest in delegated powers. Clause 5 of the Bill provides for flexibility should there be need to change the legislation because of unforeseen technological developments. As Professor Green says, we are on a trajectory of innovation and greater security, but we are talking about updating a statute from 1882. We would like to look as far into the future as we are able, whilst giving room for people to innovate.
Lord Holmes of Richmond: To misquote a phrase, possession is 9/10ths of the Bill.
The Chair: We now turn to questions in relation to the extent of the Bill and its territorial application over the UK.
Q10 The Earl of Lindsay: I should start by declaring an interest as chair of the United Kingdom Accreditation Service, which is the government-appointed national accreditation body. I wanted to ask both witnesses different questions about the extent of the Bill, as the Chair anticipated.
Professor Green, why did the Law Commission Bill not propose that this be a United Kingdom-wide Bill?
Minister, conversely, the Law Commission having proposed a Bill for England and Wales, why did you come forward with a United Kingdom-wide Bill?
Professor Sarah Green: From my point of view, the answer is very boring and practical. The Law Commission of England and Wales can only make recommendations for changes to English and Welsh law. In the past, we have engaged in joint projects with other law commissions, but those commissions do not always have the resources available to join us when we have the resources available. That is exactly what happened here; the Scottish Law Commission knew that we were engaging in this project and was very supportive of us, but it did not have the resources to join us when we embarked upon it. That is the Law Commission answer.
Lord Parkinson of Whitley Bay: There is no reason or sense in creating divergent legal frameworks for the different parts of the UK. We want the benefits of international trade to be realised by businesses all over the United Kingdom. We have worked with the territorial offices and the devolved Administrations to ensure that those benefits can be realised, and officials in the Scottish Government, the Welsh Government and the Northern Ireland Executive have all confirmed their support for the Bill.
Q11 The Earl of Lindsay: Thank you both. Are you both confident that this Bill takes account of any differences there are with the law of Scotland, and can you comment on the purpose and effect of Clause 3(4), which deals with the interaction between this Bill and the Moveable Transactions (Scotland) Bill, which the Scottish Government have brought forward?
Lord Parkinson of Whitley Bay: The Government have undertaken significant legal work, including with independent counsel, to look at and ensure the compatibility of the Bill with both English and Scots law, including the Bill that you mentioned, which is currently before the Scottish Parliament. Clause 3(4) ensures that this Bill will remain fully effective in Scots law, notwithstanding the changes that may be brought about by the Moveable Transactions (Scotland) Bill.
The Chair: Do my colleagues have any further questions arising out of the answers that you have given or, more generally, that are not encompassed?
Q12 Lord Bassam of Brighton: Will a Sewel Motion be required—should this legislation be passed, as I am sure it will?
Lord Parkinson of Whitley Bay: Do you mean a legislative consent Motion?
The Chair: Yes.
Lord Parkinson of Whitley Bay: It is reserved in relation to Northern Ireland, and we have agreed that the legislative consent Motion process is not engaged there. With regard to Wales, we have agreed that it would be outside the legislative competence of the Senedd and that the LCM process is not engaged there either. In relation to Scotland, we are requesting a legislative consent Motion from the Scottish Parliament, on the basis that the focus of the Bill is on modifying the private law of property, which is generally devolved there.
Q13 Lord Holmes of Richmond: Obviously we hope that the Bill goes through. It is a good Bill, and it will be made even better through this Committee stage. However, by its nature, the Bill is permissive rather than mandatory, so what are the Government's plan, if the Bill goes through, to ensure that all the benefits are realised, not just for trade but for our economy and society in general?
Lord Parkinson of Whitley Bay: We are keen to get the Bill on the statute book swiftly so that people can see the benefits. This process and, indeed, the consultation led by the Law Commission have drawn it to the attention of lots of businesses that could benefit from it. You have been active in singing the praises of the Bill and what it could do, which is very helpful. We are keen that this process, and Royal Assent, will encourage people to make use of it.
The Chair: If there are no more questions, I thank you both, and your supporters and helpers behind you, for sparing the time to come, because I do not think your work is yet over, particularly at the Law Commission. We have left you one rather difficult question, and I fear that we may have one or two other questions. In your letter to us, you very kindly said that you would be happy to answer any further questions, and rather than letting hares run we ought to take time to reflect on whether there are any areas that we would like to look at further, and how we can make more sure that everyone understands that this implements MLETR and that there is no inconsistency, because, of course, that is not apparent on the face of the Bill.
Professor Sarah Green: Yes, absolutely. Once you have had a chance to reflect on what we have said today, the Law Commission is more than happy to provide further written evidence, so please do let us know if there is anything you want us to elaborate on.
The Chair: That brings this session to an end.
