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19 July 2023

Build it, but will they come? Thumbs up for new UK Electronic Trade Documents Act 2023

Head of Trade, Treasury and Risk
As the UK Electronic Trade Documents Bill is enacted into law, with a start date in two months’ time, will the ‘build it they will come’ approach work for trade digitisation, or is more needed? TXF investigates the importance of ‘reliable systems’, and is there any significance of a humble ‘thumbs up’ emoji in Canada for the progress of trade digitisation?

I don’t intend for this article to be longer than the new UK Electronic Trade Documents Act 2023, but that may be a challenge. The act is only seven pages long, if printed on paper (which, of course, somewhat undermines the purpose), but it stands to have a disproportionately big impact on international exports and imports and will put electronic trade documents on the same legal footing as paper ones. 

It’s a neat act, and in those sparse pages it defines what paper trade documents mean – giving common examples, defines electronic trade documents, explains what it means by possession (very neat, and there used to be a big stumbling block for definitions of digital possession), indorsing [which means legal signatures] and parting with possession (equally neat), and how and when documents can change form, exceptions, what existing laws the act is going to apply eo (consequent provision), what the act is called (see the paragraph earlier), and when it’s going to come into force (two months after it was passed on 10 July). And, er, that’s pretty much it. Thumbs up (I’ll come onto that later). 

And with this, the Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act of 1992, the bedrock legislation of large parts of international trade, can be amended to allow for the use of digital negotiable instruments by the simple insertion of “or to anything that is an electronic trade document for the purposes of the Electronic Trade Documents Act 2023” in the case of the former, and by an omission in subsections of the latter. 

With Commonwealth countries using the same pieces of foundational law, the theory is that they will also soon be able to adopt the new bill wholesale or with minor changes, which could amplify legal changes globally. 

First a hat tip to the Law Commission which drafted and shepherded the bill, and to the International Chamber of Commerce (ICC) for their dogged efforts for the past five years to get this succinct document into law.

It is built. But will they come?

What will the new act mean in practical terms, and what now for banks and corporates? “Damn right that ‘build it and they will come’ doesn’t usually work,” says one international trade consultant. Where will that momentum for change from paper-based trade to digital come from?

“The experience of the last few years has shown us that it’s wishful thinking to expect sudden change when a new trade technology becomes available,” says Natasha Condon, global head of trade sales at JP Morgan. “Most of the corporates I’ve spoken to are adopting a ‘wait and see’ policy, whereby they’re happy to look at solutions if the bank actively offers them, but they’re not going out looking for those solutions themselves.” 

While it’s big news for trade finance banks, Condon says, “A lot of corporates still don’t know much (if anything) about digital negotiable instruments (DNIs), and there is a lot of information and guidance they will need in order to get comfortable with any specific technology provider here. We need to get out there and explain to our clients what is happening and how they can take advantage of the change.”

Banks may have to take a lead in explaining DNIs

Will it then be reliant on the banks and financial institutions to lead any charge to build momentum to get their clients to shift away from paper-based trade? 

“I’m excited about the possibilities of converting our existing paper-based business to digital,” adds Condon. “And we have some specific flows that I cannot wait to convert as soon as I have the opportunity! It will be a smoother, faster, greener and safer experience for clients if we get it right. We intend to take a targeted approach where we can really make a difference to the client experience, rather than trying to boil the ocean.”

And if banks are not trying to do everything at once [boiling the ocean], are there any practical tips for corporate clients?

Rooting for ‘reliable systems’…

“The technology landscape for DNI is not mature yet, and while there are a few well-known providers ready to go there are a lot more who are still thinking about it. The new act refers to ‘reliable systems’ and right now if you’re a corporate I am not sure that you have enough information to identify what’s out there that qualifies,” says Condon. 

Negotiable instruments cover a lot of different things – not just bills of lading but bills of exchange, promissory notes, warehouse receipts, etc. “So my recommendation to corporates is ‘think small’ and find a logical starting point, maybe an existing flow with a counterparty you know well and who is interested in making a good trading relationship more efficient. You don’t have to do everything at once. And ask your banks what tools they have available to help,” Condon says.

Indeed, in that reassuringly short new act, the word ‘reliable’ features three times. The act deliberately does not spell out what those ‘reliable systems’ will be and is refreshingly not prescriptive, but that does leave a space that the industry is vying to fill. 

“The industry is not short of talent and available technology to deliver reliable systems, the key problem to solve for are the commercial models and how to execute cheaper, faster, and simpler trade finance solutions leveraging the new law. The winners are going to be those that solve specific client problems,” says industry expert Daniel Cotti.

…But not creating digital islands

The risk trade financing marooned on ‘digital islands’ always looms – and if anyone deserves having that phrase patented, it’s Michael Vrontamitis, deputy chair of the World Trade Board. “We need to keep this concept of ‘reliable systems’ to be simply executed. When one country certifies a reliable system, it needs to be passported to other jurisdictions. The development of the initial standards around a ‘reliable system’ is going to be quite critical to the success of the bill.”

In defence of ‘build and they shall come’ 

“Build it and they shall come is the message from the Law Commission which they necessarily had to make as all they can do (it's a lot!) is change the law,” explains Sean Edwards, ITFA president. “In fact, plenty of people have been building their own business models, tools and transacting in reliance on, and in anticipation of the act.” 

There is precedent. “The Lloyds, Mercore and Arqit transactions have shown that there is real interest in using digital financial instruments such as bills of exchange and promissory notes, as opposed to bills of lading, and that they represent a viable alternative to both paper versions of these instruments and other forms of trade debt such as invoices. Their benefits for supply chain finance are starting to be explored as they enhance transparency and possession of the underlying payable,” Edwards says. 

Volumes are currently small but scalability is beyond question, he adds. “I expect a very steady ramp-up of business especially when you consider the popularity of these instruments in emerging markets such as the Middle East and Asia.”

MLETR and the Singapore dimension

The new UK act means the UK is the first G7 country to align its trade laws with UNCITRAL’s Model Law for Electronic Transferrable Records (MLETR). Pamela Mar, managing director of the Digital Standards Initiative (DSI) at the ICC in Singapore gives some international context. MLETR adoption is further down the line in Singapore, but has it had the traction people hoped? What is Mar seeing from multinationals along supply chains? Are they are ready, and if not what should they/their banks be doing?

“I agree that ‘wait and see’ is not the approach we are recommending for business!” Mar says. “MLETR is a macro policy measure that will help create the right enabling environment for business to consider digital trade more seriously. It answers the crucial regulatory compliance question decisively and enables business to consider digitalisation strictly on its commercial terms. But digital transformation is challenging for any business – there are many standards, platforms, data flows, and technology questions. This is why the DSI aims to simplify the ‘go digital’ process by harmonising trade data, standards, and technology approaches. Whether MLETR is a starting point or happens midway through a company’s transformation is less important: one needs both in order to reap the benefits. But on an economy wide basis, it is a clear signal that the days of fully digitalised trade will come sooner, with all the opportunities of efficiency, speed, and transparency that it offers.”

Mar continues: “This is why Singapore, with its early adopter approach to MLETR alignment – gives also very strong , integrated support for the digital economy as a whole: for instance, it has created a new genre of digital economy partnerships and agreements with likeminded countries, and of course they back initiatives such as the DSI, for which we are grateful.”

Literal and figurative (thumbs up) and reliable systems

There’s digitisation and digitisation, though (thumb pun intended). A recent decision from Saskatchewan in Canada may have wider consequences. The case, South West Terminal Ltd v Achter Land, 2023 SKKB 116 (CanLII), on the conclusion of a contract by using a ‘thumbs up’ emoji (👍) is relevant in a few ways for MLETR implementation. 

As Luca Castellani, legal officer in the UNCITRAL Secretariat and secretary of UNCITRAL Working Group IV (Electronic Commerce) which oversaw preparation of the UNCITRAL MLETR tells TXF. “Firstly, it is based on UNCITRAL provisions that have been adopted in more than 100 States, and therefore may influence judges sitting outside Canada. This means that enacting uniform laws texts – such as MLETR – provides a larger pool of case law than purely national ones. 

Secondly, it highlights the complexity of real-life transactions (contractual negotiations were exchanged by text, phone, and a photo of a paper-based contract sent by mobile phone) and the relevance of contractual practices established between parties. 

Thirdly, it reminds us of how flexible the notion of ‘reliable systems’ may be. In this case, the parties did not challenge reliability, though systems were quite simple (the identification of the seller was carried out through the mobile phone number). On the other hand, MLETR implementation may require parties’ agreement on the reliability of the system before its use, even if the system may just be an app from the user side.”

But, back to the new act. ITFA’s Edwards says: “As to the thumbs up case, not a surprising decision legally, but maybe not the best standard for digital systems.”

👍 👍 Two thumbs up for the new act then? Ouch, what have we just signed up to?

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