UK: The Concept Of Negotiability And The Electronic Bill Of Lading - An Overview

Last Updated: 5 September 2001
Article by Victor Emerson

Abstract- Introduction

Negotiability is a very important concept in international commerce and is generally associated with payment and fiscal matters. In the course of its evolution and development, certain documents have come to be accorded negotiable status e.g. the bill of exchange.

However other documents that are not directly concerned with the monetary or fiscal aspect of trade have also come to be conferred with negotiable status as a result of mercantile practice and custom. In commercial parlance, the Bill of lading is regarded as quasi-negotiable primarily because of its transferable status as a document of title. This attribute of the bill of lading has made it very attractive to traders and remains the most prominent factor for its indispensability in international commerce.

Over the years the use of paper documents (particularly the bill of lading) in international commerce became burdensome due to the numerous defects and disadvantages associated with the use of paper as a medium of communication. The practice of using Bill of lading particularly became associated with delay of the goods and perhaps even more alarming, fraud, due to the mercantile practice of issuing bills in sets of originals.

The concerns associated with the use of paper in international commerce led to the emergence of the move towards the dematerialization of documents using electronic technology. The incursion of electronic technology in the area of commerce has since metamorphosed and is now subsumed under one generic heading titled ‘Electronic commerce’. This technology aims to achieve a paperless environment in any commercial or business transaction using the Internet and any other electronic but related technology.

Today, a very high level of dematerialisation has been achieved by electronic means and it is possible to transact business without the use of paper. The paper bill of lading has not been spared by this revolution and virtually all its functions have been usurped by electronic means. However the negotiability of the bill of lading remains an issue in spite of the tremendous electronic developments made.

What then is a negotiable instrument and what are its attributes? How does the Bill of Lading derive its negotiability? Can negotiability be achieved in the light of the electronic simulation of the functions of the bill of lading? What progress has been made in the journey towards negotiability of the electronic bill of lading?

This paper offers an overview of the concept of negotiability in relation to the electronic bill of lading.

"With the advent of new technology, securities are becoming dematerialised or immobilized in depository institutions; negotiable instruments are giving way to electronic fund transfers; physical cash will soon be displaced by the electronic purse; the paper-based bill of lading and letter of credit may one day be consigned to oblivion"

Professor Roy Goode1

 

The Essence Of Negotiability

The concept of negotiability is an offspring of commercial necessity. It developed principally in response to the need by merchants to avoid carrying large sums of money over long distances due to the difficulties and dangers involved2. The rationale behind negotiability was simplicity personified in the sense that it allowed for the recognition of an ordinary piece of paper to be accorded negotiable status and constituting an authority to pay to the holder a sum certain on a fixed date and time. This concept of recognition coupled with the certainty that it would be honoured when presented properly provides the framework and the central, organising theme for the law of negotiable instruments.

A true negotiable instrument must be capable of the following:

(i) It must be capable of being transferred and without notice.

(ii) It must be capable of passing a full and legal title that is free from all equities upon delivery to a subsequent holder.

(iii) Its negotiable status must be ascertainable by an examination on the face of the document without the additional burden of referring to any other document.

(iv) The words contained on the document constitutes a formal promise against the maker and becomes liable to be performed if the promisee relies on it in good faith.

(v) The document and the promise contained thereon constitute an independent transaction that is autonomous and isolated from the transaction that generated its use.

(vi) In view of the foregoing, it becomes pertinent that the instrument be tangible and capable of physical manifestation of the intangible promise3. Thus it must be a physical item that can be dealt with in any manner.

The bill of exchange offers the best illustration of a negotiable instrument. It enjoys all the attributes of negotiability and is very popular as a means of payment in both domestic and international transactions. It achieves ‘essential negotiability’ by protecting a holder in due course from any defenses that could emanate from the underlying transaction thus ensuring the certainty that is so much coveted in commercial transactions. Therefore a merchant could accept a bill in lieu of payment secure in the knowledge that it would be honored without bothering about its historical antecedents.

Negotiability Of The Bill Of Lading

The bill of lading is a document issued on behalf of a carrier of goods by sea to the person (usually known as the shipper) with whom he has contracted for the carriage of goods4. It is a commercial document with a long history and has over the time acquired special commercial significance and unique legal status5 thus successfully laying claim to the title of the most versatile document in commercial history.

It is generally accepted that the bill of lading performs three traditional functions. Firstly, it serves as a receipt for the goods described in it and received by the carrier for shipment. Secondly, it is evidence of the contract of carriage and lastly it serves as a document of title in respect of the goods.

This work is however concerned with the function of the bill of lading as a document of title.

Under English law, the expression "documents of title to the goods is used in two senses; a narrow common law sense and a much broader statutory sense6. While there is no authoritative definition of documents of title to goods at common law, it would appear that "a document relating to goods the transfer of which operates as a transfer of the constructive possession of the goods and may operate as transfer of the property in them"7 suffices. The paper bill of lading meets this requirement and is recognized as a document at common law8 to the exclusion of any other class of documents9.

That the bill of lading can effect the transfer of constructive possession of the goods to the transferee confers on it some measure of negotiability. The bill of lading is within the context of English law however regarded as quasi-negotiable even though it possesses most of the features of the negotiable instrument. This is because it lacks one of the attributes of true negotiability i.e. the ability to pass free from all equities and its transfer does not confer a better title on the transferee10.

However, in mercantile practice, the ‘negotiable’ bill of lading a document of title performs three important functions:

First, it provides proof of ownership of goods thus facilitating the movement of goods between various borders. This is particularly reflected in string and multiple string contracts where the seller just endorses the bill to the new buyer who immediately acquires all proprietary rights in the goods.

Secondly, apart from facilitating easy dealings in goods, the bill of lading also represents a bundle of rights entitling its holder to claim some form of compensation against the carrier and/or the insurer in the event of loss or damage to the goods. These rights are intangible and incapable of physical delivery and are generally locked up in the document (i.e. bill of lading) such that a transfer of the document also operates as a transfer of these rights. By endorsing and delivering the document, the rights of the previous holder are subsumed and conferred on the subsequent holder.

Thirdly, the ‘negotiable’ bill of lading is acceptable as collateral security to banks and other financial institutions involved in the financing of international trade.

The ‘essential negotiability’ of the bill of lading emanates from its first two functions as a document of title and remains the major reasons why the bill of lading remains attractive and relevant to traders till date despite repeated demands and calls for its discontinued use in the light of the fact that other documents can perform its other functions creditably well without the problems associated with the need for its physical presentation11.

The Electronic Bill Of Lading

Achieving ‘essential negotiability’ has been the most challenging aspect of replicating the functions of the bill of lading by electronic means. This is due to a number of reasons the most relevant ones being highlighted as follows:

Firstly, the laws that regulate bills of lading presuppose the use of paper in transferring ownership or proprietary rights in the goods. This creates problems for the implementation of the electronic bill of lading which aims to dispense with the need for the physical transfer of documents. Similarly in a string or multiple string contract, the ownership of the goods is transferred by the mere endorsement and delivery of the bill of lading and all the last holder of the bill of lading has to do to obtain the release of the goods to him is to present it to the carrier at the port of discharge.

In view of the challenge posed by the negotiability of the bill of lading, it is not surprising that various schemes and experiments aimed at electronically replicating this characteristic of the bill of lading were made by a number of international organisations.

The first of such experiments was the SEADOCS project which was described as the first serious attempt to facilitate the electronic transfer of the bill of lading12. Unfortunately this attempt failed for a number of reasons the most pertinent of which is that it failed to achieve true negotiability as the acts of notifying the carrier of subsequent changes in ownership contravenes one of the conditions of negotiability i.e. transferring the instrument without any notice whatsoever. This experiment never eliminated the use of paper document and rather relied on it.

The second attempt was initiated b the CMI (Comite Maritime International), an organisation dedicated to the facilitation and improvement of International maritime trade and transport. The attempt by the CMI led to the introduction of the CMI Rules for Electronic Bill of lading in 1990.The rules are contractual in nature and as such the parties must expressly incorporate them into their contract for them to have effect. Under the CMI rules the bill of lading starts life in an electronic form and does not require the existence of a paper bill.

The attempt failed for some other reasons that cannot be articulated in this work13. Again essential negotiability could not be achieved. However even though the experiment failed, the CMI Rules survived and they still play a prominent role in the next attempt to be discussed below.

The Bolero Bill Of Lading

The attempt by Bolero represents the turning point in the journey toward electronic trade documentation. This is because while the other experiments discussed above were largely restricted to the bill of lading, Bolero aims at providing a secure environment for the exchange of electronic trade documents.

Bolero which started off as an European Union initiative has been described as the ‘one of the world's largest legal studies into electronic commerce'14 and offers ‘the opportunity to have completely paperless systems with attendant cost savings and customer service improvements’15.

The Bolero system went operational in September, 1999 and relies extensively on its Rulebook. These rules are contractual and a condition precedent to the use of the Bolero system is that the parties must expressly agree to the use of the Bolero Rulebook. The rulebook in essence governs the validity of electronic transactions and the legal effect of Bolero Bills of Lading.

Bolero has devised a clever but definitely practical method of achieving ‘essential negotiability’ using electronic bill of lading. It achieves this by relying on the common law concepts of attornment i.e. the transfer of the bailor of its right in the bailed property and novation i.e. basically a new contract on the same terms.

The transfer of constructive possession is effected by simple making the shipper a ‘bailor with constructive possession of the goods’. All the bailor has to do to transfer constructive possession is for him/her to attorn his interest to a successor who becomes designated as new holder. Thereafter the carrier as a bailee holds the goods to the order of the new holder.

The transfer of the contract of carriage and all the rights emanating from it is effected by the means of novation. The carrier who is the continuing party in each successive contract designates Bolero as its agents. Bolero thereafter remakes each contract with the new transferee on behalf of the carrier. A full detail of how the Bolero Bill of lading works is provided in the company’s website at www.bolero.net.

From the foregoing it is clear that negotiability can be achieved without the use of paper although there is provision for the reversion to paper should the need arise. To this end, the activities of Bolero deserves a lot attention and commendation and may well be the most important attempt at electronically simulating the functions of paper documents in international trade practices.

However, Bolero is currently undergoing the process of gaining acceptance within the business community. A visit to the website will reveal that a lot of companies and organisations including some major players in International maritime commerce are signing up to bolero almost on a daily basis. However the website fails to tell us the percentage or numbers of the other players that have not signed up to it. Furthermore the predominant influence of European/US concerns raises the issue of acceptability from another perspective. This issue is further aggravated with development of parallel systems along regional lines as well. One of such systems is TEDI (Trade and Settlement EDI) which is basically a Japanese affair. In the event of a merger between these two systems, a new problem of anti-competition activities may arise.

Another issue is that despite Bolero’s success so far in providing a paperless environment for trade documents, there is still the problem of providing the feeling of comfort associated with paper. The tangibility of paper is still a force to be reckoned with. In the area of trade financing, Banks still insist on the presentation of paper bills of lading before they issue letters of credit. This insistent on paper bills by the Banks is passed along by the shipper who would also demand for the issuance of paper bill of lading from the carrier.

The next few years is very crucial to the success of Bolero and it s quest in proposing a global electronic network has been rightly described as ‘a bold gambit’16 in a sector where the stakes are really high.

Developments in the United States

The United States has always been in the forefront of the advancement of electronic commerce and there is much to be learned in the light of the developments happening there. The last century witnessed the enactment of three significant Acts aimed at enabling e-commerce. These are the These are the Electronic Signatures in Global and National Commerce (E-SIGN) Act 2000, the Uniform Computer Information Transactions Act (UCITA) 1999 and the Uniform Electronic Transactions Act (UETA) 1999.

The laws regulating commercial law in the US are largely codified under the provisions of the UCC. However the National Conference of Commissioners on Uniform State Laws (NCCUSL)17 has in the past few years been busy revising the articles of the UCC with the general aim of ensuring their relevance in an electronic environment. Article 7 which deals with the Bill of lading amongst others is presently been revised and it will be interesting to see the outcome of this exercise18.

Developments in the United Nations

The UN through the work of its commission on International trade and Law (UNICITRAL) has always been involved in the implementation of electronic commerce in International trade and not only has it adopted its model law on electronic commerce in 1996, its Draft model law on Digital signatures is also expected to be adopted by UNCITRAL at its 34th session in 2001.

The commission’s working group on Electronic commerce is presently considering ‘possible future work on Electronic commerce: Transfer of rights in tangible goods and other rights’. Rights associated with the transfer of such documents like the bill of lading, securities, Cotton warehouse receipts etc will be generally considered. The 38th session of this group was held between 12th -23rd March, 2001.

In concluding, it is to be noted that the concept of negotiability of the bill of lading remains very relevant in commercial matters and cannot be dispensed with particularly in International trade. The attention being devoted to the implementation of the electronic bill of lading along national regional and Global lines bears witness to this fact. While the activities of Bolero has gone a long way in simulating negotiability of electronic documents, the question whether the electronic bill is an acceptable and suitable replacement for the paper bill remains largely unanswered. The paper bill of lading forms an integral part of communication in the area of commerce and it is advanced that an alternative must be able to perform all its functions and more. The tangibility and comfort the paper bill presents must be capable of being replicated and cannot be dispensed with.

This article is now published in Issue 3 Feb/March 2001 Journal of Electronic Commerce law and Practice (Butterworths)

 

Footnotes

1) Goode, R., ‘Commercial Law in the next Millenium’, (Published under the auspices of the Hamlyn Trust, Sweet & Maxwell), 1998.

2) James, J., Richardson’s Guide to Negotiable Instruments, (Butterworths), (8th Edition), 1991

3) Toh See Kiat; ‘Paperless International Trade: Law of Telematic Data Interchange’ (Butterworths), 1992

4) Benjamin’s Sale of Goods, (5th Edition), (Sweet & Maxwell), 1997

5) R. Bradgate; ‘Commercial law’, (2nd Edition), (Butterworths), 1995

6) Benjamin’s Sale of Goods, Paragraph 18-005

7) Benjamin’s Sale of Goods, Paragraph 18-005

8) See Lickbarrow V Mason (1794) 5 T.R. 683. Section 1(4) of the Factors Act 1889 defines document of title to goods and includes not only the bill of lading but also other documents excluded by common law e.g. delivery orders and warrants.

9) Official Assignee of Madras V Mercantile Bank of India Ltd. [1935] AC.53. The relevance of the Bill of lading as an instrument of transferring constructive possession was emphasized in the much cited dictum of BOWEN L.J in SANDERS BROS V MACLEAN (1883) 11 QBD 327 at 341 (C.A)

10) C. Johnson; ‘EDI and negotiable instruments- legal issues’ 1992, Vol.6, International Yearbook of Law, Computer & Technology. Page 5

11) Diane Faber, "Shipping Documents and EDI" 1992, Vol.6, International Yearbook of Law, Computer & Technology, page 73; Diane Faber., "Electronic Bills of Lading" 1996 Lloyd’s Maritime and Commercial Law Quarterly, page 232; Anthony Lloyd; ‘The Bill of lading: Do we really need it? 1989 Lloyd’s Maritime and Commercial Law Quarterly, page 47 and Jennifer James., ‘Richardson’s Guide to Negotiable Instruments’, (Butterworths), (8th Edition), 1991.

12) Yiannopoulous, A. N., (ED.), Ocean Bills of Lading: Traditional forms, Substitutes and EDI Systems, (Kluwer Law International), 1995.

13) A comprehensive report of why the CMI experiment failed is provided in Yiannopoulous, A. N; (ED.) ‘Ocean Bills of lading: Traditional forms, substitutes and EDI systems’ (Kluwer Law International), 1995

14) Peter Scott, Commercial Director for Bolero quoted in David Clarke; ‘Unclogging International Trade’ www.wired.com/news/print/0,1294,20614,00.html

15) Mariika Virrankoski; News from Bolero International Limited; Bolero .net – A solution for Electronic Trade Documentation.

16) David Clarke, ‘Bolero aims to get export singing a digital tune’: www.webcom.com/~pjones/bolclarke.htm

17) This is a body that has worked for the Uniformity of state laws since 1892 and is responsible for the enactment of the Uniform Commercial Code- the codified legislation for commercial law in the United States. This code has been adopted and is used in 49 of the 50 states in the US.

18)Other articles being revised include Art 2 which deals with sales and Art 3 which deals with Negotiable instruments. For those interested in regular updates and recent developments regarding the work of the UNCCL, the website of the NCCUSL is accessible at www.nccusl.org

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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