Digital Business Transactions – What’s Next? | Sullivan and Worcester

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[co-author: Stefan Bateson]

On the latest trade and export finance webinar, Geoff Wynne, Head of Trade and Export Finance Group and Sullivan’s London office, presented recent developments in digital options available in trade finance, including including multi-jurisdictional efforts to recognize electronic transferable documents.

The case of digitization

Digitization has been on the agenda of global organizations and national governments for some time. While the International Chamber of Commerce (ICC) has created a working group on digitization, organizations such as the International Trade & Forfaiting Association (ITFA) launched a Digital Negotiable Instruments Initiative, aimed at digitizing promissory note equivalents (PN) and bills of exchange (BE).

Meanwhile, on the lending side, banks have been busy updating existing systems and implementing new digital frameworks, with fintech companies coming up with new solutions based on platforms using intelligence. artificial, smart contracts and digital ledger technology to commercial operators. (Please see our previous blog post “It’s a Digital World – Adopting Technology in Trade Finance” for a brief overview of different digital solutions, including electronic signatures, blockchain-based platforms, electronic payment and the Uniform Rules for Digital Business Transactions (URDTT).)

While the COVID-19 pandemic has certainly increased the appetite of market players to “go digital,” the call for new technological solutions – and the corresponding rules and legal framework – certainly existed long before that. This is undoubtedly due to the fact that the use of paper has historically resulted in late payments and disputes resulting from the mismanagement of physical documents (e.g. bills of lading and shipping documents) and late payments / processing resulting from document mismatches (an estimated 60-70% of documents are rejected on first presentation). As anyone in trade finance knows, letters of credit (LC) are considered a clunky business instrument for urgent transactions – the average timeframe for issuing LCs is 7-10 days – and the reliance on paper documents leaves the door open to potential fraud. All of these problems, which predate COVID-19, have only been exacerbated by the pandemic.

Indeed, the administrative burden imposed by dependence on paper has been highlighted by the Law Commission of England and Wales, which, in its recent consultation paper on electronic trade documents, estimates that global container transport generates 28.5 billion of paper documents per year.[1]

Addressing digital challenges – a global effort

Despite the potential benefits of digitizing commerce, it’s important to remember that technology, unsurprisingly, is changing faster than the law. Fortunately, English law has proven to be robust and flexible to meet the demands of the modern world, electronic signatures being a prime example. However, further reforms will be needed to accommodate electronic business documents and transfer of possession via an electronic system, which are currently not recognized by the Bills of Exchange Act 1882. To date, efforts in England have been concentrated on developing a new definition of “possession” for certain business documents in digital form. Key to this issue is the need for “sole control” and independence of the underlying business document.

As we have already covered on this blog, the Law Commission of England and Wales has published a consultation paper on proposed legislative reforms to recognize electronic transferable documents (consultation now closed), and a draft of Law on electronic business documents must be submitted to Parliament. in 2022.

Meanwhile, the use of electronic signatures is governed by the UK eIDAS regulation.[2], which after Brexit retained most of the EU’s eIDAS regulation.[3] The two eIDAS regulations distinguish between simple, advanced (AES) and qualified electronic signatures (QES), a QES considered the gold standard for electronic signatures to ensure that electronic signatures are considered legal, valid, binding and enforceable in both the EU and the UK.

Other jurisdictions have channeled their energies to the United Nations Commission on International Trade Law (UNICITRAL) Model Law on Electronic Transferable Documents (MLTR),[4] a supranational effort to promote the use of electronic transferable documents at national and cross-border level. The MLETR applies to electronic transferable documents, broadly defined as “Information generated, communicated, received or stored by electronic means”, which are functionally equivalent to transferable documents or instruments, such as bills of lading, BOOs and PNs.[5] Initial adoption was slow, with Bahrain being the first jurisdiction to adopt MLETR. Abu Dhabi followed closely behind, with Singapore leading later.

Under the MLETR, any legal signature requirement will be met by an electronic transferable document provided that a reliable method is used to (i) identify the signatory and (ii) indicate the signatory’s intention with respect to the information contained. in the record electronic transferable document. This is a lower standard than required by an AES or QES under UK and EU eIDAS. Another potential problem is that the MLETR does not address issues such as the transfer of possession of business documents.

Other supranational efforts have focused on the standardization and adoption of digital documents. Digitization of commerce featured prominently at the last G7 summit, with six interventions identified to promote collaboration of various digital frameworks, including a proposed framework for G7 collaboration on electronic transferable documents.[6] As part of this framework, the G7 proposes to engage in “scoping exercises” until October 2021 to define and eliminate national legal obstacles to the use of electronic transferable documents and to examine other legal questions which may be require international cooperation. It should be mentioned that the MLETR is being touted as the way to deploy an international effort to facilitate the use of electronic transferable documents, which could very well accelerate its adoption in all jurisdictions and align various national laws to implement a framework. harmonized.

Going forward – a note of caution

Amidst the exciting developments surrounding electronic business documents, it is worth moving forward with caution. If the G7 recommendations are followed and the MLETR is adopted, some experts estimate that legal barriers to digital trade could be removed in as little as 12-18 months. However, MLETR only provides a framework for electronic records. The question remains: will countries be ready to pass national laws to facilitate digital commerce that address, among other things, how to manage possession of trade documents and exclusive control?

The standardization of digital platforms and the successful automation of contracts will also be integral to the success of the push to digitize commerce to ensure that trade can be facilitated across different systems, with all documents and data accessible to different parties to it. a transaction. This has its own set of risks, piracy being one. Digital payments and digital currencies also seem likely to prove useful, especially for large transactions, as they have the potential to increase the visibility and timeliness of payments flowing across multiple jurisdictions.

Please click here for a link to a video of the webinar.

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[1] https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2021/04/Electronic-trade-documents-CP.pdf

[2] The UK eIDAS Regulation includes the Electronic Identification and Trust Services for Electronic Transactions (Amendment, etc.) (Exit EU) Regulation 2019 and the Electronic Identification and Security Services Regulation 2016. trust for electronic transactions (2016 n ° 696).

[3] Regulation (EU) 910/2014 on electronic identification and trust services for electronic transactions in the internal market. Chapter II (Electronic identification) was not retained on the grounds that it is no longer relevant as it focuses on mutual recognition, liability, cooperation and data processing / protection within the European Union.

[4] https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mletr_ebook_e.pdf

[5] Electronic transferable documents are not intended to cover transferable securities, such as stocks and bonds, or other investment instruments.

[6] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/986162/Annex_4__Framework_for_G7_collaboration_on_Electronic_Transferable_Records.pdf

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