Electronic Trade Documents:Game-Changer or Pandora’s Box of Challenges

The world is abuzz as the UK joins the ranks of countries like Singapore and Bahrain that have adopted the UNCITRAL Model Law on Electronic Transferable Records (MLETR) in the race to digitalise. The recent passage of the UK’s Electronic Trade Documents Act 2023 (ETDA), which will come into force on 20 September 2023, has revolutionised the trade finance industry by granting electronic trade documents the same legal validity as their paper equivalents¹ in the UK. This development is particularly significant as English law is often chosen as the governing law of trade documents (the International Chamber of Commerce (ICC) estimates that 80% of trade documents worldwide are based on English law)².

Digitalisation offers many clear advantages, including:

• Increased efficiency: The ICC estimates that the ETDA will reduce trade processing time by 70%, generate £25 billion (USD 31.8 billion) in new economic growth by 2024 and enable efficiency savings amounting to £224 billion (USD 284.5 billion)³.
• Environmental sustainability: The UK Law Commission estimates that the ETDA will result in a huge reduction of paper waste from the current usage of 28.5 billion paper trade documents annually⁴.

The transition from the antiquated paper form to a digital form has sparked excitement in the trade industry as it creates opportunities which were, until such developments, difficult to achieve.

The trillion-dollar question is: HOW does this affect the legal aspects of a cross-border trade financing? Particularly, what are the important legal implications that have not been discussed?

How do the ETDA and MLETR interplay with the conflict of laws?

Cross-border trade involves trade documents passed from one participant to another in a different jurisdiction. How do we determine the applicable law? This invokes conflict of law rules (which determine which jurisdiction’s law should apply to determine the validity of certain acts) and it is a complex area of law that requires careful consideration based on specific trade documents, legislation and jurisdiction involved.

For instance, consider bills of exchange: Section 72 of the Singapore Bills of Exchange Act 1949 (which aligns with the UK Bills of Exchange Act 1882) provides for the conflict of laws rules for determining the governing law applicable to the form of a bill of exchange, the negotiation or acceptance of a bill of exchange. When applied to the digital realm, where do such events occur within an electronic system? How will Section 16J of the Electronic Transaction Act 2010 (which adopts Article 13 of the MLETR) or Section 2(2) of the ETDA work alongside the requirements of the respective legislations? The concept of acceptance of a bill of exchange is completed by delivery or notification, how is this achieved in the digital space? As bills of exchange (and numerous other trade documents) typically do not contain a governing law clause, the developments in this area require some forethought in the development of platforms.

How is the conventional element of possession of paper trade documents affected by the shift to intangible electronic trade documents?

One of the main complications arising from the ETDA revolves around the issue of possession. Under English law, possession of a trade document is a key concept in relation to the transfer of the document that represents right to the goods. However, it is difficult to ascertain what possession is in the context of electronic documents. The ETDA does not explicitly define electronic “possession”, leaving the courts to interpret and establish this concept. With tangible paper documents, it is very clear when possession has been transferred between parties, but with intangible electronic documents, this concept is novel. In this respect, the new laws represented “possession” via two core criteria: control and reliability. If the holder of the electronic trade document can exercise exclusive control over the document (including the ability to use, transfer or otherwise dispose of it), which is stored on a “reliable system” (discussed below), such document will fall within the ambit of the ETDA / MLETR.

Are electronic trade documents truly singular compared to paper documents?

With the advent of technology including colour printers, the creation of fraudulent paper documents has reached new magnitudes. Compared to paper documents, are electronic documents less likely to be susceptible to fraud and other cyber threats? This begs the question associated with the concept of a “reliable system” – what exactly qualifies as a “reliable system”? To this end, both the ETDA and MLETR adopt a technology-neutral stance, refraining from providing an explicit definition of a “reliable system” to, presumably, accommodate future emerging technologies and systems. As such, the onus falls on businesses to take reasonable precautions to safeguard their “electronic” trade documents adequately. Will the accreditation of electronic transferable records management systems that satisfy the requirements of providing a reliable method in one jurisdiction assist in global adoption?

Embracing a digital future

The introduction of the ETDA alongside the MLETR framework is undoubtedly a huge stride forward for trade and trade finance. The wave of digitalisation is definitely gaining traction and it is time to focus on the opportunities that every change gives rise to.

¹ Section 1(2) of the ETDA lists examples of paper trade documents which are commonly used in the UK, which include bills of exchange, promissory notes, bills of lading and warehouse receipts.
² “UK Economy to Receive £1 Billion Boost through Innovative Trade Digitalisation Act,” GOV.UK, 2023, accessed 11 August 2023.
³ ICC, Aligning national laws to the UNCITRAL Model Law on Transferable Records, UK Business Case (2021).
⁴ Law Commission, Electronic trade documents: Report and Bill, (15 March 2022) at para [10.28].