Paperless Trade and the CCA
The Digital Connectivity Cluster’s[i] (DCC) launch of its latest report entitled a “Quantitative Analysis of the Move to Paperless Trade”, in March of 2022, inspired me to revisit the issues associated with a transition to paperless trade and to share work I completed in August of 2021 (updated) on the associated legal challenges.
The DCC report posits that there are “clear economic and political imperatives to accelerating digital trade facilitation and legal reform for digitalisation, with potential benefits of nearly US1.2 Trillion to Commonwealth trade by 2026.”[ii] In a study of the then 54 Commonwealth countries, the report concludes that costs will on average, fall by around 75% which by itself would enable as much as US$90 billion in additional trade across the Commonwealth. “In countries where the costs of trade are disproportionately high relative to the revenues received, moving toward paperless trade will have the effect of creating trade where very little exists.”[iii]
The incentives being what they are, paperless trade is coming, and soon. These incentives, among others are already driving legal reforms in leading economies such as the UK, as it moves to recognise and enable the use of electronic transferable records in international trade transactions. However, the potential cost reduction and trade stimulating benefits will most certainly not be evenly distributed across the Commonwealth because of the existing unevenness in the distribution of digital technologies, financial resources, and limited capacity to pursue legal reforms.
The DCC is one of five cluster working groups or focus areas under the Commonwealth’s Connectivity Agenda (CCA) for Trade and Investment. With its focus on the delivery of a pragmatic and accessible platform for countries to exchange best practices and experiences to trade and investment and undertake domestic reforms, this initiative led by the Commonwealth Secretariat may provide the best option for the small and vulnerable countries of the Commonwealth to leverage the benefits of paperless trade.
Global Political Consensus has already been achieved
In 2021, the seven richest democratically governed countries in the world (the G7), declared its intention to actively cooperate around the themes necessary to achieve digital and regulatory connectivity and interoperability, with the shift to paperless trade a key and prioritized outcome.[iv] This grouping includes Canada and the UK, which are also leading members of the association of Commonwealth countries.
The G7 by default and perhaps with little challenge will establish the bar for engagement in a new global paperless trading regime. How high they set the bar in terms of the digital and regulatory requirements to interconnect and interoperate will determine the extent to which the resulting framework is inclusive and permitting of the widest distribution of potential benefits. In 2023, all countries should now be considering a roadmap toward paperless trade.
One way to ensure better outcomes for smaller countries is for these countries to monitor what the leaders are doing to advance the agenda domestically. In that regard, if paperless trade is to be the new frontier of unknown opportunities and perils in international trade, the UK is most certainly at the forefront of shaping its contours and taming it.
Wanting to preserve its pre-eminent status as the law of choice in global commerce, the UK is among the first of the G7 economies to take on paperless trade law reforms. English law is the source of domestic law in over 80 jurisdictions around the world[v] and the majority of legal systems in the Commonwealth are founded on English common law.[vi] Therefore, how the UK captures value from paperless trade will be instructive for countries hoping to derive similar benefits from paperless trade and it will set an important precedent for all jurisdictions which recognise contracts that use English law.
The Problem with Paper
The problem with paper is that it is expensive and inefficient. In fact, it is estimated that the international trade industry generates around four billion documents each year,[vii] at an annual global cost of handling estimated at $500 billion, “an average of about 10% of the cost of each trade transaction.”[viii] Further, each transaction currently requires not only that the parties get the paperwork right, but also get the right paperwork, on time, to the right people, in the right places.[ix]
Covid 19 accelerated the pace of expansion of the digital economy and in doing so exposed the inherent inadequacies of an international trading regime reliant on paper and people to conduct its business. Driven by its constituency, the International Chamber of Commerce (“ICC”) in April of 2020 called for governments to “take emergency measures to immediately void all existing legal prohibitions on the use of electronic trade documentation.”[x] The World Trade Organization (“WTO”) added their voice, saying the pandemic has “accelerated digitalization in all sectors, including international trade, which remains plagued by labour and paper-intensive processes that are the source of many frictions and inefficiencies”.[xi] Given the availability of suitable digital formats and technologies, paper is increasingly unappealing.
The problem is electronic versions of trade documents are not legally recognised. Paper is the only format trusted universally to perform and evidence commercial transactions.[xii] In fact industries who use them are unprotected and may be prevented by law from migrating to fully paperless trade processes.[xiii] Why is this the case?
The Importance of being Tangible
Well, despite the current size and sophistication of global markets, the processes that drive them and the laws governing them are based on practices developed by merchants hundreds of years ago.[xiv] In particular, international trade still relies to a large extent on a category of paper-based documents called “documentary intangibles.”[xv] A documentary intangible is a document that is “recognized by law as embodying the right of which it is also evidence.”[xvi] For example, where the documentary intangible refers to goods, the law considers possession of the documentary intangible after delivery with any necessary indorsement, equivalent to possession of the goods; meaning that whomever has possession of the documentary intangible also has possession of the goods and the right to control what happens to them.
Delivery of the document from person A to person B is sufficient to transfer the right to claim performance of the obligation. The transfer does not require consent of any other party, nor does it require any actions to be taken other than an indorsement and signature, where required. The practical effect of this is an ability to transfer rights in property with relative ease, promoting “efficiency and convenience in commercial dealings.”[xvii] Further, the documentary intangible can be subject to a bailment and bailed as part of a pledge or held as security, and because documentary intangibles are treated as tangible assets in and of themselves, they are covered by strict liability in property torts of trespass and conversion, and by negligence.[xviii]
In terms of remedies, the measure of damages is the value of the obligation or right embodied in the document.[xix] To discharge an obligation embodied in a documentary intangible, the obligor must render performance to the holder of the documentary intangible. Rendering performance to any other party will not discharge the obligation.[xx]
The rights and obligations embodied in a documentary intangible captured on paper are protected from interference because their expression on paper satisfies the test of tangibility. The assumption in law is that the record of the documentary intangible, as evidence of the intent of the transferor and/or of the right of possession can only be captured on paper.[xxi]
As indicated earlier, the use of documentary intangibles has its origins in the medieval law merchant, a transnational body of customary rules and principles relating to merchants and mercantile transactions which eventually integrated itself into the domestic laws of nation states.[xxii] The transnational origins are important because they mean that documentary intangibles have substantially the same legal effects wherever they are used. The ease with which rights may be transferred using this method promotes efficiency and convenience in commercial dealings and is central to global trade.[xxiii]
Prior to July 2023, the law in England and Wales did not recognise electronic documents as capable of being possessed. Possession was a characteristic associated only with tangible things and while it has many fair qualities, electronic documents can make no credible argument for tangibility.
Severing the link with Tangibility
The irony of such strict reliance on tangibility for a document called an intangible is well sublime. Further, although the term documentary intangible may seem an eminently appropriate and perhaps obvious nomenclature for e-documents, legally it was a contemporary medium wholly unrecognised by English legal tradition, until the passage of the Electronic Trade Documents Act of 2023.
Contending that recent advances in technology have brought about the possibility of digital things, that some digital things have the same relevant properties when it comes to possession as tangible things and recognising the ability of its common law to stretch traditional definitions and concepts to adapt to new business practices, UK reformists argued that electronic documents, despite their intangibility are indeed capable of being possessed.
Here’s why. Reformists argued that there is a substantive legal and policy basis for saying that many of the factors which are relevant to possessing tangible things are replicable in the electronic environment. This is because in common law, the factors considered by a court when assessing title founded on possession are not necessarily found to be tied to the tangible nature of the thing at issue. In fact, the courts place more importance on the fact that there is only one (active) version of the thing, and that only one person can hold it at a time.
Extrapolating these properties to an electronic document means that first, electronic data would have to constitute a “document” for the purposes of the law. An electronic document is arguably “a thing in electronic form.” It exists as a matter of fact, independent of both the person laying claim to it and the legal system, and any instruction not to tamper with it is valid against anyone without a better title to it.
Second, there must be a method of associating that “document” with just one person at a time (the possessor), that is, that the document can be exclusively controlled. Common law provides that to be possessable a thing must not be rivalrous or capable of supporting concurrent use or control by multiple parties at one time. Importantly, whether a thing is under a person’s control will vary according to the nature of the asset, and therefore possession is a question of relative fact, and measured against what is possible in the circumstances. Extrapolating this principle and applying this to electronic trade documents, the conclusion is that if the electronic trade document is under the control of a single party or parties acting together, it is, to the extent that exclusion and control are possible in the circumstances, amenable to possession and should be regarded as such in law. Logically, the argument recognises that the concept of control in this context is unable to be extricated from the underlying technology applied; that it is in fact the technology that defines the limits of the concept of control.
Third, there must be a method that ensures that when the “document” is transferred to someone else, the transferee becomes the only possessor and the transferor’s rights to the electronic trade document are effectively extinguished. Therefore, when control of the relevant document is exercised on transfer, the transferor must in fact be divested of both the document and control over it. Again, there is recognition that the extent to which this is possible depends on how the technology applies it. Distributed Ledger Technologies (DLTs) for example could ensure that the transferor does not have opportunity to “double spend,” i.e., the situation in which “A could give title to B in exchange for payment and then purport to transfer the same title to C or reuse the document in any way with another transferee. If the electronic trade document achieves these three things, it will be recognized as possessable property under English law with all attendant rights and privileges.
A bill to make provision about electronic trade documents, and for connected purposes, based on principles that sever the link between possession and tangibility, following passage through both Houses, received Royal Assent on 20 July 2023 and is now the law of the land as the Electronic Trade Documents Act 2023. The Law Commission projects that 50% of current paper documents could be in electronic format within nine years of the bill coming to force.
Toward a new Paradigm
International trade is of course, a global concern in every sense and there are many other collateral issues to consider before paperless trade can take hold. For example, a global trading system will have to find a way for databases belonging to a diversity of actors with varying interests to interoperate.[xxiv] For parties to exchange and reuse e-documents, all information needs to be clearly defined and unambiguous, both from a semantic and syntactical perspective.”[xxv] Trading partners will have to agree on the meaning of each individual data element to ensure that all parties understand the information in the same way.[xxvi]
It is also worth considering that the need to transition to paperless trade is predicated on a notion of structural transformation of the global economy away from traditional economic sectors to those emerging in the digital economy; the growth enhancing potential of which many countries do not yet enjoy. According to UNCTAD, the spread of digital technologies is uneven and threatens to leave developing and especially least developed countries even further behind.[xxvii] For example, in least developed countries only one in five people use the internet as compared with four out of five in developed countries.[xxviii] As a result, the uptake of e-commerce is not equally spread around the world. UNCTAD concludes that in many digital technological developments, the rest of the world and especially Africa and Latin America are trailing considerably behind the US and China.[xxix]
All countries hoping to engage in trade will have to do the work to arrive at national political consensus around paperless trade and to identify development priorities, implementation capacities and capacity acquisition priorities in pursuit of it. For most countries the rules required to participate in paperless trade are novel issues for their national legal and regulatory systems. There is broad scope for error and misapplication as countries strive to develop adequate national regulatory frameworks and digital capabilities that advance their national development agendas.
Commonwealth countries interested in expanding their trading relationships and which have not already done so, will be well advised to review their legal relationships with paper documentary intangibles and if relevant, seek to define the contours of their “possessability” problem. The UK experience shows that severing the link with tangibility is an elegant way to absorb technology into existing legal frameworks with minimal disruption but lasting impact.
With directly related connectivity objectives and initiatives, the Commonwealth’s Connectivity Agenda (CCA) is ideally positioned to support the type of exchanges and voluntary mutual support to help lesser resourced countries harness the opportunities from paperless trade. Indeed, the CCA purports to place special emphasis on “taking into account the needs of small and vulnerable economies and least developed countries in the Commonwealth”.[xxx] Given its seeming inevitability, cooperation and support around paperless trade may be a fitting test for the objectives of the CCA and a salient expression of the Commonwealth advantage in action.
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