Documentary Credit World

When assessing the digitalisation of trade finance, it is debatable whether the shipping and financial industries are trying to mimic an already effective paper-based system and simply move it to an electronic format or attempting to set up something entirely new. Take, for example, the place of a commercial letter of credit in international trade. Although law, practices, and standards impacting LCs can be updated, their purpose remains the same, namely, to provide the beneficiary under an LC with an assured right to payment when credit conditions are met upon a complying presentation of documents. The system is trusted by the market, it provides security for the parties, and as has often been stated by English judges, is the “lifeblood of international commerce”.₁ Digitalisation needs to maintain these elements; the trust, the security and ideally in the process, make things faster, smoother, and more cost-effective.

The trade system can be described as a web of contracts, most often an underlying sale agreement for the transportation of cargo from one port to another, insured under marine policies, and financed by a letter of credit. That is, a sale contract, a carriage contract, an insurance contract, and a financial contract. In practical and in legal terms, the trigger for the entire system is the financial contract, for until the letter of credit is opened, the seller is under no obligation to ship goods. It is the opening of the credit that triggers the actual shipment and thus one can argue it all begins and ends, with the money.

When considering digitalising the system, we must look at each part of the web individually, and then the web as a whole. The UK government started this process during the COVID-19 pandemic by asking the Law Commission of England and Wales to make recommendations for reform to allow legal recognition of trade documents in electronic form. The culmination of that work is the UK Electronic Trade Documents Act 2023 which received Royal Assent on 20 July 2023 and comes into force 20 September 2023.

What Does the Act Do?

At its core, the Act does something incredibly simple: it provides legal status to electronic trade documents, making them equivalent to their paper counterparts.₂ Whereas before the law only recognised as “possessable” documents which were tangible, and thus in paper form, now the 2023 Act recognises that the electronic equivalent of certain trade documents are “possessable” under the law. The importance of this minor, but very effective update can be illustrated by considering a bill of lading. Certain rights relating to the goods are tied to physical possession of the bill of lading document and these rights transfer upon physical transfer of the document itself, by law.₃ If in legal terms, only hard copy documents were possessable, it meant that an electronic bill of lading could not operate in the same way as its paper counterpart. The law did not recognise that an electronic bill of lading could be possessable, and consequently it could not recognise that its transfer from one party to another, also transferred rights to the goods. The Act refers to a range of documents used in trade, the transport of goods and financing thereof, including bills of exchange, promissory notes, bills of lading, ship’s delivery orders, warehouse receipts, mate’s receipts, marine insurance policies, and cargo insurance certificates.₄

Why is It Important?

The Law Commission estimates₅ that international trade is worth GBP 1.266 trillion (USD 1.6 trillion) to the UK₆ and that global container shipping generates billions of paper documents a year.₇ Therefore, the potential positive impact of using electronic trade documents including in terms of efficiency, cost, and environment, is vast. The ICC UK estimated that digitalising trade documents could generate GBP 25 billion in new economic growth for the UK by 2024 and free up GBP 224 billion in efficiency savings. ₈

The Act is hailed by many as a “gamechanger” including ICC United Kingdom Secretary General Chris Southworth₉ who said “this is a great piece of law … we are not changing the big picture of the legal framework of trade here; we are just going digital”.₁₀ Southworth added in a LinkedIn post his prediction that when the Act comes into force it “will have enabled 80% of bills of lading, 60% of global trade finance, the lion share of marine insurance and shipping as well as every company in the world which uses English law to now begin removing paper and digitalise trade transactions.” Lord Holmes, a member of the UK House of Lords, during the Lords’ second reading of the legislation said the “Bill is one of the most significant pieces of legislation which most people have not heard of. It is trade-transforming, tech-enabling, economic growth-generating, carbon-cutting legislation”.₁₁ Viscount Camrose in the last House of Lords debate on the legislation called it “a brilliant and transformational Bill.” ₁₂

There are a small number of other jurisdictions that recognise electronic trade documents but it is undeniable that, as one of the leading maritime service centres, the UK in taking this step will no doubt add a push to digitalisation as well as influence other jurisdictions to adopt similar legislation, particularly considering the existence of the UN MLETR₁₃ and the desire of governments to make sure their country’s market remains competitive. English law is frequently the applicable law of maritime contracts and trade finance undertakings, and the law recognising electronic equivalents lends trust to electronic documents and weight to the security they can provide.

What Does It Mean in Practice?

The maritime industry is one of the oldest and rules that govern its operation can trace their roots back to the ancient Greeks so naturally, changes to well-established traditional systems may raise concerns in some quarters. The reality is that electronic documents have been in use for a couple of decades and if individual trading parties wished for them to function legally as their paper counterparts, they could have done so even before 2023. UK law will always yield to parties’ specifically negotiated terms and if traders had agreed in their sale contract that an electronic bill of lading (eB/L) could be used and that its transfer operated in the same way as paper, then so be it. The limit was that such function of the eB/L was only recognisable between the parties involved in that specific trade contract.

The 2023 Act on the other hand means that UK law will recognise eB/Ls as equivalent to paper B/ Ls without the need to specify this in the contract. But again, the law will yield to parties’ negotiated terms, if they do not want eB/Ls to have the status now given to them by the 2023 Act, the Act itself gives exceptions.₁₄ In particular, Section 5 states “If an intention that section 3 should not apply in relation to an electronic trade documents appears in, or can reasonably be inferred from, the document or terms that have effect in relation to the document - (a) that section does not apply in relation to the document, and (b) section 4 also does not apply in relation to it”. Therefore, parties may choose whether or not they wish the law to apply to the electronic documents used. As with other matters, those involved in a trade transaction should make sure that all parts of the ‘web’ reflect this choice, so where the underlying sale contract envisages use of an eB/L and other electronic transferable documents, this should be reflected in the LC conditions and other undertakings relating to the underlying sale.

What has happened therefore is simply that the default position has changed – electronic trade documents are recognised as equivalent to their paper counterparts in UK law but if parties do not wish to use them in this way, that is perfectly possible. One supposes that the real progress is in effect that the UK government endorses electronic trade documents and is encouraging the industry to use them.

Are There Limitations?

The very nature of international trade means it is a cross-border activity and therefore we must be realistic about what the Act can achieve. While the UK is an important jurisdiction no doubt, industry in various jurisdictions must move as a whole to embrace electronic trade documents. UK businesses trade with parties across the globe and therefore the ‘web’, involves parties and logistics providers in different jurisdictions, goods crossing international borders and financial institutions operating under various applicable laws. The system must all be in sync; it must recognise electronic documents along with the UK, though it should be noted that if the applicable law across the contracts is English, then electronic documents could be accepted irrespective of the location of the parties. We must also be careful not to cause a digital trade divide where developed economies with a strong fintech infrastructure are effectively barring emerging markets from full engagement in global trade. It is a delicate balance where information and knowledge must be shared and although the UK lead may influence other jurisdictions to follow, on an international level organisations such as the UN and the ICC will have an important role to play, to ensure a level playing field and equal access to the digital trade ecosystem.

What's Next?

One cannot help but wonder though, that if what the 2023 Act does is very simple, and electronic trade documents, e-bills of lading for example, have been around for years, then why was this simple step not taken before? If that was all that was needed, then why did it not happen earlier?

COVID-19 forced the issue of electronic equivalents no doubt, but with this pressure now lifted, will the industry just revert back to reliance on paper documents?

The issue now therefore is whether implementation of the Act will inspire confidence among trade partners, trade finance providers, and other stakeholders to utilize electronic trade documents. Maritime law is often reactive rather than proactive. In other words, legislative bodies construct law to support practices that the industry has been using for some time, rather than first formulating law and expecting the industry to follow. It seems to be the case that the law is now being proactive, so we need the industry to move. We need the electronic platforms, the guarantee of security for these platforms, parties to understand expectations as to these e-documents and new formats. Most of all, we need recognition of electronic documents in the law across jurisdictions and we need the industry to trust the electronic system as reliable and secure.

The Act will help in this regard; it should certainly build confidence in use of electronic alternatives. The fact that it covers different types of trade documents means that we could see a fully digital trade transaction subject to UK law. This could lead to an increase in the use of commercial letters of credit subject to eUCP or possibly use of transactions under URDTT.₁₅

* Dr. Anna - Mari ANTONIOU is Associate Professor in Law, School of Business and Law, University of Brighton, UK. She can be contacted at: A.M.Antoniou@brighton.ac.uk.

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