E-bills of lading

First published in Maritime Risk International, September 2017

There have been attempts since the 1980s to introduce electronic bills of lading (E-Bills) to replace traditional paper bills. Take-up has been relatively slow, but over the past few years BOLERO and ESS (two E-Bills of lading providers which have been approved by the International Group of P&I Clubs) have reported substantial growth in the use of their platforms¹.

The incentives to finding an alternative to paper bills of lading include:

• Administrative costs: Paper bills are costly from an administrative perspective. A UN study from the late 1990s estimated the global cost of processing trade paperwork at approximately US$420 billion a year. This, in part, arises because of the number of transactions. In 2014 Maersk calculated that a shipment of refrigerated goods from East Africa to Europe can pass through nearly 30 people and organisations and include more than 200 different interactions and communications.
• Practical issues: The carrier of the goods is obliged to deliver the goods to the holder of the bill of lading on production of one of the original bills. However, in modern international trade, as bills of lading pass through so many hands and the goods they represent are traded so many times, it is unusual for the bill of lading to be waiting at the discharge port when the goods arrive. As a consequence, ship owners will commonly deliver cargo in return for the provision of a letter of indemnity, indemnifying them against the consequences of delivering the cargo without production of a bill of lading, adding to the costs of any transaction. It is also hard to correct mistakes or split cargoes once a paper bill has been issued.
• Exposure to fraud: Fraud is a risk because paper bills can be forged or switched. As a matter of English law, delivery against a forged bill of lading is a misdelivery and it is no defence that it was done innocently.

E-Bills presents a number of advantages including:

• Speed: The speed of transfer of an E-Bill means that a bill of lading can pass through multiple hands and still be at the discharge port when the vessel arrives, removing the need for (and cost of) letters of indemnity.
• Administrative costs: The ease of electronic transfer reduces the significant paper based administration costs.
• Dealing with errors: E-Bills reduce the costs and time spent dealing with inevitable errors because they can be easily cancelled and re-issued.
• Reduced risk of fraud: In one respect the risk of fraud is reduced by audit trails, electronic signature and PIN numbers which make it more difficult to forge an E-bill. However, electronic systems are exposed to new risks, such as the risk from hackers (as highlighted in MSC Mediterranean Shipping Company v Glencore [2017] EWCA Civ 365, where the PIN for an electronic delivery system appears to have been misappropriated by a cyber-attack).

That said, beyond cyber security, there remain a number of hurdles which E-Bills have to overcome. One of the most significant is how to replicate the law and regulations behind a paper bill of lading when in electronic form so as to give the E-Bill functional equivalence.

There are currently three E-Bills systems in the market which are approved for use by the International Group of P&I Clubs: BOLERO (the oldest of the three), ESS and E-Title (the newest entrant). In addition, there are other new challengers in the market who are developing new systems which rely on distributed ledger technology (discussed below).

BOLERO, ESS and E-title require all users to sign up to a multi-party contract in order for their electronic systems to replicate, by contract, the law behind paper bills of lading. However, the downside of this is that if somewhere in the supply chain a party is not a user of the electronic system, a paper bill will need to be issued, which to some extent negates the benefits associated with the electronic system. This disadvantage means that until a critical mass of E-Bills users develops there is less of an incentive to sign up the electronic systems.

Part of the reluctance of many to sign up stems from uncertainty as to whether or not some jurisdictions, particularly those that require a substantial degree of formality (e.g. Indonesia and India), will accept E-Bills. This means that while many jurisdictions may in theory accept E-Bills, some users are only considering their use in more developed markets. On top of that is a general resistance in the market to change; many users are comfortable with the current paper system (despite there being plenty of room for improvement). And of course there are valid concerns regarding hacking/cybercrime risks as highlighted in the Glencore case mentioned above.

Despite decades of slow adoption, over the past few years E-Bills systems have reported substantial growth in the use of their platforms. So what has prompted this increase in users? There are likely to be multiple factors, but some major drivers appear to be:

• A greater recognition in the shipping industry that adoption of digital technology is likely to be essential to remaining competitive in the future.
• Acceptance by the International Group of P&I clubs and influential shipping associations such as BIMCO, adding momentum to the growing acceptance of E-Bills.

Key industry players having signed up, encouraging others to do so, meaning that some sectors of the shipping industry may be reaching critical mass. For example, ESS reports that 61% of the world tanker fleet is now signed up to its CargoDocs system.  This in turn encourages other sectors.

One interesting area which could further drive the adoption of E-Bills is the development of E-Bills systems which use smart contract and blockchain and distributed ledger technology solutions (the technology underpinning the Bitcoin cryptocurrency). A blockchain is a digital, distributed ledger, with identical copies maintained on multiple computer systems controlled by different entities².

These technology platforms could provide a number of exciting opportunities through the automation of contracting via smart contracting models to the automation of record-keeping with distributed ledger technology. While potential deployment of these solutions may still be some time off, bills of lading are an area of interest for technology specialists in this area.

Some existing E-Bill providers and new entrants such as Wave (a start-up backed by Barclays Bank)are already looking to develop systems which use distributed ledger technology.

There are a number of potential benefits to these new technologies, including providing transparency of transacting history and immutability of records (on current computing power), while automation provides potential for cost cutting and other efficiencies.

However, in the short-term, wide-scale adoption of these technologies may be limited. Similarly, many users are likely to have to still sign up to a multiparty contract to act as a framework under which the technology solutions will operate. This means that in the short term at least, these systems may still suffer from the same hurdles as traditional systems, in that they will need critical mass to generate sufficient incentive for wholesale adoption in the shipping industry.

How long it will take for E-Bills to replace the use of paper bills across the majority of the of the shipping industry is unclear. Further development is likely to occur sector by sector and there are some sectors of the shipping industry which appear to be ripe for adoption.

LNG is one such example. Adoption of E-Bills in LNG trading has been slow to date. For example, ESS reported the first used of its CargoDocs E-Bills for LNG trading only relatively recently, in September 2016³. Given the limited amount of companies in the LNG market, the confined number of LNG terminals around the world and the fact that LNG is a product than can be traded multiple times before final delivery, it seems to be an area of the shipping industry which is well placed for the wider adoption of E-Bills.

There are still various barriers to adoption which need to be overcome. However given the huge benefits of paperless trading, the overwhelming gravitational pull must be towards a world in which E-Bills eventually become the norm in all sectors of the shipping industry.

If developments such as the use of distributed ledger technology are successful, this is only likely to add to the momentum driving the increasing use of E-Bills systems.