Documentary Credit World

Development of  eB/Ls

A B/L  can be issued and transferred by non-paper means. In the query posed in ICC Opinion TA.929, the eB/L  was issued with the words “to bearer” on behalf of the carrier via an electronic document platform and was transferred to the shipper. The shipper then endorsed electronically on the back of the eB/L.  On the electronic platform, the eB/L  along with other trade documents were moved and exchanged. A B/L  performs certain key functions, namely as a receipt, document of title, and contract of carriage. It evidences ownership of goods and by simply handing over a B/L,  one can give the new holder a right to the goods described in the B/L.  A bank may also obtain possession of a B/L  pursuant to a valid transfer to become the holder and thereby have a possessory security over the goods relevant to the B/L.  In the past, trade in transfer of goods was evidenced by paper B/Ls,  but a B/L  can be evidenced by a record consisting of information stored in an electronic medium. This eB/L  otherwise satisfies the expectations of a paper B/L  and is capable of performing the above three functions of a paper B/L.  It may be issued and have the required information on an electronic platform. It can be encrypted and accessible by virtue of a password. An eB/L  evidencing legal rights of goods can be more secure and reliable than its paper counterpart. Over time, it is inevitable that paper B/Ls  will inexorably move towards to eB/Ls.

Updated technology has been utilized to develop the eB/L.  The goal of fully paperless trade may not be realized without the use of eB/Ls.  Some digital platforms, such as Bolero, can be used to dematerialize a B/L  between and among trade parties and they could support an eB/L  for use in trade that mimics its paper counterpart. Bolero set up a system and the resulting Bolero eB/L  is controlled by the system. The Bolero eB/L  is initially created by the carrier and then the rights and obligations in relation to it may change over the life of the Bolero eB/L.  Electronic records of an Bolero eB/L  are retained and updated. The Bolero eB/L  is irrevocable and legally binding. It is globally accepted and is approved by the International Group of P&I Clubs, which is at the forefront of approving eB/L  providers. It has been reported that Chinese banks have greatly advanced digitalization of trade transactions by using the digital platform of Bolero.₂  The second generation of eB/L  systems relies on blockchain technology. This technology has been identified as a key development to make possible the use of eB/Ls  without the need for a central authority. eB/Ls  can include electronic records created and maintained by blockchain technology. Blockchain-based eB/Ls also can be transferred between participants. CargoDocs and CargoX facilitate end-to-end digital trade by using blockchain technology to support eB/Ls.₃ Although Bolero is not a blockchain-based platform, it can interoperate with different blockchain platforms for the adoption of eB/Ls. Blockchain technology has made eB/Ls  increasingly feasible and more rapidly adopted, but current industry rules of practice and laws do not expressly recognize that a blockchain-based eB/L  has the same functionality as its paper counterpart.₄

Law  Reform to  Recognize eB/Ls

An eB/L  is not yet recognized in most jurisdictions. Current law and practice rules rely heavily on paper-based rules for the transfer and negotiation of paper B/Ls,  but do not adequately accommodate use of eB/Ls.₅ An eB/L  cannot function in the same manner as its paper counterpart under the current law of most jurisdictions and applicable practice rules governing transfers of eB/Ls have yet to be specifically codified.₆  Consequently, the status of eB/Ls  is confusing due to the obstacles and lack of clarity under most current laws and practice rules. This creates uncertainty and use of eB/Ls  in international trade remains very limited. There also is a need to clarify the different rules for perfecting financing transactions involving eB/Ls.  The rights of eB/L  transferors and transferees need to be clarified as well. Rules of law must be established for the transfer or negotiation of eB/Ls  to facilitate financing on the basis of eB/Ls.

Some international initiatives provide legal certainty as to the use of eB/Ls.₇  The United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (Rotterdam Rules) approved by the United Nations Commission on International Trade Law (UNCITRAL) in 2008 have attempted to take into account use of eB/Ls,  notwithstanding that they are not yet in force and do not provide practical experience in eB/Ls.  By devoting a chapter to electronic transport records,₈  they were intended to facilitate the use of eB/Ls  and provide for the equal value of a paper B/L  and the eB/L  equivalent. They made provisions for accommodating eBLs and indicate procedures for use of eB/Ls.  UNCITRAL’s Model Law on Electronic Transferable

Records (MLETR) also applies to eB/Ls,  which are referred to as the electronic equivalent of paper B/Ls.₉  It is an international attempt to provide a legal framework for eB/Ls  and other electronic records. It states that an eB/L  “shall not be denied legal effect, validity or enforceability on the sole ground that it is in electronic form”.₁₀  The MLETR provides functional equivalence requirements, enabling use of eB/Ls  and control under the MLETR can achieve the same result as possession of a paper-based B/L.₁₁  As enabling change of medium is critical for the wider acceptance of eB/Ls,  and the replacement of an eB/L  with a paper B/L  is more frequent than the reverse scenario, it provides that the replaced eB/L  will not further circulate and ceases to have any effect or validity.₁₂

Laws of some jurisdictions have been updated, at least in part, to make an eB/L  the legal equivalent of a paper B/L.  For example, in the United States, the Uniform Commercial Code (UCC) Articles 1 and 7 provide for electronic documents of title and tangible documents of title.₁₃  To keep pace with legal and technological developments, the 2022 UCC Amendments would further update the UCC and provide a more robust legal framework for eB/Ls.₁₄  They address technological developments affecting eB/Ls  notwithstanding the fact that eB/Ls  have obtained legal recognition.₁₅ They define “control” for eB/Ls  and accommodate emerging technologies, including blockchain technology. The Law Commission of England and Wales (LCEW) has completed a law reform project on electronic trade documents including eB/Ls,  the Electronic Trade Documents Act 2023.₁₆  Initiated in 2021 with the purpose of enabling the legal recognition of B/Ls  in electronic form, the Act allows for an eB/L  that meets certain criteria to have the same functionality as its paper counterpart.₁₇  It also permits paper B/Ls  to be converted into eB/Ls,  and vice versa,₁₈  subject to requirements similar to those in the MLETR. According to UNCITRAL, the Commercial Act of the Republic of Korea also enables eB/Ls  and it establishes the legal equivalence between paper-based and electronic B/Ls.₁₉ It also provides for “control” as a means for the possession and transfer of eB/Ls and specific provisions on the presentation of the eB/Ls for delivery of goods. As explained above, Chinese banks have used digital platforms of Bolero and as well as essDOCs to support their LC transactions involving B/Ls. Use of eB/Ls in China is greatly beneficial for facilitating international trade and finance, but legal issues relating to eB/L have not been addressed and resolved in Chinese laws. Current Chinese laws have not yet recognized the legal validity of eB/Ls as functionally equivalent to paper-based B/Ls. Therefore, certainty is needed under Chinese laws as to the legal value of the use of an eB/L to enable wider use of the eB/L.₂₀

Control is a central concept under the above law reforms. An eB/L must be capable of being subjected to an identifiable person’s exclusive control. The law reforms provide the method for control of an eB/L. They also update the rules governing transfer of eB/Ls and clarify the rights of an eB/L transferor and transferee. The reforms also allow a change of medium for a B/L from electronic to paper form (or vice versa) and provide a mechanism for the conversion. They are generally hospitable to eB/Ls and more capable of adaptation to eB/Ls. The reforms permit adoption of blockchain technology as well. The overall approaches of the international initiatives and the law reforms be considered are sound in principle, but international practices relating to use of eB/Ls are not yet equally well established. By learning from the current law reforms, it may also offer an opportunity to review existing practices of the ICC eRules.

The ICC eRules also Apply to eB/Ls

The eUCP applies to an eB/L. Following UNCITRAL’s adoption of the MLETR in 2017, eUCP Version 2.0 entered into force on 1 July 2019. The MLETR was used as a reference for the eUCP revision as the MLETR accommodates evolving commercial practices and supports existing internationally accepted business practices. The eUCP repeatedly took note that the purpose and functions of paper can be fulfilled by electronic equivalents and added the term “electronic record” to the meaning of document.₂₁ The eUCP definition of “electronic record”₂₂ is in line with the definition of ‘electronic record’ of MLETR.₂₃ As explained above, MLETR relies on the ‘functional equivalent approach’ and it refers to an eB/L that is equivalent to a paper B/L. By adopting the functional equivalent approach, an eB/L as an electronic record under the eUCP is the equivalent of a paper B/L. An eB/L under the eUCP is identifiable. It must be protected against unauthorized interference or alteration. A new definition of electronic transferable record which references a B/L was included in the 2023 eUCP (Version 2.1). Article e3(b)(v) provides: “Electronic transferable record means an electronic record that contains the information that would be required in the equivalent paper document, such as a negotiable bill of lading or an assignable insurance document.”

The ICC’s Uniform Rules for Digital Trade Transactions (URDTT) which became effective in 2021 are also rules accommodating use of eB/Ls. An eB/L under the URDTT may retain the integrity of the electronic document and the electronic record can also be identified.₂₄ They introduce the control concept.₂₅ An eB/L under the URDTT could be transferred by change of control of the records and the rules entitle the person in control to claim performance contained in the eB/L. In order to allow for its transfer, the eB/L should be capable of being controlled from the time of its creation until it ceases to have any effect or validity.₂₆ Transfer of control over an eB/L is the functional equivalent of delivery. For a negotiable eB/L, “delivery” is a necessary condition for negotiation. A person with an eB/L delivers it by voluntarily transferring control. The person in control of the negotiable eB/L is a “holder”. The data processing system may use a reliable method to identify the person in control of the eB/L.

The eRules explicitly and unambiguously support the usage of electronic records, including eB/Ls, but they do not provide any detailed requirements for the use of eB/Ls. The focus of the eRules is concentrated upon the presentation of electronic records and they may facilitate presentation of eB/ Ls. The MLETR would meet business needs, including the use of eB/Ls and the ICC eRules are also compatible with the MLETR. An eB/L is an electronic transferable record and therefore the ICC eRules would apply to an eB/L.

Alignment of Practice Rules with Law Reforms

eCommerce laws, in general, have deferred to internationally-accepted practices, but the ICC eRules followed concepts developed in the laws. The eUCP definitions are modeled on the UNCITRAL Model Law on Electronic Commerce. The URDTT are also designed to be compatible with UNCITRAL Model Laws, including the MLETR and some of the definitions are modelled on the MLETR to promote the adoption of the Model Law.₂₇ For an example, the word ‘accuracy’ included in the URDTT₂₈ is in line with the MLETR.₂₉ In general, there would be no conflict between most eCommerce laws and the eRules with respect to use of eB/Ls, and the eRules could be based on them.₃₀ Practice rules to enable the widespread use of eB/Ls are required and they should be updated and aligned with the laws and legal framework.

The ICC also promotes broader use of the eRules.₃₁ The challenge with an eB/L is whether or not it is legally valid. To facilitate the move to paperless transactions, the ICC is engaged in pursuing legal status for eB/Ls.₃₂ It has also called on all governments to remove any unnecessary legal requirements for eB/Ls and to clarify the functional and legal equivalence of an eB/L and a paper B/L.₃₃ In order to facilitate widespread use of eB/Ls, ICC supported MLETR and has urged governments to adopt it.

The eUCP may be improved with more explicit treatment of eB/Ls. The eUCP does not adequately accommodate eB/Ls as it does not set out the basic conditions for use of eB/Ls and the rules governing an eB/L. As such, the eUCP rules relating to use of eB/Ls need to be improved. The above analysis would help to bolster the practice rules and introduce new provisions to accommodate evolving practices regarding eB/Ls. The improvement would aim at removing obstacles to eB/L use and may make dedicated provisions addressing the use of an eB/L that is functionally equivalent to a paper B/L.

Improvement of eUCP for Control of eB/L

The functional equivalent of possession is essential for the MLETR and control is central to its function.₃₄ The notion of control aims at preventing multiple requests for performance of the same obligation and this approach provides a solution to the challenges posed by the potential consequences of unauthorized duplication of eB/Ls, as only one party may claim entitlement to performance of the obligation embodied in the eB/L. Technology has also developed₃₅ that can enable an identifiable person to obtain exclusive control over an eB/L evidencing such rights and that control was recognized to provide evidence of ownership equivalent to that provided by physical possession of the paper B/L. Control may be achieved through the token and the registry systems. For example, Bolero achieved exclusive control through a title registry. Therefore, the concept of control of an electronic record such as an eB/L is critical. Some law reforms recognize eB/Ls as electronic records which evidence rights to goods. The laws utilize the concept of control, which is the centerpiece of law reforms. The URDTT introduced the control concept, but does not define control. To obtain control of an eB/L, the person to whom the eB/L has been issued must be able to be identified. When an eB/L is issued to a person and the electronic platform in which the required information is maintained identifies the person and that person has sufficient rights with respect to the electronic record, the person has control of the eB/L. The identification may be by virtue of passwords or other encryption methods. A security interest in an eB/L may be perfected by control. The control also perfects a security interest in goods covered by the eB/L. Application of the control notion aims at preventing the possibility of multiple claims to perform the same obligation contained in the eB/L and therefore precluding double spending of the eB/L.₃₆ The control concept provides the legal framework for developing systems for eB/L.

The eUCP Article e11 (Transport) should be added a provision that applies to eB/L. It should provide that “eB/L contains electronic record being amenable to exclusive control and only one person (or persons acting jointly) must be able to exercise control of the eB/L at any one time.”. This provision is particularly focused on the eB/L and the eB/L is the object of control in this provision. Control of an eB/L can be transferred and then rights of the eB/L can be granted to the person who obtains control. Blockchain platforms can accomplish control of an electronic record. The blockchain systems generally place control of an eB/L in the hands of the person with knowledge of the relevant “private key”.₃₇ On a blockchain-based system, the transferor can use its private key to send the eB/L to the account of the transferee, thereby divesting itself of the eB/L. As such, once the criteria of control is met, an eB/L would enjoy the same level of recognition as its equivalent paper B/L and perform the same function. It is also best practice that the eB/L may be issued and transferred to an intended holder. It may be assured that the eB/L retains its integrity that the information in the eB/L remains complete and unaltered. It should contain the information that would be required to be contained in its paper equivalent.

Improvement of eUCP for conversion of eB/L

As explained above, the MLETR provides for the replacement of an eB/L with a paper B/L and such replacement is more frequent than the reverse case, but the eUCP does not contain a provision for the conversion of an eB/L to a paper B/L. Thus, the improvement in this regard can meet the ICC’s requirement that it is significantly important that the ICC eRules align with the MLETR. Needs may arise for replacement of an eB/L with a paper B/L. Enabling change of medium is critical for the use of eB/Ls. The need for replacement is more frequent to accommodate a party whose involvement was not envisaged at the time of the creation of an eB/L and that party is not in a position to use the eB/L. In ICC Opinion TA.929, the eB/L was requested to be converted into a paper B/L. Upon request by the carrier, the agent accessed the system and downloaded the PDF version of the eB/L, which had been automatically generated and made available to the agent. The carrier ’s electronic signature on the front of the eB/L had been automatically removed and the carrier ’s signature block was blank, then the agent manually signed the paper B/L on behalf of the carrier. The paper B/L was identical to the eB/L at time of the conversion. The eB/L was converted to a paper B/L, but the eUCP contains no rules for the conversion.

The eUCP should set out rules for the replacement of an eB/L with its paper B/L counterpart. eUCP Article e11 (Transport) should also add a provision that allows for change of form of a B/L from electronic to paper. It should provide wording to the effect that an eB/L may be changed to a paper B/L, but all other things remain the same and the paper B/L should be identical to the eB/L except the medium from electronic to paper form. Upon the conversion, the eB/L should cease to have effect. All rights and liabilities contained in the eB/L should continue to have effect in relation to the paper B/L. A paper-based printout of the eB/L may be considered as equivalent to the eB/L, but would need to satisfy requirements contained in the UCP. In ICC Opinion TA.929, the paper B/L was signed by the shipper with an image signature and the endorsement on the reverse of the eB/L remained after the conversion. The issuing bank contended however that the paper B/L was not manually endorsed and refused to accept the paper B/L. The Opinion’s Analysis correctly stated that “the signature is deemed to be a facsimile signature and acceptable under UCP 600 article 3.” Signing the eB/L serves the same function as does signing the paper B/L. In addition, it is best practice that the paper B/L may include a statement that it replaces the eB/L and the eB/L thereafter ceases to have any effect or validity. The eB/L cannot be further transferred after the conversion. The rights and obligations of the parties contained in the eB/L are not affected by the conversion.

Conclusion

A B/L can be issued in an electronic medium and blockchain technology has made the eB/L increasingly feasible, but current laws and practices do not adequately accommodate use of eB/Ls. International initiatives and laws of some jurisdictions are being updated to make an eB/L the legal equivalent of a paper B/L. The ICC is engaged in pursuing legal status for eB/Ls and ICC eRules apply to eB/Ls, but they do not deal with issues directly arising from use of eB/Ls. eUCP should be improved to explicitly accommodate eB/L use by providing that an eB/L would have the same level of recognition as a corresponding paper B/L by exercising control of the eB/L. It also should be improved by providing that an eB/L may be changed to a paper B/L and may set out requirements for valid conversion. ICC Opinion TA.929 involved conversion of an eB/L from electronic to paper. In my opinion, the approach in treatment of the conversion contained in the Opinion is correct.

* Hei Zuqing is a Distinguished Researcher of ZIBS (International Business School, Zhejiang University) and Graduate Mentor at Nankai University. He has previously worked at Bank of China and Societe Generale. He can be reached at: heizuq64@163.com  The author expresses sincere thanks to Mr. Michael Evan Avidon, past Co-Chair of the Letters of Credit subcommittee of the UCC Committee of the American Bar Association and past Chair of the Subcommittee on Letters of Credit of the New York State Bar Association’s Banking Law Committee, for his comments on this article, but opinions and responsibilities are those of the author.

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