Possession and tangibility are closely related concepts long established under English law. Yet a change to these concepts is around the corner. The change could finally unlock the full potential of digital trade documents, while at the same time keeping English law at the forefront of global commerce.

The existing position under English law is that one cannot legally ‘possess’, or have physical control of, something intangible (not including intellectual property rights, which are governed by separate rules). This means that a purely electronic or digital trade document cannot be possessed, and so cannot fulfil the legal functions of its possessable paper equivalent. But the UK Law Commission’s recent proposals for the reform of English law regarding possession of electronic trade documents and the accompanying draft legislation (the Draft Bill) suggest that more universal digitisation of electronic bills of lading and other trade documents will soon be a reality.

Electronic trade documents, at least in the form of ‘e-bills’, have been in use for almost two decades due to their undisputed benefits and efficiency. However, they remain, as the Law Commission puts it, “workarounds” to the problem of intangible, digital documents not being capable of possession under English law. This is primarily because electronic documents are created under multi-party contracts between a closed group of parties engaged in a particular trade that agrees to recognise them as having the same qualities as a paper document.

What the Law Commission’s proposals seek to address is the “possession problem”, a timely example of English law keeping up with technological solutions (including blockchain) to give electronic trade documents the same legal function as their paper equivalents.

New direction

The Draft Bill identifies seven types of trade documents that can be possessed in electronic form, namely:

a) Bills of exchange

b) Promissory notes

c) Bills of lading

d) Ship’s delivery orders

e) Warehouse receipts

f) Marine insurance policies

g) Cargo insurance certificates

The functionality of these documents depends on their ability to be possessed, which is why, according to the Law Commission, a legal change is needed to allow them to be legally effective in their electronic form. Further, clause 1(3) of the Draft Bill defines an “electronic trade document” as one that:

a) is in electronic form;

b) contains the information that is required in the equivalent paper counterpart; and

c) is held by means of a system that ensures that no more than one person has control of the document at any one time and that, after the document is transferred from one person to another, the transferor no longer has control of it.

The concept of control is of fundamental importance to the effective possession of electronic documents, as explained below. And under clause 1(4) of the Draft Bill, a person has control of a document if they can use the document and transfer or otherwise dispose of it.
How do you possess an electronic trade document? Under the Draft Bill, an electronic trade document is capable of being possessed if it:

a) has an existence independent of both the law and persons – i.e., it is not a bare legal right (e.g., a debt or contractual claim);

b) is capable of exclusive control; and

c) must be fully divested on transfer (i.e., if A transfers a document to B, A must no longer be able to access or use the document).

The test for whether an electronic document is possessed is therefore that:

a) the person who has control of the document is the person who has possession of it; and

b) possession is transferred from one person to another when the transferee gains control of that document.

The Law Commission’s proposals also envisage that the concept of possessing an electronic trade document will extend to bailment, conversion and possessory security interests that require physical possession of an asset (e.g., pledges and liens).

Practical considerations

In practice, widespread adoption of electronic trade documents requires technology to guarantee the three criteria for possession. If the Draft Bill is adopted, and the necessary technology exists, then the idea of not possessing an intangible electronic document in your control should become a thing of the past. And the technology, primarily but not exclusively distributed ledger technology, looks very promising.

At the very least, the identification of the three criteria for possession will enable technology providers to have a clear run at developing the right platforms and systems to guarantee the required degree of control over electronic documents.

Further, the Draft Bill seeks to address how electronic trade documents will work in practice and includes clauses on transfer and indorsement. And because many legal systems do not treat electronic trade documents as legally effective, the new law will allow a change of medium for trade documents from electronic to paper and vice versa.

Where next?

Aside from the Law Commission’s proposals, which are still in the policy development stage, attempts to legally recognise electronic documents continue internationally. These include the UNCITRAL Model Law on Electronic Transferable Records 2017 (MLETR), which uses the concept of exclusive factual control as being equivalent to possession. MLETR has been implemented in Bahrain, Abu Dhabi and, notably, Singapore, a legal system very similar to that of England. In fact, the Law Commission has noted that its own proposals are aligned with the aims and policy of MLETR.

The Covid-19 pandemic has caused major disruption in the physical world which, coupled with the fact that approximately four billion international trade paper documents are used annually, could act as a real catalyst to the digitisation of trade. Such digitisation could increase security, benefit the environment and promote greater flexibility and adaptability across the shipping industry. But headwinds remain. The adequacy and variety of existing technology platforms, the needs of different jurisdictions (including ports) and, importantly, the number of countries not yet accepting electronic trade documents as equivalent to paper may yet delay uptake.

Ultimately, the Law Commission’s proposals herald a far-sighted and welcome modernisation of English law to reflect the new digital world. What will be important going forward is that the global marketplace perceives that enough of the technological challenges around electronic trade documents have been overcome to facilitate widespread uptake. If that can be achieved, then English law will be ready to help realise the full potential of digital trade documents.
Source: The Baltic Exchange