Electronic Trade Documents Bill

Response to Special Public Bill Committee call for evidence by Professor Christian Twigg-Flesner [*]

The focus of the Electronic Trade Documents Bill (“ETD Bill”) is on a particular category of trade documents. Such documents embody a particular performance obligation, and the person in possession of such document is entitled to receive the performance of the relevant obligation. In very general terms, the person in possession of a trade document (the holder) can transfer the right it enjoys to another person by transferring possession of the document. Trade documents have emerged from commercial custom and their special status was eventually recognised in law. As trade documents have historically been in paper form, the fact of possession of the trade document and the transfer of such possession (with indorsement) have been the key way for determining the person entitled to receive performance of the obligation contained in the trade document. Commercial practice has developed around the existence of a paper trade document, possession of which needs to be transferred. As commercial activity increasingly takes advantage of electronic rather than paper documents and increasing digitalisation, a shift to electronic trade documents might seen as desirable by many. Other respondents to the call for evidence will undoubtedly report on the practical aspects.

The very welcome objective of the ETD Bill is to enable the use of electronic trade documents rather than paper documents, provided appropriate reliable technology exists to facilitate their use. In this sense, the Bill is important and timely. The proposed reforms would achieve their intended purpose insofar as the use of electronic trade documents would be made possible.

However, the approach taken in the ETD Bill is rather modest. This is understandable – all the Bill would do is to enable the use of electronic as well as paper trade documents, but would not effect any change in the law beyond that. Indeed, the objective of the Bill is simply to resolve the apparent challenge of satisfying the requirement of “possession” in an electronic environment (where, by definition, physical custody of an electronic trade documents is not possible). Provided an electronic trade document satisfies the requirements of clause 2(2), clause 3(1) stipulates that an electronic trade document can be possessed.

One of the key requirements in clause 2(2)(c)-(e) is that the relevant electronic system restricts the ability to “control” the electronic record to a person who can demonstrate that they are able to exercise such control, and that a transfer of the electronic trade document effectively entails a transfer of such control. “Control” is therefore an essential aspect of how the Bill would enable the use of electronic trade documents. Substantively, therefore, the ETD Bill aligns with the approach taken in the UNCITRAL Model Law on Electronic Transferable Records (MLETR), specifically Article 11.

Both the ETD Bill and the MLETR are therefore primarily adopting a “functional equivalence” approach to “possession”, as possession is a key aspect of (paper) trade documents. This is done so as not to change the law on trade documents, but simply enable the use of electronic trade documents within existing legal rules and principles. Neither the ETD Bill nor the MLETR define “control” specifically, although the MLETR guidance notes stress (at p.51) that it would have to be interpreted autonomously in light of the international character of the MLETR.

Whilst it is correct that the ETD Bill focuses on “possession” and the MLETR on “exclusive control”, but the guidance notes (at p.51) explain that the focus on “control” in the MLETR is due to its role in the context of the MLETR. However, ultimately, both the ETD Bill and the MLETR seek to enable the application of possession-based rules on trade documents to electronic trade documents, and both rely on the notion of control to achieve this.

“Functional equivalence” is an approach which has been used repeatedly by UNCITRAL in its texts (see the Model Law on Electronic Commerce of 1996, as well as the UN Convention on the use of electronic communications in international contracts). It assumes that by identifying means by which an electronic document can satisfy legal requirements developed in the context of physical documents, the use of such electronic documents is enabled and no change in substantive legal rules is required. It is usually combined with commitments to technological neutrality (i.e., not assuming the use of a particular technology) and a non-discrimination principle (i.e., electronic documents should not be treated differently from physical documents in law and as a matter of evidence). Undoubtedly, in many instances, such an approach is sufficient in order to enable electronic/digital contracting. The ETD Bill shows that this approach can be applied with trade documents. Although the availability of distributed ledger technology (DLT) will have been in the minds of the Law Commission, and indeed UNCITRAL, the Bill does not specifically require the use of DLT for an electronic trade documents to be recognised as such under the Bill.

Crucially, relying on “functional equivalence” requires careful analysis of what the “function” is what which an equivalent is sought. Both the ETD Bill and the MLETR look for “functional equivalent” to possession, because possession is a key criterion for the use of trade documents established in commercial practice and associated customary and legal rules. However, rather than identifying a functional equivalent to possession, it might also be possible to look for an equivalent of the function which possession provides in the context of paper-based trade documents. As noted earlier, possession of a trade document shows that the person in person is generally entitled to the performance of the relevant obligation. If one were to look for an equivalent in the electronic/digital environment, one might therefore start not by asking how possession can be established in respect of electronic trade documents, but rather how the person entitled to receive the relevant obligation can be ascertained and how that person’s entitlement can be transferred.

If one were to design such a system from scratch, one might not even consider engaging the concept of possession. Instead, a register-style system which records the obligation and the person entitled to receive performance, and a process for updating the register as the person changes, could be developed instead. A register-based system would have its own related rules, which would not rely on possession at all. Indeed, the design of suitably reliable electronic systems for the use of electronic trade documents might end up resembling registries in any case.

That said, the use of paper transferable documents and the importance of “possession” are ingrained in commercial practice, and legal practitioners are familiar with the legal rules in place. Shifting entirely away from this approach would either mean a full recalibration of international commercial practice (which is highly unlikely to happen in response to a top-down change of approach), or the creation of parallel systems (one for paper based documents and a different type of electronic system). Both the ETD Bill and the MLETR seek to avoid such an outcome by ensuring continuity of application of existing rules on trade documents where such documents are used in electronic form.

Assuming the ETD Bill becomes law, it will have to be established over time whether the application of the possession-based legal rules to electronic trade documents will be effective. However, if, for instance, the case-law on electronic trade documents diverged from that on paper trade documents, then one might think that the functional equivalence approach of the ETD Bill/MLETR has not achieved its intended objective.

More generally, functional equivalence, in seeking to do no more than is necessary to apply existing legal rules and principles to electronic/digital ways of contracting, implicitly assumes that the existing legal rules and principles continue to be the most suitable. In many instances, that might be so. However, before pursuing a functional equivalence approach, it would seem appropriate to consider whether a shift to electronic/digital means of conducting certain commercial activities might be an opportune moment for considering reform of substantive legal rules.

In the case of electronic trade documents, such wider reform would be difficult because of the international nature of the practices and legal rules surrounding trade documents. The point here, however, is that the particular functional equivalence route chosen in the ETD Bill, and the MLETR, is not the only way of doing so.

I have kept my observations brief, but hope that these are of assistance to the Committee’s work.

Professor Christian Twigg-Flesner

10/01/2023