Origins of the Act
The Act has its origins in a Law Commission project initiated to devise reforms that would provide for the legal recognition of trade documents, including bills of exchange, promissory notes and bills of lading, in electronic form. The majority of international trade transactions are governed by English law, and much relies on what the Law Commission described as “documentary intangibles”: a document whose physical transfer will carry with it the right to claim performance of the obligation described within it. Prior to reform, English law recognized that legal rights could pass with possession of a physical document, but there was no equivalent provision for documents in digital form.
What does the Act change?
The Act sets out how a person may possess, indorse, and part with an electronic trade document. It defines an electronic trade document as one which contains information that would, if contained in a document in paper form, constitute a paper trade document. In addition, a “reliable system” must be used to:
- Identify the document so that it can be distinguished from copies;
- Protect it against unauthorized alteration;
- Secure the document so that only one person may exercise control of the document at any one time;
- Allow a person to demonstrate control over the document; and
- Enable a secure transfer of control of the document.
Importantly, these requirements, and what may be taken into account to determine whether a system is “reliable” are technology neutral, so that different systems and technologies, including those not yet developed, have the potential to meet the requirements of the Act.
The Act also specifies that a paper trade document may be converted into an electronic trade document (and back again). This feature is particularly helpful in a world of multi-jurisdictional transactions involving varied operating systems and legal frameworks.
Is the Act living up to expectations?
Within days of the Act coming into force a leading UK bank announced that it had completed its first transaction using digital promissory notes, shortening previous transaction times by 2 days.
Fintech companies are also seizing the opportunities offered for the use of distributed ledger technology, setting up platforms using blockchain to encrypt and transfer electronic trade documents, and the rights that they represent, securely and swiftly.
The ICC United Kingdom and the Centre for Digital Trade and Innovation have also reported on the tangible benefits of the Act. Their reported case studies demonstrate benefits including a 15-20% reduction in costs and $300-400 average saving per transaction as well as reductions in the time taken to raise liquidity in relation to relevant trades. There are also obvious benefits for the environment, with one featured company achieving a 100% removal of logistics paperwork.
The international dimension
In preparing its recommendations, the Law Commission took note of other initiatives for reform including the Model Law on Electronic Transferable Records (MLETR) adopted by UNCITRAL in 2017; Legislation based on or influenced by the MLETR has now been adopted in 8 States, including the UK and Singapore, which is another global hub for international trade.
In Europe, France is also close to creating new laws recognizing the legal effect of electronic trade documents. A report in June 2023 by Paris Europlace and ICC France outlined the strong need for laws enabling full recognition of electronic transferable trade documents (“titres transférables”) and included draft legislation. The process of transposing the MLETR into French law has now commenced and the proposed legislation, after review by relevant committees and industry bodies, is anticipated to come before the Conseil d’Etat in January 2024 before progressing, via the Conseil des ministres, to Parliament in March 2024.
Germany too is developing its legislative framework. Certain electronic forms of trade documents are already recognized under German law but a draft ordinance submitted to the Ministry of Justice by ICC Germany goes further, seeking to lay the foundation for a comprehensive and uniform regulation of electronic trade documents.
A trailblazer for digitalization?
Greater digitalization is a top priority for many, and the changes brought about by the Act will no doubt play a part in progression towards that goal. However, digitalization clearly covers a broader agenda than just international trade, and hot on the heels of the Electronic Trade Documents Act, we are seeing a keen focus on topics including the issuance, transfer and trading of digital securities.
Parallels can be drawn between blockchain based trade finance and digital bonds in particular, and with the Electronic Trade Documents Act already demonstrating tangible real-world benefits, it is certainly not too great a leap to envisage how the framework established by the Act might be developed further to advance digitalization in these and other areas.