UK Digitalisation of Trade

New Law on Electronic Trade Documents

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