Electronic Trade Documents Act aims to facilitate international trade

The Electronic Trade Documents Act 2023 became law in July, and took effect on 20 September.

The Act takes forward detailed recommendations made by the Law Commission of England and Wales which aim to facilitate the legal recognition of documents widely used in trade finance, in electronic form, so that they can be used in the same way as their paper counterparts.

The Act is expected to greatly facilitate international trade transactions, including trade finance, import-export transactions, shipping and international maritime trade, given the extensive use of documents in relation to those transactions. Enabling the use of electronic documents is expected to deliver significant cost savings, reduce transaction processing time, and mitigate the risk of human error and fraud.

The Act covers trade documents where possession is required “as a matter of law or commercial custom, usage or practice for a person to claim performance of an obligation”, deliberately setting out a non-exhaustive list of such documents. These include promissory notes, bills of exchange, bills of lading, and other documents such as ship’s delivery orders, warehouse receipts, mate’s receipts, marine insurance policies, and cargo insurance certificates. These documents entitle the bearer to claim delivery of goods or payment of a sum of money while it is in possession of the document.

The core issue addressed by the Act is the requirement for physical ‘possession’ in English law in order to claim performance of an obligation or to transfer the rights to claim performance.

The Act deals with this by identifying the key characteristics of paper documents and grants the same legal functions to electronic documents containing the same information as their paper equivalents, provided that a ‘reliable system’ is used to: identify and distinguish the document from any copies; protect the document against unauthorised alteration; prevent the document being controlled by more than one person at a time –  the system must be sufficiently “secure” – with “control” being exercised when the person uses, transfers or disposes of the document; be accessible so as to allow the person who can exercise control over the document to demonstrate this; and ensure that the document is fully divested on transfer, i.e. the transferee is granted exclusive control.

A system’s ‘reliability’ may be determined with reference to matters including the system’s rules of operation, its security and information integrity measures, as well as the provisions of any voluntary scheme or industry standard to which it adheres. In addition, the extent to which the system is audited by an independent body, and assessed for reliability by a supervisory or regulatory body, may also be taken into account.

Alongside the concurrent development of platforms that facilitate electronic document exchange and provide platform-specific frameworks for the creation of rights between contracting parties, the Act is expected to enable the wider adoption of ‘distributed ledger technology’ or blockchain-based systems meeting these reliability standards, to underpin the advantages conferred by the Act with the necessary systems to facilitate the real-world use of electronic trade documents.

Export finance expert Camilla Ash said: “We are seeing more and more green loans and sustainability-linked loans in the export finance market, and the digitalisation of documentary evidence will go a long way in supporting market participants’ efforts to be more sustainable.”

While a significant proportion of global trade is conducted under English law-governed documents, questions remain over the cross-border recognition and enforceability of electronic trade documents. Although the Act has been designed to align with the 2017 UNCITRAL Model Law on Electronic Transferable Records (MLETR) – which created a framework to enable the use of ‘electronic transferable records’ that all countries could adopt with adjustments depending on national specificities – jurisdictional divergences in the MLETR’s adoption to date has resulted in a patchwork of different regimes, meaning further legislative progress is needed globally, or efforts to establish mutual recognition regimes, to facilitate truly global trade on a level playing field.

Documents with no effective governing law clause, such as typical bills of exchange, could arguably be at the mercy of courts applying their own jurisdictional rules. However, the Act provides for the conversion of an electronic document into paper form and vice versa – provided that the converted document clearly states the form from which it has been converted, and that any contractual or other requirements governing conversion are complied with. This is expected to facilitate international operability, ensuring that an electronic document holder can still enforce its rights even where electronic documents are not recognised.

Ash said that while the full benefits of the legislative framework for the facilitation of electronic trade documents will take some time to be realised, the introduction of the Act represents a crucial step towards efforts to bring digital solutions to the globalisation of trade and commerce, bringing greater safety, reliability, and speed of execution to market participants and their transactions.

“The introduction of the Act is a significant development for the export finance market, receiving widespread support from export credit agencies, trade bodies and financial institutions alike,” Ash said.