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Electronic trade documents in Scots law

By Andrew Steven, Professor of Property Law, University of Edinburgh

Economic importance

In 2021 international trade was worth approximately £1.266 trillion to the UK. The moving of goods across borders still heavily relies on paper documents and practices which developed centuries ago. A trade finance transaction typically involves 20 entities and between 10 and 20 paper documents, totalling over 100 pages. Recent technological developments have enabled the use of secure forms of electronic documents. But the law requires to catch up.

The Law Commission Report

The Law Commission for England and Wales has recently published its Report on Electronic Trade Documents (Law Com No 405, 2022). I responded to the consultation which preceded it. This contains a set of recommendations and draft Bill of seven sections. If implemented these would facilitate the use of electronic trade documents. But they are only for England and Wales. The Law Commission nevertheless recognises that the existing law here effectively operates on a UK basis. This is the case for example for the Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act 1992. Paras 1.37-1.38 of the Report note:

“It is beyond our remit and expertise to analyse how the Bill could or would apply in Scotland or Northern Ireland, and do not attempt such analysis in this report. If the Bill is extended beyond England and Wales, appropriate legal advice will be required to consider whether any changes to the Bill are necessary to accommodate differences between the laws of the different jurisdictions.

We are pleased that the Government is engaging with the territorial offices and devolved administrations to explore the possibility of implementing our recommendations throughout the UK.”

It is pity that the project which led to the Report was not carried out on a joint basis with the Scottish Law Commission, as has happened in the past for commercial law projects such as on insurance. But that did not happen. It is understood that there was an urgency for the project to commence because of the difficulties of using paper documents during the pandemic. The adoption of the UNCITRAL Model Law on Electronic Transferable Records by other countries, notably Singapore, may also have provided the impetus for a swift review of English law.

Reform for Scotland too

My view is that it would regrettable if legislation based on the Law Commission’s draft Bill is not extended to Scotland. Digitalisation does not stop at Gretna. The economic and indeed environmental (through the saving of paper) case for the reform seems irrefutable. If a reform Bill is taken forward in the UK Parliament, the Scottish Parliament could pass a legislative consent motion. See the Scotland Act 1998 s 28(8).

It must be asked nevertheless whether the Law Commission’s draft Bill is satisfactory as far as Scots law is concerned or whether it would require to be amended. One of the challenges here is that Scotland as a smaller jurisdiction to England has less case law. Some of the subject matter of the draft Bill is less developed than south of the border.

Types of document

The objective of the draft Bill is to provide for the use of electronic trade documents in place of paper trade documents. Certain paper trade documents recognised by the law have special features. For example, in both English and Scottish law a party taking a negotiable instrument in good faith is protected from a defect in the title of the transferor. Again in both jurisdictions, a paper bill of lading symbolises the possession of goods on board a ship and the delivery of the bill is equivalent in law to delivering the goods. But what is the connecting factor between trade documents in general? Section 1(1) and (2) of the draft Bill take the following approach:

“(1) A document is a “paper trade document” for the purposes of this Act if—

(a) it is in paper form, and
(b) possession of the document is required as a matter of law or commercial custom, usage or practice for a person to claim performance of an obligation.

(2) The following are examples of documents that, if they fall within subsection (1), will be paper trade documents—

(a) a bill of exchange;
(b) a promissory note;
(c) a bill of lading;
(d) a ship’s delivery order;
(e) a warehouse receipt;
(f) a mate’s receipt;
(g) a marine insurance policy;
(h) a cargo insurance certificate.”

The key provision here is subsection (1)(b): the document must be required to claim performance of an obligation. For example, where a debt is embodied in a bill of exchange possession of that document is needed to recover payment. Subsection (2) goes on to give a list of documents. It cannot be said with confidence that the law in England and Scotland is exactly the same here. For example, in relation to goods stored in warehouses there is a difference as to how possession of these is transferred. South of the border the law of attornment requires the warehouse to confirm to the transferee that the goods are now being held to the order of that person. North of the border this is not required. See Scottish Law Commission, Report on Moveable Transactions (Scot Law Com No 249, 2017) para 25.6. But in both jurisdictions warehouse receipts are documents of title under the Factors Act 1889 s 1(4). As a second example, I am unaware of specific Scottish authority on mate’s receipts.

The drafting, however, is clever and apparently subtle enough to take account of any Scottish differences. Even if a document is mentioned in the section 1(2) list, it is not covered unless it satisfies section 1(1)(b). This gives room for manoeuvre to the Scottish courts in developing the law even although in any event there do not seem compelling grounds in the area of international trade to take an individualistic approach.

Technology requirements

Section 2 of the draft Bill deals with the technological requirements for an electronic trade document to qualify as one which is covered by the legislation. These are referred to in chapter 6 of the Report as the “gateway” criteria. Section 2(1) and (2) provide:

“(1) A qualifying electronic document is an “electronic trade document” for the purposes of this Act if a reliable system is used to—

(a) identify the document so that it can be distinguished from any copies,
(b) protect the document against unauthorised alteration,
(c) secure that it is not possible for more than one person to exercise control of the document at any one time,
(d) allow any person who is able to exercise control of the document to demonstrate that the person is able to do so, and
(e) secure that a transfer of the document has effect to deprive any person who was able to exercise control of the document immediately before the transfer of the ability to do so (except to the extent that the person is able to exercise control by virtue of being a transferee).

(2) For the purposes of subsection (1)—

(a) a person exercises control of a document when the person uses, transfers or otherwise disposes of the document (whether or not the person has the legal right to do so), and
(b) persons acting jointly are to be treated as one person.”

These provisions require the electronic trade document to be held within a computer system which is robust and which allows only one person (or more than one person acting together) to have control of it at any one time. They could easily be applied to Scotland too.

Possession

 What matters in relation to a paper trade document is who has possession of it. There are significant conceptual challenges in applying the doctrine of possession to electronic trade documents and digital assets more generally. The Law Commission has commenced a digital assets project. It is to be hoped that the Scottish Law Commission will also be involved in this work. Separately, the Scottish Government has established a Working Group on Crypto-assets and Related Technology in Scots Law which is co-chaired by the Lord Advocate and Lord Hodge, the Deputy President of the Supreme Court. Professor David Fox of Edinburgh Law School sits on this.

The draft Electronic Trade Documents Bill deals with possession succinctly in section 3(1) and section 3(2) confirms the effectiveness of such documents:

“(1) A person may possess, indorse and part with possession of an electronic trade document.

(2) An electronic trade document has the same effect as the equivalent paper trade document.”

There is no definition of “possession”. In the draft Bill appended to the Consultation Paper which preceded the Report the concept had been defined by reference to “control” but consultees pointed out certain defects with this approach, in particular that the drafting seemed to remove the need for an intention to possession and did not allow for constructive (in Scotland, civil) possession.

The Law Commission makes it clear at para 7.44 of the Report that “our intention is simply to remove the legal blocker that currently prevents electronic documents from being possessed”. Further, para 7.56 states:

“We have concluded that leaving the application of the concept of possession to electronic trade documents to the courts and to the common law is the better course of action. Possession is a common law concept that is generally and highly flexible. There is no fixed and discrete definition of possession for the purpose of tangible assets.”

Here the Law Commission is obviously referring to English law, but has Scots law the ability also to be flexible? I think so. Scots law already has different requirements for the physical element of possession for different types of tangible (corporeal) assets. For example, as regards land, in the words of Stair: [Someone] who possesseth a field need not go about it all, or touch every turf of it, by himself or his cattle, but by possessing a part, possesseth the whole unless there were contrary possessory acts” (Institutions, II,1,13). In relation to corporeal moveables, Dr Craig Anderson has shown the relevance of the idea of control in an examination of the case law. See his Possession of Corporeal Moveables (2015) paras 3-19 to 3-75. The English case of Parker v British Airways Board [1982] 1 QB 1004, on whether the owners of an airport departure lounge had sufficient control of it and thus possession of a lost bracelet, was followed in Harris v Abbey National plc 1997 SCLR 359. That Scottish case related to items left in a cupboard in a property in respect of which a standard security was being enforced. I think therefore that there is both a flexibility in Scots law plus a willingness to draw on English authority where helpful.

The Law Commission notes at para 1.36 of its Report:

“Scots law has recognised possession of certain intangible rights but has done so through deeming possession of certain physical objects to be possession of the intangible rights.”

There is a footnote reference to Stair, Institutions, II,1,15, the relevant part of which states:

“Sixthly, Civil possession is by a token or symbol, which is no part of the thing to be possest, but is a token only to represent it, as either having some resemblance with it, as the delivery of the copy of a scroll for an office, or otherwise has no resemblance, but is a token merely suppositious to represent it; as delivery of a baton in resignation, or delivery of a thing bought or sold, by a wisp of straw, which ordinarily is in absence of the thing to be possessed.”

In relation to electronic trade documents, following this approach, it would seem necessary to have the handing over of something like a memory stick. I disagree. In the first place, an office, nowadays at least, is not property. In the second place, a trade document is already a symbol of goods or a debt. To require a symbol of a symbol is a complication which the courts would surely find unattractive. It is possible to go further and argue that a trade document is not merely a symbol but an embodiment of the right to which it relates. Seen in this way the relationship of possession is already more direct by one degree. In the third place, Stair’s idea of handing over a symbol such as a wisp of straw finds little support in case law. Thus David Carey Miller with David Irvine, Corporeal Moveables in Scots Law (2nd edn, 2005) para 8.26 comments that “in most cases the inference [of change of possession] is founded upon the transferee obtaining a measure of control over the thing”. In the fourth place, the deliberate policy of section 3 of the draft Bill is to reform the current law in England (but Scots law is effectively the same) that only tangible things can be possessed. If possession of a tangible such as a memory stick were required the whole reform would be frustrated.

Moveable transactions reform

 One notable difference between the English and Scottish law of trade documents relates to creating security rights. Hamilton v Western Bank (1856) 19 D 152 is authority for the proposition that a pledge of goods can only be achieved by actual delivery, that is to say by physical handing over. This disallows the pledge of a bill of lading, paper or electronic. The decision although universally criticised has never been overruled. The Scottish Law Commission in its Report on Moveable Transactions (above) recommended a statutory rule authorising pledges of bills of lading. The Scottish Government in its Programme for Government 2021-22 announced a Moveable Transactions (Scotland) Bill based on the Scottish Law Commission’s work. This reform will fit well with electronic trade document reform.

Next steps

In addition to my Edinburgh Law School colleagues Professor Fox and Dr Simone Lamont-Black (to whom sincere thanks go for their comments on a draft of this blog) there were two other Scottish consultees who provided views to the Law Commission: the Centre for Commercial Law at the University of Aberdeen and the Law Society of Scotland. Both were supportive of the reform. It may be that the UK and Scottish Governments wish to carry out a specific Scottish consultation. There would be sense in that to give an opportunity to consider further Scots law issues. But in my view it would be regrettable if legislation reached the statute book on electronic trade documents in England and Wales, without the same happening in Scotland too. It is to be hoped that the opportunity for reform presented by the Law Commission’s Report will be seized.

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