Jacqueline Cook, Of Counsel, and Larissa Head, Trainee Solicitor, sum up the key points of the Electronic Trade Documents Act 2023 (the Act) which will shortly receive Royal Assent and come into force two months later.
What is the aim of the Act?
The aim of the Act is to allow certain documents used in trade and trade finance in electronic form to have the same legal effect as paper documents. Until the Act comes into force, these electronic trade documents are not considered capable of being (physically) possessed under English law to enforce rights to payment of sums of money or delivery of goods on board a vessel or in a warehouse.
How will the Act affect the trade finance industry?
The effect of the Act could be far reaching for businesses in the trade and trade finance industry, as nearly all documents used in international trade have until now been in paper form, other than a few platforms where contractual arrangements between the parties and the platform provider set out the terms of recognition of such electronic versions of those trade documents.
The following documents will have the protection of the Act and will be recognised in their electronic form:
- bills of exchange and promissory notes;
- bills of lading and ship's delivery orders;
- warehouse receipts and mate's receipts;
- marine insurance policies and certain insurance certificates.
Businesses will need to use a reliable system that affords one person exclusive control of the relevant electronic record of that trade document.
What is a 'reliable system'?
There must be a 'reliable system' for an electronic trade document to fall within the scope of the Act. The Act itself does not specify the exact technology requirement as the Law Commission was keen to make the Act technology neutral. The electronic system would be one which is used to:
- identify the document so that it can be distinguished from any copies;
- protect the document against unauthorised alteration;
- ensure that it is not possible for more than one person to exercise control of the document at any one time;
- allow any person who is able to exercise control of the document to demonstrate that the person is able to do so; and
- secure that a transfer of the document has the effect of depriving the transferor of control of the document
How will the Act affect the future of trade?
The Act provides a welcome solution to solve the issue that certain intangibles cannot be 'possessed' under English law. By removing the 'blocker' requirement, the Act allows specified electronic trade documents to be possessed and treated as equivalent to paper trade documents.
While the Act offers considerable new opportunities for the trade finance industry, businesses must deal with the mechanics of offering and accepting electronic forms of trade documents. To avoid risks associated with fraudulent 'doubling' of documents, businesses need to be able to build on their own security and integrity around fraud prevention, as the Act is not intended to be anti-fraud legislation.
The final debate in the House of Commons recorded that, with the introduction of the Act, the UK is showing other countries the way, so the practice of international trade should become more efficient and much more environmentally-friendly.
Please see our client alert for the key advantages of the Act for market participants in the trade finance industry.
[1] https://publications.parliament.uk/pa/bills/cbill/58-03/0327/220327.pdf
