Law Commission proposal on electronic trade documents

The Law Commission’s Report and draft Bill on Electronic Trade Documents is the first piece of proposed legislation arising out of their recent focus on new technologies and gives a significant hint as to the outcome of other consultations, particularly that on cryptoassets. The Law Commission proposes a single far-reaching change – decreeing that several types of electronic trade document may be ‘possessed’ – and accompanies this with a number of subtle accommodations that demonstrate their understanding of the power of the English common law to assimilate new concepts. If this influences other jurisdictions to adopt a consistent approach, it could transform international trade finance documentation. Norton Rose Fulbright LLP was one of only three law firms that submitted a complete response to the consultation that led to this proposal.

The possession problem

A series of recent Court decisions have considered the nature of cryptoassets as property, and much academic ink has also been spilt addressing this question (see, for instance, “What sort of property is a cryptoasset?”). At the heart of the debate is the problem that English law divides property into tangible and intangible assets and only tangible assets are capable of being possessed. The Law Commission calls this ‘the possession problem’.  Cryptoassets and other purely digital entities such as electronic trade documents, while clearly intangible, actually share more attributes with tangible than intangible property. A concept analogous to possession would be a convenient way to address the proprietary aspects of cryptoassets in English law.

The Law Commission proposal

For the particular case of electronic trade documents, the Law Commission deals with this issue as only a potential legislator can: it simply decrees that certain categories of electronic trade document shall be capable of being possessed and that this has exactly the same consequences as possession of a paper trade document. It sets out a series of criteria that determine whether a document may be possessed. This is a purely factual test that relates only to factual possession.

This is an elegant solution that requires only the insertion of a single change into an existing framework. As a question of fact, it can be determined by judges in individual cases taking account of the entire factual matrix. Relevant factors include integrity and reliability of the system. The document must also be transferrable and capable of exclusive control – meaning not that only one person has control over the document, but that only one person at a time can actually exercise control, so, for instance, it cannot be transferred by two different people to two different accounts at the same time. Although the criteria are technology agnostic, they are likely to be fulfilled only by distributed ledgers or – possibly – a centralised registry.

Determination of factual possession

One issue not addressed by the Law Commission concerns the relevant time for any determination of factual possession. A Court will determine whether an electronic trade document fulfils the statutory requirements to be capable of possession and also who actually possesses it. For the second question, there will be a relevant point in time – the question will be whether someone possesses the document at some relevant moment. Presumably, the question of whether the document is capable of being possessed will be determined at the same point. The problem is that, unlike tangible goods, an electronic trade document may not necessarily be capable of possession at all times. For instance, if the registrar in a central registry is temporarily unavailable, no transfer could be registered for documents in that registry and, during that time, those documents would fail to satisfy one of the requirements for being capable of possession. And similarly an electronic trade document that is not capable of being possessed may later become possessable. It may be that, through the requirement of reliability and its implication of a stable, unchanging system, the Law Commission hope to avoid these possibilities and the confusion they would cause, but statutory clarification of this point might be helpful.

Cross-border compatibility

Critical to the take up of electronic trade documents will be their treatment in other countries. The Law Commission are careful to specify that their recommendation concerns only English law, although they do take into account the Model Law on Electronic Transferable Records (MLETR), and that they may address conflicts of law in future consultations. International incompatibility can manifest in two ways. First, Courts in two different countries may disagree about which system of law determines a specific question. This is a question of conflicts of law which is outside the current consultation. But it only leads to practical difficulties if there is a second incompatibility: if those two systems of law give a different answer to that specific question. This is not a question of conflicts of law at all, but a question of comparative law. International trade is particularly concerned with documents such as bills of exchange that often do not contain effective governing law clauses. It is thus peculiarly vulnerable to different Courts applying their own laws, as opposed to a single law chosen by the parties, and so also to inconsistencies between different governing laws. It follows that any new scheme governing international trade will only be effective to the extent that it meets with widespread acceptance in other jurisdictions. If the English approach is to succeed, other countries – particularly the larger trading hubs – will have to adopt regimes governing electronic trade documents that are compatible with it.  To give an example, bills of lading are issued at the loading port – those involved in shipping goods from China as an example will look first to Chinese law and practice to determine whether such documents are equivalent if issued electronically.    It may be that the Law Commission hopes English law will lead the way by putting forward a practical solution that will be adopted by other systems of law. In any case, consistency with foreign systems will eventually be the test for the success of this proposal.

Conclusion

Overall, the Law Commission’s proposal is an elegant solution motivated by two key insights. First, solving the possession problem by legislative fiat means that electronic trade documents may be straightforwardly assimilated into the current English law framework for international trade. And second, confining this change to the concept of possession as an issue of fact means that Courts will be able to take a sensible approach in individual cases. Both of these insights play to the strengths of the English common law system.  The proposal is to be welcomed and international trade will be strengthened if other jurisdictions follow a similar approach.