Electronic bills of lading (eBLS) have been gaining traction in the international markets, and trade commodity financiers are increasingly recognizing eBLs as valid collateral. The need for a secure and paperless way to manage cargo information in today's markets is obvious, and eBLs seem to answer that need. But is there a downside? Below, we take a look at some of the potential challenges surrounding their use.
Recent changes in English law have brought a legislative framework to recognize eBLs as a legal equivalent to traditional physical bills of lading. This is clearly a welcome development, but in this new and untested area of law we examine the potential pitfalls.
In a global trade and commodities finance market worth trillions of dollars, the risk of exposure to fraud is ever-evolving, as demonstrated by several high-profile cases, such as the litigation arising out of the Hin Leong fraud.1 Trade finance has come under increasing scrutiny as a result. While eBLs go some way to mitigating the risk of fraud in the global supply chain, they also pose new opportunities for fraudulent actors.
What is a bill of lading?
Under English law, a bill of lading is a title document which evidences legal ownership of goods in transit. It is issued to a seller once the goods have been loaded onto the ship and is then used by the buyer to claim the goods at the port of destination. If these goods are financed, for example by way of a letter of credit or a trade finance loan, the bill of lading will form an important part of the collateral for the financing. Traditionally, the physical original bill of lading will need to change hands through various parties in the transaction chain. As trade and commodities finance lawyers we often see the parties to a financing transaction accept the (legally imperfect) position of an endorsed copy of a bill of lading in the interest of pragmatism.
Legislative developments and potential gaps
UNCITRAL has developed a Model Law on Electronic Transferable Records, which has already been adopted in a handful of countries, including Singapore and Bahrain. More recently, the Electronic Trade Documents Act 2023 (the ETDA) incorporated the UNCITRAL model into English law, giving eBLs which meet the requirements of the ETDA equal legal standing under English law with their paper equivalent. As English law is the common framework for resolving cross-border trade disputes, the enactment of the ETDA represents a significant shift towards modernization.
As a result of the ETDA, an eBL will be recognized as evidence of title to the consignment in the same way as a bill of lading in paper form, provided the eBL meets the following requirements, as set out in the ETDA:
- Information is held in electronic form which, if contained in paper form, would lead to the document being a paper trade document
- A reliable system is used to:
- Identify the document so that it can be distinguished from any copies
- Protect the document against unauthorized alteration
- Ensure that it is not possible for more than one person to exercise control at one time
- Allow a person who is able to exercise control to demonstrate that the person is able to do so
- Ensure that a transfer of the document transfers control
- When determining whether a system is reliable, the matters that
may be taken into account include:
- Rules of the system that apply to its operation
- Measures taken to secure the integrity of the information
- Measures taken to prevent unauthorized access
- Security of the hardware and software
- Regularity of independent audit of the system
- Assessment of reliability made by a supervisory or regulatory body
- Provisions of any voluntary scheme or industry standard
The electronic bill of lading appears to present a highly pragmatic and environmentally conscious solution to a fast-paced industry that has until now relied on antiquated and imperfect processes. However, in making these advancements some of the protections of the paper regime have been left behind. It is interesting to note from a legal perspective that, whilst the ETDA provides for the possible conversion of an eBL to a paper bill of lading, the legislature chose to incorporate the nature of the technology as an inherent component of the eBL. Only when an eBL is administered on a reliable system does it qualify for recognition as a valid document of title. Whilst the ETDA provides guidance as to the characteristics of a reliable system this is an untested area of law which could open up grounds for challenge. Suitably advanced platforms for eBLs are still emerging and evolving. In a highly politically charged landscape, it is not inconceivable that platform providers holding title documents worth billions could be subject to malicious attacks designed to disrupt financial markets. A catastrophic event targeted at this technology could bring into question a system's reliability for the purposes of the ETDA.
Unlike the system of paper bills of lading, which in practice has involved the issuance of multiple backup copies of a bill of lading, the eBL as contemplated by the ETDA consists of a single digital original with no prospect of a fallback. This then raises fundamental questions around the very legal nature of a purported eBL which, through the exposed vulnerability of the platform, fails to meet the criteria of the ETDA; was such an eBL ever, in fact, a valid document of title for the purposes of English law? Would an insurer providing coverage for war or terrorism risks or systems failures acknowledge a claim for loss on the basis of a flawed title document?
Fraud risks remain
No system is perfect to eradicate the risk of fraud.
With the movement of trade documents online, the level of sophistication required for fraudulent acts with eBLs significantly increases and, arguably, the prevalence of fraud should therefore reduce. However, the platform offering for this market is still relatively in its infancy and is largely unregulated—and the potential volume of transactions is massive. At the same time, a necessary feature of a successful eBL platform is buy-in from a critical mass of market participants. It remains to be seen whether the market will coalesce around one or a handful of platform providers, and consequently whether there are sufficient providers or whether there is a risk of excessive reliance on one provider. These factors could present a perfect storm for a sophisticated fraudulent act on an ambitious scale. This in turn raises questions as to who bears the risk of the platform being hacked.
Conclusion
Electronic bills of lading as a concept have been in existence for several decades, but participants have only recently begun embracing them in practice. In large part this is due to the protection afforded by the ETDA, which provides a legal framework for electronic trade documents under English law. However, the transition away from traditional paper bills of lading has been gradual, and conflict of laws questions on enforcement still remain.
The alignment of English law to modern trade practices is a very welcome advancement for our industry. Stakeholders should consider carefully all angles of risk in embracing this new development.
If you have any questions regarding the use of electronic bills of lading on your transaction, please do not hesitate to reach out to us.
This article was originally published on www.dentons.com.
Footnote
1. See, for example, Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corp Ltd & another [2024] SGCA 31 and UniCredit Bank AG v. Glencore Singapore Pte Ltd [2022] SGHC 263.
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