Could reforms be coming for international trade documents?

Why change the law on international trade documents?

The main problem the Law Commission finds with the current system is the sheer volume of paper produced through trade documents. It is estimated that the international trade industry generates four billion paper documents per year.

Despite the obvious environmental advantages of moving to an electronic system, the Law Commission also suggests that this reform could lead to significant cost savings and efficiencies, as well as improving information management and security.

The current law and the challenges of reform

Under the current law, trade documents (such as bills of lading and bills of exchange) carry with them a number of legal rights and obligations, for example they:

• act as evidence of who has title to the goods;
• create obligations around payment and performance of contractual duties; and
• provide proof of shipment.

Due to what these documents represent, they are subject to more substantial protections and remedies than normal paper documents.

Furthermore, English law currently provides that paper documents are capable of ‘possession’, meaning that they are subject to a number of legal rights and remedies, such as being subject to bailment or a lien.

• A lien is a form of security where the provider of goods or services has a right to possess property belonging to a customer until a debt owed by that person is discharged or an obligation owed by that person is performed.
• Bailment is where the owner of tangible goods (other than land or buildings on it) surrenders possession of it to a bailee for a particular purpose and particular period of time. In essence the bailee looks after the tangible goods whilst possessing them, on behalf of the owner.

However, the law does not currently recognise electronic documents as being capable of ‘possession’ and as a result, are not subject to the same legal rights and remedies.

Therefore, the Law Commission has proposed that the way electronic documents are treated legally must be reformed, so that they are subject to the same rights and remedies as their paper counterparts.

Suggested reform

The Law Commission has suggested seven criteria that must be met by electronic trade documents to enable them to be awarded the same rights and remedies as their paper equivalent, these criteria are:

1. Information: It must contain the same information as a paper trade document.
2. Reliable system: It must be stored under a ‘reliable’ system, meaning a system that meets certain standards in the way that it operates. The Law Commission is not suggesting that this should be independently regulated as this will create unnecessary hurdles, rather that the parties are to decide on the system used so long as it meets certain required standards.
3. Integrity: The document must be adequately protected against unauthorised interference and alteration.
4. Exclusive control: Although multiple parties may have access and control over the document, the Law Commission suggests that it must not be possible for more than one person to exercise control over the document, as is the case with the current system.
5. Divestible: The transfer of the document must transfer both the document itself and the ability to control the document, so any person who was able to exercise control prior to the transfer can no longer do so after the transfer.
6. Document identification: It must be possible to identify the original document to distinguish it from any copies and other documents.
7. Controller identification: As well as being able to identify the original document, it must also be possible to identify those who are able to exercise control over it. This may be done by access via a secure portal, rather than identifying each individual on the document.

Further considerations

There are a number of difficulties around digitising trade documents, and the Law Commission is producing a further report which focusses on the barriers that this reform may face in the context of private international law, which will be available mid-2022.

The Law Commission’s report and draft legislation is available to read here.