We’re all acutely aware of the challenges international trade is experiencing. Whether it be shortages at the petrol pump or a lack of goods passing through Dover it’s easy to overlook just how fragile the supply change is, writes David Little, a Partner in our Corporate and Commercial team.
According to the Department of International Trade international trade is worth £1.153 trillion to the UK. The physical process of moving goods across borders in order to get them from the seller to the buyer typically involves a multiplicity of actors including transportation, insurance, trade and/or supply chain finance and logistics service providers. Consider too that one transaction typically involves 20 entities and generating between 10 and 20 paper documents, totalling over 100 pages.
Despite the size and sophistication of this market, many of its processes, and the laws underlying them, are based on practices developed by merchants hundreds of years ago.
In particular, international trade still relies to a large extent on a category of documents called ‘documentary intangibles’. Documentary intangibles are unique because transfer of the document can be sufficient to transfer the right to claim performance of the obligation which the document embodies, whether that is an obligation to pay money or an obligation to deliver goods. For example, simply handing over a bill of lading can be sufficient to give the new holder a right to the goods described in the bill.
The legal rules governing these documents are based on the idea that they are physical documents which can be physically held or ‘possessed’.
The current law in England and Wales does not recognise the possibility of possessing electronic documents; possession is associated only with tangible assets. Industries using these documents are therefore prevented by law from moving to a fully paperless process.
To give a sense of the enormous amount of paperwork global trade generates, consider that the world’s largest containerships can carry 24,000 twenty foot containers at any one time on any one voyage. For each one of those cargoes a paper transport document is issued, and has to be processed manually to go from the shipper of the goods to the ultimate buyer at destination, sometimes through numerous intermediaries. This needs to be done using paper because the buyer is required to present the paper document when claiming the goods at the port of discharge. It has been estimated that the international trade industry generates four billion paper documents per year.
This is clearly archaic, inefficient, and wholly unsuited to a world in which processes and transactions are increasingly in digital form. Allowing for electronic versions of documentary intangibles could lead to significant cost savings and efficiencies, together with improvements in information management and security.
The move would also be good for the environment, with global container shipping estimated to generate 28.5 billion paper documents a year.
The International Chamber of Commerce has estimated that digitising the documents could generate £25bn in new global economic growth by 2024, and free up £224bn in efficiency savings.
The development of technologies over the past decade has made paperless trade increasingly feasible. The push for digitalisation became particularly acute in 2020/21 with the introduction of global restrictions on movement and human-to-human contact in response to the COVID-19 pandemic.
While the pandemic forced businesses to develop rapid technical solutions, the law continues to lag behind. In a survey undertaken by the World Trade Organisation and Trade Finance Global on the impact of COVID-19 and trade, they noted that “legal challenges were rated as posing a more pressing challenge than any of the other challenges”. They pointed to the “lack of legal clarity and enabling regulatory framework”.
Quoted here Professor Sarah Green, Commercial and Common Law Commissioner said: “Electronic documents have the potential to make global trade more efficient, cheaper and more secure. Until the law catches up with the relevant technology, however, these benefits – worth billions every year – will not be realised.
The law of England and Wales currently enjoys a pre-eminent status as the law of choice in global commerce, but if it fails to evolve to reflect new technological possibilities, it risks losing this pre-eminence. So it’s really heartening that following consultations which ended in the summer the Law Commission is developing final recommendations for reform, and a final draft bill, which it is aiming to publish in early 2022.
The physical paper trail for international trade should soon become a thing of the past. Not a moment too soon.
The above is accurate as at 12 October 2021. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.