The Possession of Electronic Trade Documents

The Law Commission has recently launched a consultation with proposals to reform the rules on possession of personal property, insofar as they apply to electronic forms of trade documents. The consultation paper includes a draft Bill which would implement those proposals. In this post, we explain the proposed legislative reforms and the issues raised in the consultation paper and draft Bill.

The Department for International Trade has recently valued the international trade industry to be worth £1.153 trillion to the UK annually. Despite its sophistication and size, the industry is still largely reliant on paper documents, such as bills of lading and bills of exchange. Stakeholders have suggested to us that a move towards electronic trade documents would result in cost savings, reduce delays, prevent manual processing errors, and decrease instances of fraud. Digitalisation has become more feasible given the progress made by new technologies, such as distributed ledger technology, which can create electronic documents that are unique, secure, and traceable. However, the industry so far has seen low uptake of any electronic alternatives to many key trade documents. For example in 2020, the Digital Container Shipping Association reported that only 0.1% of bills of lading are issued electronically.

Stakeholders have told us that the main barrier to the uptake of electronic documents is not practical, but legal. In general, possession of certain trade documents is relevant to determining who may exercise certain rights at law. In part, this is because many trade documents are “documentary intangibles” – a category of document wherein the right or obligation is not merely evidenced by, but embodied in, the piece of paper. This means that, for example, transfer of the possession of a document can also transfer the right or obligation on its face.

However, under the current law, a trade document in electronic form is not possessable, because it is intangible. This is the result of two decisions: OBG v Allan and Your Response v Datateam. 

In OBG v Allan, the House of Lords considered whether a set of contractual rights could be the subject of the tort of conversion. By a three-to-two majority, the court ruled that such rights could not be converted because, as a form of intangible property, contractual rights could not be possessed. The majority judgments emphasised that the tort of conversion applied only to tangible property, effectively eliding tangibles with things in possession.

Lord Walker, in his majority judgment, noted that there was a “powerful case” for extending the tort of conversion to intangibles. However, Lord Walker considered that this would require “too drastic a reshaping of this area of the law of tort” and that it would be more appropriate for the reform to come from Parliament after further consideration by the Law Commission. Baroness Hale recommended similarly that such a reform be considered by the Law Commission.

In Your Response v Datateam, the Court of Appeal considered whether a possessory lien could be exercised over an electronic database. Lord Justice Moore-Bick gave the leading judgment and held that the database was a form of intangible property. His Lordship was bound by OBG v Allan and held that intangible property was not amenable to possession. Therefore, the claimant could not exercise a possessory lien over the electronic database. While Lord Justice Moore-Bick noted that there was a “powerful case for recognising that the essential elements of possession can be exercised over digitised materials”, his Lordship considered that this step would be more appropriately taken by Parliament.

Trade documents in electronic form are intangibles, and therefore cannot be possessed under current law. As a result, these electronic documents cannot function in law in precisely the same way as their paper counterparts, which, according to our research, has resulted in their low uptake. 

In our consultation paper, we identify seven key documents used in international trade which must be possessable in order to be used. These are: bills of exchange, promissory notes, bills of lading, ship’s delivery orders, warehouse receipts, marine insurance policies, and cargo insurance certificates. Take, for example, a bill of exchange, which is governed by the Bills of Exchange Act 1882. In section 2 of the 1882 Act, three concepts central to the bill of exchange are defined in relation to possession: 

“Bearer” means the person in possession of a bill or note which is payable to bearer.

“Delivery” means transfer of possession, actual or constructive, from one person to another.

“Holder” means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.

While some of the other documents which we have identified are governed (at least partly) by the common law rather than statute, possession is equally significant to their legal operation. In our consultation paper, we make proposals which would allow for electronic trade documents to have the same legal effects as their paper counterparts by removing the possession blocker.

In our consultation paper, we provisionally propose an electronic trade document should be capable of possession at law if it:

• has an existence independent of both persons and the legal system (that is, it is not a bare legal right such as a debt);
• is capable of exclusive control: the nature of the thing does not support concurrent assertions of occupation or use; and
• is fully divested on transfer (that is, if Alice transfers the electronic document to Bob, Alice must no longer be able to control the document).

These criteria are encapsulated in clause 1(3) of our draft Electronic Trade Documents Bill. Under the draft Bill, a person has possession of an electronic trade document if they have “control” of it (clause 2(1)). “Control” is defined in clause 1(4):

A person has “control” of a document if the person is able to –

(a)   use the document, and

(b)   transfer or otherwise dispose of it. 

There have been several international proposals to reform the law in this area. The most well-known is the Model Law on Electronic Transferable Records (MLETR), adopted by the United Nations Commission on International Trade Law in 2017. Article 11 of the MLETR gives electronic documents (in the model law, referred to as “electronic transferable records”) the same effect as their paper equivalents (“transferable documents or instruments”), by drawing an analogy between possession and “control”.

Our proposals align with the aims and policy of the MLETR. However, instead of establishing control of an intangible as analogous to the possession of a tangible (as in the MLETR), we instead suggest that intangibles can be possessed in fact, and that this should be recognised in law. In other words, we do not make control a functional equivalent of possession: we instead define control, and provisionally propose that such control amounts to possession.

In the consultation paper, we ask a number of questions about the draft Bill. These fall broadly into the following categories. First, we ask questions about whether the list of documents covered in the draft Bill is complete. Second, we ask questions about our approach to the possession of electronic trade documents. Third, we ask questions about what other consequential changes to the law would be required to ensure that electronic trade documents have the same legal effect as their paper counterparts (for example, in relation to the recognition of the indorsement of electronic documents). And finally, we ask questions about the expected impact of our provisional proposals. 

Although this consultation paper focuses on electronic trade documents, we are aware that there is also significant interest in the rules regarding other intangibles (including, for example, cryptoassets). This is the subject of another Law Commission project on digital assets on which we have published a short call for evidence.

We are keen to hear from stakeholders who are interested in the electronic trade documents project. The Law Commission’s formal consultation is open until 30 July 2021.

Responses can be made by completing an online form or by email to electronictrade@lawcommission.gov.uk.

More information, including the draft Bill, consultation paper and a summary, is available at https://www.lawcom.gov.uk/project/electronic-trade-documents/.

Weishi Yang is a Research Assistant at the Law Commission of England and Wales.

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How to cite this blogpost (Harvard style): 

Yang, W. (2021). Possession of Electronic Trade Documents. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2021/06/possession-electronic-trade-documents (Accessed [date])