By Client Legal Director, Natalia Samodina
The Electronic Trade Documents Act 2023 (“ETDA”) came into effect on 20 September 2023, ending centuries of tradition and bringing with it recognition of the same legal effect previously afforded to paper trade documents to their electronic counterparts. Below are the key points to note about ETDA’s enactment.
One: The Basics
ETDA extends to England, Wales, Northern Ireland and (with some exceptions and modifications) to Scotland and applies only to trade documents governed by English law.
Two: What is an Electronic Trades Document?
- To be able to be defined as an “electronic trade document” (or “ETD”), a document must have the criteria of a “paper trade document” (or “PTD”). The latter is defined broadly as a document “used in trade or transport of goods or in financing such trade or transport”. The non-exhaustive list of examples includes documents commonly used for the shipment, insurance and trading of goods such as a bill of lading, a bill of exchange, a warehouse receipt and a marine insurance policy.
- An “ETD” is defined as such information in electronic form which would constitute a “PTD” if a “reliable system” was used to (among other things):
a. identify the document so that it can be distinguished from any copies;
b. protect the document against unauthorised alteration
c. secure that a transfer of the document has the effect of depriving any person who has control of the document immediately before the transfer of the ability to do so, unless they are a transferee.
Notable exceptions: an uncertificated unit of a security that is transferable by means of a relevant system in accordance with Uncertificated Securities Regulation 2001 (S.I. 2001/3755) is excluded from the scope of an ETD.
Three: What is a "reliable system"?
To determine whether a platform is a “reliable system”, ETDA outlines the following factors to consider:
- any rules of the system that apply to its operation;
- ·measures taken to secure the integrity of information held on the system;
- measures taken to prevent unauthorised access to and use of the system;
- the security of the hardware and software used by the system;
- the regularity of and extent of any audit of the system by an independent body;
- any assessment of the reliability of the system made by a body with supervisory or regulatory functions;
- the provisions of any voluntary scheme or industry standard that apply in relation to the system.
Although electronic platforms for the origination and use of electronic trade instruments existed prior to the ETDA, they were not subject to unified standards and government regulation and their use was governed contractually as between the user and provider. By codifying the above guidance, ETDA has the effect of both regulating and unifying rules applicable to such platforms.
Due to the non-prescriptive nature of the above criteria, their interpretation by competing platform providers will likely diverge and we can expect some initial turbulence in this space.
ETDA is silent with respect to the consequence of a platform’s non-compliance with the above criteria. As such, outside of the usual remedies available in contract and tort, the rights of a user against the platform provider under ETDA in such a case are presently unknown.
Four: Possession and indorsement
ETDA permits a person to “possess, indorse and part with possession of an ETD” and further states that “anything done in relation to an ETD has the same effect in relation to the document as it would have in relation to an equivalent trade document”.
The impact of this section on UK international trade is hard to underestimate. Whereas previously the owner of goods (or of a chose in action, in case of such documents as a promissory note or a bill of exchange) had to be in possession of a physical document to evidence title, this restriction has now been removed under English law.
In practical terms, transactions in most facets of international trade, be that shipping, insurance, trading, finance or storage, can be conducted more nimbly by eliminating the need for physical printing and delivering of trade documents, saving the holders time and costs in the process. The cost saving will, however, be to a certain extent offset by the costs of use of electronic platforms. Electronic transmission would also eliminate the risk of documents being lost or defaced in (physical) transit.
Five: Change of form
A PTD can be converted into an ETD and vice versa if (and only if):
- a statement that the document has been converted is included in its new form; and
- any contractual or other requirements relating to the conversion have been complied with.
This section provides the holder of a trade document with a flexibility to switch between the forms, if need be.
The second limb, in particular, would prove a solution for any restrictions to the use of ETDs overseas. If such exist in the jurisdiction of e.g., a goods buyer (a bill of lading), a financial instrument obligor (a bill of exchange) or a storage facility (a warehouse receipt), these could potentially be addressed by switching the form.
The sections of ETDA relating to possession and indorsement and change of form do not apply to trade documents issued prior to 20 September 2020.
Six: Governing law provisions
As ETDA applies only to trade documents governed by English law, in the context of cross-border trade, it would be advisable to include the express governing law clause into the relevant ETD in order to benefit from ETDA’s provisions.
Seven: Impact of EDTA
The introduction of ETDs is a positive development for UK trade. Additionally, as a high proportion of international trade, trade finance and associated shipping and insurance transactions are governed by English law, the impact is going to be global. Below is the summary of the key changes that ETDA is likely to bring to the trade industry:
- increased efficiency – dispensing with (or at least complementing) the paper documents will bring with it cost and time savings for trade businesses, as well as the reduced risk of documents being lost in transit due to postal errors;
- higher information integrity – the successful implementation by electronic platform providers of “reliable system” platforms will (i) heighten information integrity and reduce the risk of loss of confidential information and fraud, (ii) increase visibility of the electronic transaction records, and thereby in time (iii) increase the users’ confidence in using ETDs;
- increased use in cross-border transactions – the flexibility of “change of form” provisions would ease some concerns associated with uncertain or restrictive overseas jurisdictional rules applicable to ETDs in a cross-border context. The additional benefit of “change of form” provisions may have the effect of reducing the relevant party’s legal fees associated with putting the transaction in place;
- positive environmental impact – the annual volume of PTDs has been in the billions for decades; proportionate reduction in favour of ETDs will reduce de-forestation and energy consumption;
- increased use of trade finance – the combination of the ease, speed and reduced cost associated with the use of ETDs, as well as the assurance of the “change of form” flexibility (particularly in the cross-border context) is likely to encourage both the existing and the emerging trade participants to scale up their businesses by utilising ETDs commonly used in trade finance (such as promissory notes and bills of exchange);
- increase in trade volumes – the cumulative effect of the above benefits is estimated by the British government to result in an increased volume of UK international trade of £1.1 billion over the course of the next ten years.
Please contact Natalia Samodina at natalia.samodina@thelegaldirector.co.uk if you would like to know more about how this piece of legislation can change your business.
