On 20 July 2023 the long awaited Electronic Trade Documents Act 2023 (the Act) received Royal Assent, and will come into effect in the UK on 20 September 2023.
What does the Act do?
The Act, which is largely based on the UK Law Commission's draft Bill published in March 2022, sets out the basis upon which trade documents can exist and be dealt with in electronic form under English law, such that an electronic trade document has the same effect as an equivalent paper trade document.
The Act states that a person may possess, indorse and part with possession of an electronic trade document, and anything done in relation to an electronic trade document has the same effect in relation to the document as it would have in relation to an equivalent paper trade document.
Prior to the Act, under English law it was not possible to possess electronic trade documents and therefore key English law principles in relation to documentary intangibles (such as bills of exchange) could not be applied to electronic forms of those documents.
The Act also amends the Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act 1992 to remove certain incompatible provisions.
What documents are capable of being electronic trade documents?
The Act states to cover a document if:
- it is of a type commonly used in at least one part of the United Kingdom in connection with trade in or transport of goods, or financing such trade or transport; and
- possession of such document is required as a matter of law or commercial custom, usage or practice for a person to claim performance of an obligation.
This part of the Act was deliberately drafted to describe the type of document (i.e. a trade document where possession is paramount as to its function), as opposed to expressly listing them all, to ensure the Act was not too restrictive. Obviously this creates some ambiguity, but usefully the Act does expressly list the following example documents as being capable of being electronic trade documents: bills of exchange, promissory notes, bills of lading, ships' delivery orders, warehouse receipts, mates' receipts, marine insurance policies and cargo insurance certificates.
What is required for a document to be an electronic trade document?
A document covered by the Act can be an electronic trade document if a "reliable system" is used to:
- identify and distinguish it from copies;
- protect it from unauthorised alterations;
- secure it so that only one person can control it at any one time and allow that person to demonstrate that; and
- ensure that once a person transfers it, that person can no longer control it.
What is a "reliable system"?
The Act deliberately does not define what constitutes a "reliable system" so as to remain technology agnostic, with the drafters preferring to describe the desired outputs as opposed to specifying a suitable technology solution.
The rush for producing a reliable system is already well on its way with systems already being provided by standalone technology providers and finance providers looking at developing their own proprietary systems. However, the approach adopted in the Act does raise the question as to how users of electronic trade documents will derive certainty that the system being used is and remains at all times a reliable system so that the relevant document being handled by the system is indeed characterised as an electronic trade document and capable of being possessed?
Where do we go from here?
Our view is that the Act, in the medium- to long-term, will be transformative to trade and trade finance processes. In the short-term, however, users of trade documents and finance providers will need to identify and/or develop "reliable systems" and get comfortable with the risks associated with them (e.g. the insolvency of the technology solutions provider) and, until the governments of other key jurisdictions adopt similar legislation (n.b. UNCITRAL's Model Law on Electronic Transferable Records (MLETR) - which has been adopted most notably in Singapore - and the current proposals in the US to amend the Uniform Commercial Code (UCC) to recognise electronic drafts), it will be hard to use and finance electronic trade documents where there are nexuses to jurisdictions which do not recognise electronic trade documents. But the future is bright and it is only a matter of time.