Second Reading Committee
The Deputy Chairman of Committees (Baroness Pitkeathley) (Lab)
My Lords, I remind your Lordships that the Minister, the noble Lord, Lord Parkinson, is on his feet in the Chamber. We will start the Committee as soon as he gets here.
Arrangement of Business
The Deputy Chairman of Committees (Baroness Pitkeathley) (Lab)
My Lords, before the Minister moves that the Bill be considered, I remind noble Lords that the Motion before the Committee will be that the Committee do consider the Bill. I should perhaps make it clear that the Motion to give the Bill a Second Reading will be moved in the Chamber in the usual way, with the expectation that it will be taken formally.
Electronic Trade Documents Bill [HL]
Monday 7th November 2022
(2 years, 1 month ago)
Grand CommitteeRead Full debate Electronic Trade Documents Act 2023 View all Electronic Trade Documents Act 2023 Debates Read Hansard Text Read Debate Ministerial Extracts
The Parliamentary Under-Secretary of State, Department for Digital, Culture, Media and Sport (Lord Parkinson of Whitley Bay) (Con)
My Lords, I am grateful for the Committee’s understanding. I have just finished answering a Private Notice Question in the Chamber.
The Bill allows for the use in electronic form of certain trade documents, such as bills of lading and bills of exchange, which currently have to be on paper and physically possessed. It implements the recommendations made by the Law Commission of England and Wales in its report on electronic trade documents, which was published earlier this year. The Bill is not mandatory: it is a permissive and facilitative piece of legislation. Though it is only a small Bill, of seven clauses in length, its impact will be huge. It will help to boost the UK’s international trade, already worth more than £1.4 trillion, by providing benefits to UK businesses over the next 10 years of £1.1 billion.
In short, the Bill will allow businesses to use electronic trade documents when buying and selling internationally, making it easier, cheaper, faster and more secure for them to trade. It is fully supported by the businesses and industries that it is designed to help. The Government’s role here is simply to remove an obstacle to progress and to pave the way for international trade and trade law to be brought up to date.
The Law Commission published its recommendations and draft legislation in March this year. In its report, it made recommendations for legislative reform to allow trade documents in electronic form which can satisfy certain criteria to have the same legal effect and functionality as their paper counterparts. The Law Commission undertook significant consultation on the aim and contents of the Bill throughout the development of its recommendations. It spoke to a wide range of interested parties, including academics, lawyers, trade experts and industry representatives.
No previous attempts have been made to legislate in this area, which is one of the factors that makes this Bill unique and novel. While the Law Commission’s recommendations are for the law of England and Wales, we have worked with the territorial offices and devolved Administrations to ensure that the Bill can be extended to Scotland and Northern Ireland to ensure that businesses across the UK can benefit from this important development.
Business-to-business documents such as bills of lading, which are contracts between parties involved in shipping goods, and bills of exchange, which are used to help importers and exporters complete transactions, currently have to be paper-based. Existing laws, such as the Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act 1992, did not envisage the digitisation of these documents. This Bill seeks to modernise the law, enabling this move to digital trade documents. Under the Bill, digital trade documents will be put on the same legal footing as their paper-based equivalents, giving UK businesses more choice and flexibility in how they trade.
The impact of the Bill cannot be overstated. Whether it is lowering transaction costs associated with trade by reducing resourcing and operational costs and increasing productivity; whether it is increasing efficiency and encouraging business growth by facilitating the development of digital products and services; whether it is delivering environmental benefits through a reduction in paper documents and emissions from couriering the paper documents; or, critically, whether it is increasing the security, transparency, traceability and transactional data of the flows of goods and finance—the Bill has the potential to revolutionise UK businesses’ ability to trade across borders.
To illustrate this, the process of moving goods across borders involves a range of actors, including those involved in transportation, insurance, finance and logistics. One trade finance transaction typically involves 20 different parties using between 10 and 20 paper documents, totalling over 100 pages. Research carried out by industry and academia has produced the following illuminating statistics and figures.
The use of electronic trade documents will reduce trade contract processing times from between seven and 10 days to as little as 20 seconds, according to the industry publication Trade Finance Global. The Digital Container Shipping Association estimates that, if 50% of the container shipping industry adopted electronic bills of lading, the collective global savings would be around £3.6 billion per annum. The International Chamber of Commerce estimates that small and medium businesses could see a 13% increase in international business if trade is digitised, and the World Economic Forum has found that digitising trade documents could reduce global carbon dioxide emissions from logistics by as much as 12%. Electronic trade documents also increase security and compliance by making it easier to trace records.
The Bill will lay the foundations for the future digitisation of our global trade approach and ambitions. I hope it receives strong support from your Lordships and I look forward to noble Lords’ contributions to this debate. I beg to move.
Viscount Waverley (CB)
My Lords, the Minister intimated that this is a milestone, innovative Bill, so with the leave of the Committee I intend to follow that theme and be equally innovative.
One of the essential ingredients to make progress with the global trading community is to combine innovation, build efficiency and create sustainability and to do so by joining the dots—putting the jigsaw into place, if you will. Currently there are different excellent components that could usefully be harnessed into a unified approach, rather than being taken in isolation. Over the past months, I have been reflecting on a possible global trade blueprint and will take the extended opportunity afforded today to put into context three ingredients that could dovetail with the Electronic Trade Documents Bill, which would be a key component. However, none is dependent on any other.
The first lends itself well, as the Commonwealth is fertile ground given the commonality of common law and language, which is the bedrock of this Electronic Trade Documents Bill. It is a free trade agreement template initially targeting Commonwealth member states, excluding the two that are members of the EU as they are responsible to internal protocols, that can be adjusted by country to address any specific anomalies. I was originally approached some time back by a well-meaning US interest to stitch together a US/Commonwealth agreement, including the UK, of course, that would unlock the UK/US circumstance, given that the bilateral free trade agreement is moribund. This Commonwealth approach would consist of making a template of what is expected to be covered in a trade agreement with language options built in. To fast forward to the week before last, I was delighted to learn at first hand that our very own noble Lord, Lord Hannan, who is not in his place, is also running with this ball with his Institute for Free Trade, in a most welcome development.
The second is a dedicated, big-data analytics platform to encompass advanced data analytics and modelling for foreign trade data relating to supply chains in order to consolidate multiple datasets already used by the International Trade Council. These datasets, with additional overlays into a single database, could be used for analysis of markets and supply chains, forecasting and predicting market behaviour. This would enable corporates to validate their supply chains, understand market pricing, monitor competitors and forecast the market and would allow Governments seeking to assist their exporters to find new markets, identify priority investment FDI targets and model future market demand, growth, customers and suppliers. A UK entity is in the making to transition this data for global consumption.
Thirdly, and this brings me full cycle to the Electronic Trade Documents Bill, the magic is that it is all the more beneficial for being an enabler process, free for the world to join up to—just follow the provisions. If the answer to today’s ails is in the timing, this initiative hits the spot with the legal enactment necessary to a more competitive world to the benefit of all. Passing this law would be a victory for global trade and for the United Nations, as the legislative work is led through the UN Model Law on Electronic Transferable Records—MLETR. By allowing electronic documents and physical documents to be used in parallel, the transition to paperless trade can be made an evolutionary process where the adoption of electronic trade documents will take place when different stakeholders in trade and trade finance are ready to take the step to paperless trade.
Radical change in removing paper-based trading documents will make for a faster, lower-cost, more resilient and more liquid world of trading, leading towards transparent digital supply chain management. It will be especially good for small businesses. While all problems cannot be solved at once, recognising a practical step-by-step approach to solve one would be an excellent beginning.
The Bill is core to the success of improving logistical flow that will address the impediment to the speed of payments, and the current need to move paper to discharge goods and receive payments, bringing more opportunities as we align with the MLETR and benefit from digital trade corridors and individual country compliance, to which I have referred. This will allow for documents that carry value and promises to be drawn up and signed in digital form, provided that the system or document fulfils the listed requirements of the Bill.
A number of trade documents with which domestic and cross-border trade would become significantly more efficient and affordable for all are listed, but small and medium-sized entities would benefit the most. This will create significant opportunities for smaller importers and exporters globally, one reason being that the law of England and Wales is often used when parties have difficulties agreeing on the jurisdiction in which to settle disputes.
Therefore, the Bill brings benefits not only for the United Kingdom but for importers, exporters, carriers, brokers and bankers internationally. It should be recognised that the Bill is a stepping-stone towards enabling the modernisation of domestic and international trade, but more needs to be done to reduce friction in trade and trade finance.
Four questions come to mind which illustrate this and I would be grateful for the Government’s view. Are they satisfied that: international digital identities are sufficiently harmonised; international digital signatory laws are harmonised; international freight tracking systems with a lack of interoperability are a hurdle that needs to be overcome; and legal entity identifiers are accepted universally?
Significant work is being done and progress is being made in these areas by industry organisations but this needs to be supported by Governments to pave the way for international harmonisation and adoption. It will be a balancing act to create international standards in such a way that creates legal certainty on the one hand without hampering further adoption of new technologies or innovation on the other.
The United Nations Model Law on Electronic Transferable Records is a very well-designed framework, balancing the need for commercial certainty, relying on current and internationally well-harmonised substantive laws, with allowing for electronic trade documents, providing that the provisions in the MLETR are met.
The Bill will play a pivotal role when other countries revise their bills of exchange acts and other trade-related legislation when promoting alignment to the MLETR. I anticipate that this will become a global trend, with law changes already taking place in North America, South America, the Middle East, Asia and Europe.
The Bill does not change the function of the instruments listed in the Bill. All the safety mechanisms these instruments have and cater for remain intact. Allowing them to be in electronic format means that they will become more efficient and significantly safer. I underline, however, that the Bill does not address the quality of signatures or how to establish identities, other than to say that they need to be “reliable”. The European Union has a list of trusted digital signature sites and for trade it is important that different parties can use simple verification processes to trust the documents coming from another party, but it is up to the contracting parties to define the method to ensure reliability.
What is reliable today, however, will differ tomorrow as new technology evolves. Legislation that is principles-based rather than technically prescriptive is more favourable. The adoption of the EU regulation for eID and other electronic trust services has been slow in cross-border trade, the main reason being that these have not been readily available and easily accessible as technical solutions. The result has been paper-based trade rather than electronic. Although not perfect, in some cases a lower standard is the stepping-stone for adoption, especially in cross-border dealings, provided that the parties have agreed on where to settle disputes.
The Bill does not resolve the development and standardisation of eID and signature technologies, however, which must continue to evolve. We will also see new payment and settlement solutions, possibly decentralised, as we realise that large players such as MasterCard and Visa will come to have a large degree of global systemic risks associated.
The Bill will help to encourage the development of solutions that will address deficiencies. To take some examples to illustrate progress, Trace:Original, a product of Enigio of Sweden, is producing the means by which electronic documents that will be trade finance-enabled yet functionally equivalent to a paper document, which will render documents paperless using existing processes and international practices, provided that this Electronic Trade Documents Bill passes. I am informed that Lloyds Bank is showcasing the technology available and that the efficiency gains are significant for all concerned. There is also noteworthy development with Contained’s BlueRing platform as a technology solution advancing the process.
It is essential that there be a key role for the Commonwealth Secretariat in informing and encouraging Governments. We should also look at a mix of the Institute of Export and International Trade—with which I am also discussing the role of secretariat to the All-Party Parliamentary Group for Trade and Investment, which I co-chair—with additional support from the International Chamber of Commerce, as an architect of this Bill, together with a secondee of HMRC of this electronic trade initiative. A trade advisory to Governments, International Economics, might also be well suited to act as a global co-ordinator.
These are early days, with much to do and no time to lose. This enabling Bill is, however, the beginning of an exciting journey that ticks the boxes and I commend it accordingly.
Lord Lansley (Con)
My Lords, I am very glad to have the opportunity to follow the noble Viscount, Lord Waverley. He is, as he mentioned, co-chair of the all-party group for trade and export promotion, of which I am a member—
Lord Lansley (Con)
Indeed—I am a vice-chair. I thought the noble Viscount made some interesting points, and I very much join him in welcoming the Bill.
Sometimes, we are wont to criticise Bills that are in the form of a framework but, in this instance, there is an understandable structure here from the Law Commission. In the adoption of electronic trade documents, it encountered the legal constraint of the possession of electronic trade documents as a common-law principle and, rather than try to codify and put into statute everything relating to the common law in this respect, it said, “Let us at least try to equate electronic trade documents to paper documents in statute.” This will allow us to see how some of the courts’ decisions over time enable those established principles in relation to paper documents to be extended into electronic trade documents, which would be very helpful.
We are, therefore, dealing with a Bill that is technology neutral. I know that my noble friend Lord Holmes of Richmond knows far more about the technology of these things than I do; I hope he will agree that a technology-neutral Bill is a good structure for us to work with.
I want to talk about a number of other things. I am a member of the International Agreements Committee of your Lordships’ House and we have had the opportunity to look at some of the agreements that we are now entering into; for example, on digital trade with Singapore and the free trade agreements that we have entered into with Australia and New Zealand, as well as the prospect of entering the CPTPP agreement, which, in the context of regional, international and plurilateral agreements, is probably the most advanced in its promotion of digital trade. There is no point having such agreements that open these opportunities for digital trade if we do not put the literal building blocks of digital trade in place.
Last October, the G7 group of Trade Ministers agreed digital trade principles. I think the United Kingdom was instrumental in enabling that to be brought together; it is therefore terrific that we are implementing it rapidly in our legislation. As the noble Viscount, Lord Waverley, said, I hope other countries will take similar steps to put their jurisdictions into a similar framework. I hope we will look toward the framework of the United Nations Commission on International Trade Law, the Model Law on Electronic Transferable Records, to which the noble Viscount referred. The more that jurisdictions across the globe can structure their legislation domestically on an international template of that kind, the better.
We have a particular responsibility because, for so many of these international trade documents, in so far as they have a legal base, they have it in English law. I am advised that 80% of bills of lading, if they were challenged, would be challenged in an English court. We really need to make sure that our law is a leader in this respect. I hope we will find that during our work on this Bill.
I entirely applaud the Bill’s overall structure and intentions. My noble friend the Minister very well and happily set out all the substantial benefits that can accrue from this, in trade, economic and environmental terms. I very much look forward to our achieving those. However, there are issues we need to discuss, notwithstanding this being a Law Commission Bill; by its nature, we need to examine it—it is our job as a revising Chamber to look at it very carefully and ask all the questions, not least so that the other place can be confident that it can pass it happily and quickly.
I will refer to a range of issues. Underlying this is the fact that, if we are not trying to structure the legislation around the concept of the possession of electronic trade documents, we are none the less trying to adopt what is referred to as exclusive control in the singularity of electronic trade documents. It is difficult. The explanatory notes to the model law in UNCITRAL captured it rather well at paragraph 82, which says that
“a paper document, as a physical object, is by nature unique and, furthermore, centuries of use of paper in business transactions have provided sufficient information to commercial operators for an assessment of the risks associated with the use of that medium, while practices relating to the use of electronic transferable records are not yet equally well established.”
We need to be sure that we understand where the risks emerge. There are potential benefits associated with the use of electronic documents, as my noble friend will doubtless explain, including those in security and reliability, but there are also risks.
I hope the House will establish a Public Bill Committee to examine this Bill so, before I stop, I will raise a number of issues. I do not ask my noble friend to reply to them in this debate; they are more appropriate for the committee, but I thought it would not hurt to flag them up, simply because in my preparation for today I encountered a number of issues that I thought would be interesting to discuss.
First, there is a reference in Article 13 of the model law under UNCITRAL to time. Provisions relating to the indication of time and place are found in many trade documents; there may well be mechanisms through which we can make the time of documents electronically secure, but not necessarily in the same way as we do with paper documents. This concept of “reliability” will have to be extended to time on documents as well as to other factors. Since Article 12 of the model law is transposed almost literally into this Bill, for example, I wondered why we have not transposed one or two other aspects of it in the same way.
Secondly, on the question of acting jointly, when one is dealing with paper documents, one knows who has possession of them. In the context of electronic documents, not least because of some of the technological aspects, such as the number of people who have access to a private key, we may deal with people who have to act jointly in circumstances that would not be evident for paper documents. We need to understand the safeguards associated with the intentions of people acting jointly, because the Bill rests upon that understanding and how it will be achieved.
Thirdly, there is a whole process in Clause 4 by which documents can be transferred from paper to electronic or electronic to paper forms. The Bill is clear that this has to be in circumstances made evident in the respective documents. However, if I recall the Explanatory Notes correctly, it is clear that, while that should be the case, if it is not, it does not automatically follow that the electronic trade document concerned is not valid. It may still meet the criteria to be a valid document for these purposes. I would like to explore in Committee how that is the case and what happens in circumstances where documents are transferred from one form to another, not least because there is greater risk of duplication in such a case.
Clause 1(2) lists examples of documents. This is not the same as the list in the model law. I know that this is not exhaustive—it is indicative—but I do not understand why, in paragraph 38 of the explanatory notes to the UNCITRAL model law, for example, there is a reference to
“bills of exchange; cheques; promissory notes; consignment notes; bills of lading; warehouse receipts; insurance certificates; and air waybills.”
This is not the same as the list in the Bill. Why is it different and what are the justifications for those differences?
A question we need to follow up and explore further in the debate is the intention of the Law Commission. It says it is going to come on to the interaction between these changes and private international law, but we need to think particularly about the transitional issues—I hope they are only transitional—associated with our jurisdiction creating valid electronic trade documents when other jurisdictions do not. How do we deal with those connections? From our point of view, similar to the discussion on a single trade window, we want interoperability. We want our borders to be frictionless and other borders to be frictionless. That means they need to be aligned in various ways, including in those jurisdictions.
I want to make two final points. First, I want to explore what the voluntary industry standards are for the purposes of the reliability standard. Secondly, in paragraph 36 of the Explanatory Notes to the Bill, there is an expectation that documents are original, but there can of course be multiple original documents. There can be multiple paper documents that are treated as original. The explanatory notes for the model law make it clear that this is something that electronic trade documents do more readily. We have to understand that these documents are not necessarily singular and how to deal with them when they are not, but are multiples that are original.
I hope that gives your Lordships a sense of the discussions we might have in Committee. I very much share what I hope is the collective view of the House: I support this Bill and want to see it make good progress quickly.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in this Second Reading consideration and to follow my noble friend Lord Lansley. I congratulate my noble friend the Minister on his return to the Front Bench. He is back in physical form and was not in digital form for very long, but it is great to have him back on the Front Bench. I also congratulate him on the way in which introduced this small but incredibly significant piece of legislation.
I would like to set out the problem, the solution and the potential benefits. Before I do that, it is worth also giving thanks to all those who have got us to this stage, not least Professor Sarah Green at the Law Commission, those at the International Chamber of Commerce, not least Chris Southworth, and many others who have worked to get the Bill into condition for our consideration this afternoon. The problem is pretty simple: to have possession of goods—if they are under a bill of lading, for example—you must be able to possess that document. It is much more than a contract merely setting out terms; it is a possessive document. Possess the paper and you possess the goods. How is it possible to take this ownership into a digital and intangible, and as yet in so many ways so contested, world?
Fortunately, because of new and emerging technologies —the technologies of the fourth industrial revolution—we now have such an opportunity. I agree entirely with my noble friend Lord Lansley that although distributed ledger technology, or blockchain, currently offers great possibilities in this space, in no sense should the Bill be anything other than neutral about technologies. What we can be absolutely certain of is that a plurality of technologies will be coming through, which potentially—not inevitably—can do great service for us in this and other areas.
The solution is the legislation before us. It is the digital standards initiative, worked upon by the ICC and the WTO. That technology, not least because of its ability to enable immutability and interoperability, is why I undertook research to report on distributed ledger technology in 2017. I wanted to highlight the potential public and private good for the nation from that technology. Had I not done that, the fear, which is as clear and present a danger today as it was back in 2017, is that all too often blockchain is seen as bitcoin, which is seen by many as suboptimal. Thus all the potential public and private benefits—potential, not inevitable—of distributed ledger technology could be lost even before we got beyond proof of concept. Those three elements—legislation, standards and technology —give us the opportunities which we are discussing today.
I turn to the benefits. The economic benefits were well set out by my noble friend the Minister. There is £1.4 trillion of business in international trade in the UK currently; if just 50% of bills of lading were put in this format, there would be a £3.6 billion annual benefit for the UK. Respondents to the Law Commission’s consultation asserted a potential 5% saving in transaction cost as a result of this.
Perhaps even more important than the economic benefit, and certainly pertinent today, are the environmental benefits. The World Economic Forum calculates a 10% to 12% reduction in carbon from the logistics business if these measures are fully implemented. At the moment, if a cargo comes into Singapore, for example, without the paperwork as it is in London, someone has to board a plane to go to Singapore to deliver the document because, remember, “possess the document, possess the goods”. There is the economic waste and an environmental impact of those actions. As result of this Bill those seven to 10 days are potentially reduced to a 20-second process with no travel requirement. This could give us the transparency and accountability that we require in our supply chains. Recent history has shown us in painful ways that we do not have the supply chains we currently need or transparency, accountability and sustainability in our supply chains. This legislation could combine origin, ownership and payment liabilities in the same data ecosystem, with all actors being able to access broadly the same data for economic, social and environmental benefits.
The Electronic Trade Documents Bill is in many ways one of the most important Bills, yet currently so few people know about it. It is one of the most important Bills heard of by so few. It has the potential to eliminate over time the 4 billion-plus pieces of paper currently circulating around the world. Crucially, the Bill as drafted is rightly facilitative and permissive. It is not mandatory, and that is quite right. Does my noble friend the Minister agree that even after the passage of the Bill that means a continuing need for industry-led, government-supported efforts to ensure that we continue to provide that combination of legislation, standards and technologies to enable all in this ecosystem to avail themselves of the potential benefits which it enables?
Other issues have already been touched upon which are incredibly significant in this space. What is my noble friend the Minister’s view on where the current work is in terms of the 2025 border strategy and the technologies being deployed there, not least in the potential for atomic settlement at the border and how that could transform the experience for our traders, and on how the current work on digital ID in the UK can lead and interact internationally and ensure that there is that work on standards and that there is interoperability? It is fruitless for any nation to have tip-top digital ID if there is no interoperability. What other work is currently going on in my noble friend’s department and across Whitehall on the deployment and potential use of distributed ledger technology and all the technologies of the fourth industrial revolution? What potential problems is his department currently looking at putting such technologies to?
The Electronic Trade Documents Bill is one of the most significant pieces of legislation which most people have not heard of. It is trade-transforming, tech-enabling, economic growth-generating, carbon-cutting legislation. The UK has such an opportunity when tied to common law to lead, connect and collaborate in this space, not least across the G7, for the benefit of all nations right around the globe. I wish this legislation a safe Second Reading and swift passage into statute.
The Earl of Lindsay (Con)
My Lords, I am grateful to the Committee for the opportunity to make a short contribution in the gap. I greatly welcome the Electronic Trade Documents Bill and, in doing so, declare an interest as chairman of the government-appointed national accreditation body, the United Kingdom Accreditation Service—UKAS. It is in that role particularly that I commend this Bill for the downstream benefits it will bring. They include greater transparency, digital verification and mutual recognition of third-party testing, inspection and certification—all of which are critical to reducing technical barriers to UK and global trade.
More generally, in echoing my noble friend Lord Holmes of Richmond, I welcome the Bill’s purpose to make trade more efficient and sustainable, as well as the important opportunities it will enable in respect of international co-operation and interoperability in digital trade.
Our current paper-based processes are part of a labour-intensive trade system that will benefit from moving to quicker, digitally based transactions. This will be especially welcomed by SMEs, which are often affected most by the complexity and associated costs of trading systems that are heavily paper based. They are likely to be among the largest beneficiaries of a move to digitally based transactions. I wish the Bill well through its further stages.
Lord Fox (LD)
My Lords, when I used to run events to which not many people turned up, in justifying the occasion, I used to tell my boss, “The quantity doesn’t matter; the quality of the people is important.” This debate has demonstrated that and the quality of the speeches that preceded will indicate how low-quality mine is—but I will do my best.
I join the chorus of people welcoming the Minister back to his position. He was hardly gone at all. This in no way disparages his successor and predecessor, who did a sterling job on the Product Security and Telecommunications Infrastructure Bill, as I can personally attest. I wish him well, too.
However, this is a difficult Bill for the Minister because, although it is cast as a digital Bill, it is turning out largely to be a trade Bill. I echo the noble Lord, Lord Lansley, in saying that some questions may be answered during the Public Bill Committee, rather than by the Minister—although noble Lords are always happy to hear his responses.
These Benches welcome the Bill. On the face of it, it is a technical Bill that has broad support from the industry. As we heard, the Government have said that it can bring great improvements in speed and efficiency, such that it reduces costs and cuts the environmental impact of trade. As we know, the Law Commission’s report suggests that the industry generates 4 billion paper documents a year and that the changes could cut the processing time of these to 20 seconds, which is almost no time at all. Never mind the carbon and cost reduction; think of the efficiency and smoothness of this. Getting it right is important because, as the DIT tells us, international trade is worth more than £1.4 trillion to the UK.
But there is another, potentially more significant element to this very slim Bill. It is being viewed by many in the legal world as the first legislative attempt to solve the “possession problem”. It seeks to address the idea that the traditional understanding of what it means to possess something is no longer adequate in our digital age. The noble Lords, Lord Holmes and Lord Lansley, alluded to that. The principles of English law that underpin the use of trade documents are based largely on historical mercantile practices. Here I have a vision of coffee shops, with Dr Johnson looking on, as insurance and bills of lading papers march in and out. Frankly, that was happening and it is what we seek to transpose with this Bill. Most trade documents rely on physical possession to be legal and, in this country, there is no legal recognition of electronic trade documents, which this Bill seeks to fix.
The Explanatory Notes put this well—I put it on record because it is the nub of the Bill:
“a bill of lading is a document used in the carriage of goods by sea which, when transferred to a buyer (or any subsequent lawful holder), gives that holder constructive possession of the goods described in the bill, and a right to claim delivery of them from the carrier.”
The document equals the goods, so that is what we seek to reproduce in electronic form. The way in which the law, as it stands, treats that permission is premised on the idea that electronic documents cannot have the same relevant legal properties as physical pieces of paper—to whit, exclusivity or the ability to be associated with a single person. However, as we have heard, technology has now reached a point where electronic documents can be created which have these properties. I commend the noble Lord, Lord Holmes, on expertly setting out the properties, for example, of distributed ledger technology in this regard although, as he points out, we must remain technology-neutral in the legislation.
We have also heard that a number of countries have taken steps to recognise the use of electronic documents as legally valid. The most obvious example was set out by the noble Viscount and the noble Lord, Lord Lansley: the Model Law on Electronic Transferable Records, the beautifully named MLETR. This is supported by major stakeholders such as the International Chamber of Commerce as an international solution to the possession problem and, I am told, has been implemented in Bahrain, Singapore and Abu Dhabi. To be recognised as legally valid under the MLETR, an electronic document must, through a reliable method, be capable of being subject to an identifiable person’s exclusive control. I repeat: a reliable method.
With this backdrop, and at the Government’s behest, the Law Commission looked at this. The Government have acted on its final recommendations, made in March 2022, and brought forward this Bill, which proposes three criteria that electronic trade documents should be subject to, reflected in Clause 2. I will not read them out, but they are independent existence, exclusive control and that the document must be fully divested on transfer.
As I have said, we support the Bill and its aims. However, it has implications around solving the possession problem and we think the committee must focus on that when we discuss it later, as it will need some careful consideration. For example, in its consultation response, the law firm Linklaters considered the issue of control and argued that it is not completely clear whether the Bill refers to legal or factual control. The Law Commission proposals suggest the concept of control should be limited to factual control, but this is not specified in the Bill. The noble Viscount, Lord Waverley, went into deep technical detail but there is a high-level issue, alluded to by the noble Lord, Lord Lansley. Linklaters highlights the practical issues that arise from the requirement that only one person has control. As we have heard, digital keys can be shared to multiple people, so restrictions on sharing could exclude much of the existing technology for moving documents around. Requirements for verification may interfere with the concept of control, especially if this is done through third parties. The committee should also consider this.
As has been said, the Bill does not establish
“what constitutes possession of an electronic trade document”
so it seems to us that the concept of control—and, through that, possession—needs to be more tightly defined. In the end, this Bill’s scrutiny should aim to establish whether the aim of ensuring that paper and electronic documents achieve “equivalent” effect has been achieved.
This Bill is almost identical to the draft Bill from the Law Commission with two obvious exceptions. First, in Clause 5, “Exceptions”, the Law Commission made explicit reference to bearer bonds being exempt from the Bill. This is not referenced in the Government’s Bill; rather, Clause 5(2)(b) says that the Secretary of State can exempt document types by regulations. Why is there this variation between the Bill and what came from the Law Commission?
Secondly, this Bill also varies from the Law Commission’s in the extent that it applies. The Minister referred to this in his opening speech. The Law Commission consultation applied to England and Wales, whereas this Bill applies across the whole of the United Kingdom. The Explanatory Notes state that
“DCMS, in discussion with the Territorial Offices and Devolved Administrations, has extended the extent of the Bill to the whole of the UK.”
The Minister referred to discussions with Scotland, but I do not think that he mentioned Northern Ireland, so I am interested in how that fits. The Scottish law officers said that Scottish law differs from the law of England with respect to possession, so how will the differences in the approaches of the two countries’ laws on possession be covered by this one Bill?
In his opening speech, the Minister talked about the traceability and transparency afforded by digital documentation. I draw a parallel between digital money and cash as an example. However, this sets a number of hares running, because it clearly offers great opportunities for HMRC and indeed law enforcement agencies. How does the Minister see the traceability and transparency to which he referred working? Surely those wishing to conceal what they were doing would continue to operate with paper documentation, so I wonder how far forward we would really get.
As I draw to a close, I would like to address how this Act will be implemented. Like the noble Lord, Lord Holmes, I hope and trust that it quickly becomes law. The Bill allows for documents to be converted between paper and electronic forms, which is key as international trade requires reciprocal recognition of documents and different jurisdictions will recognise electronic documents to varying extents. What consultation are the Government doing internationally to encourage other countries to implement the recognition of electronic documents?
This Bill also presents the potential, as we have heard, for huge cost reduction and environmental benefit, but that is dependent on take-up of digital trade documents. The Minister said that there was potential for £3.6 billion of savings, but that relied on 50% of documents going from paper to digital. What plans do the Government have to advertise this change to business and to help business to take it on? Will the Government monitor the use of digital documents to see how take-up is going, and will they be able to make an assessment of whether further changes are needed to encourage future take-up?
Finally, this is a legislative attempt, as I have said, to solve the “possession problem”. While there is a narrow focus on trade documents in this Bill, it may—and, I think, should—inform government thinking on wider policy in relation to digital assets. In November 2019 the UK Jurisdiction Taskforce published its Legal Statement on Cryptoassets and Smart Contracts and suggested that crypto assets should be treated as property under English law. This principle has since been underlined in case law, but the law is not comprehensive and is still grappling with the particular issues raised by digital assets.
The Law Commission launched a separate consultation on proposals to ensure that the law recognises and protects digital assets in a digitised world. That consultation closed last week, on Friday 4 November. When can we look forward to the results being published? Can the Minister tell us whether it is the Government’s view that this Bill sets a precedent for how future law will cover the possession of crypto assets? I look forward to the Minister’s response and to Committee stage.
Lord Bassam of Brighton (Lab)
My Lords, like all other Members of this Committee I welcome the Minister back to this modest piece of legislation, although it has a truly massive import, as all previous speakers have said today. I have drawn one or two points from their comments.
The noble Viscount, Lord Waverley, made the point that this was a major innovation in legislation and an important part of a jigsaw that needs to fall into place if we are to ensure that our place in the trading world is maintained. The noble Viscount asked four important questions; I shall listen for the answers to them with great interest. As he said, this is part of an exciting journey and one which we obviously need to follow closely. I was deeply impressed by his contribution and that of the noble Lord, Lord Lansley, who accurately described it as an important framework Bill—that is what it is, at seven pages long. With his enormous experience in international trade, I am sure that he will focus laser-like attention on it when we get to Committee. The major issue that he identified was interoperability, which is key to what we are trying to achieve here. Overcoming obstacles around that will be extremely important.
I was grateful to the noble Lord, Lord Holmes, for his comments because he brought the debate into the real world when he said that the Bill could achieve something like 5% savings in transaction costs. In itself, that does not sound like an enormous amount, but when you think about the value of international trade it is vast. Another important point that he made was about the environmental benefits that this legislation could bring. I think we are all very conscious of those now, but he also talked about the importance of accountability and transparency and we, too, on our Benches, very much share that.
The noble Earl, Lord Lindsay, made the important point that SMEs will be the big beneficiaries from this. That is without doubt or question, because clearly it is of enormous advantage to an SME when its transaction costs are reduced and ability to trade speedily is very much underlined. The noble Lord, Lord Fox, talked about the Bill being technical, and it is, but the big problem it has to solve is that of possession. We should all focus on that.
The Labour Benches fully support the introduction of the Bill. We see it as a long overdue reform, which allows for the legal recognition of certain types of documents used in trade and trade finance in electronic form. This will finally mean that parties can use the law that currently applies to paper trade documents when transacting with electronic trade documents.
As we know, the Law Commission does invaluable work in advising on the reform of long outdated legislation. Despite the size and sophistication of the international trade market, many of its processes, and underlying legislation, are based on practices and frameworks developed by the nation’s merchants hundreds of years ago. It is the Bill’s intention that electronic trade documents, when capable of possession, should be treated in law in a manner equivalent to their paper counterparts—a simple notion but one that is obviously complex to implement.
The Bill represents for us a most welcome opportunity to further modernise trade transactions. In theory, it should speed up transactions and bring business into the modern world, where electronic interactivity is commonplace. The Law Commission report said that
“there is an existing set of complex private international law rules that determine which courts have jurisdiction over a dispute, and which country’s laws should be applied to resolve it … these rules are complex and fact specific”.
It then said that electronic trade documents may give rise to
“novel issues … that require further consideration”.
For instance, it continued, there are “inherent difficulties” in ascertaining “the geographical location” of digital assets, including electronic trade documents. Similarly
“questions may arise as to how an electronic trade document issued in England and Wales would be treated by a country that does not recognise the validity of electronic trade documents”.
The Law Commission also recommended that private international law aspects of electronic trade documents should be dealt with in a separate commission project that deals with digital assets more broadly as part of its 14th programme of law reform. I think it was supposed to be completed in mid-2022. Can the Minister advise on what steps will be taken in the meantime to mitigate issues that may arise affecting the operation of trade transactions? Can the Minister undertake to report back to Parliament on the operation of the provisions within a year of the date on which the Act is implemented?
We on our Benches believe it is important that parliamentarians are kept advised of progress in this field. I have nothing much more to add, except that we thank the Law Commission for its critical work on the Bill which we see as largely uncontroversial and of great value in ensuring that the world of trade and commerce operates smoothly and efficiently as possible and that UK businesses are not disadvantaged in any way. This Bill eases those processes and transactions that we need for us to continue to be competitive in a highly competitive world of trade.
Lord Parkinson of Whitley Bay (Con)
My Lords, I am very grateful to all noble Lords who have contributed to today’s debate, including my noble friend Lord Lindsay, who spoke in the gap. As the noble Lord, Lord Fox, rightly said, it is quality not quantity that counts. I am glad that noble Lords who took part were unanimous that although the Bill may be small its potential impact is significant.
In my opening remarks I touched on that transformative impact, and I am keen to emphasise the elegant way that the Bill achieves its goal. It is a simple Bill, although I hesitate to use that word because a great deal of consideration and work has gone into making it so. My noble friend Lord Holmes of Richmond is right to pay tribute by name to some of the people who have been involved in that important work. The Bill achieves what it sets out to do in a minimalistic way. As the noble Viscount, Lord Waverley, said, it is also an enabling Bill which leaves people free to sign up to use it if they wish. The opportunity it presents to bring trade law up to date is immense.
English law underpins the laws of global trade, and all eyes will be on us in the UK as we take this legislation forward. As the noble Viscount, Lord Waverley, said, the benefits will be there for others to accrue beyond these shores. The objective of the Bill is for the UK to take the lead in setting an international standard for how electronic trade documents can be defined and recognised under domestic law with the intention that other jurisdictions will adopt similar laws. The more that other countries harmonise their domestic laws to recognise electronic trade documents, the less it will matter whether UK law and this Bill in particular apply, and that is the case with paper trade documents today.
I am grateful to my noble friend Lord Lansley for highlighting some of the areas that he intends to probe in the Special Public Bill Committee. He is right that the Bill requires that scrutiny there.
I will deal with some of the questions that were raised. I hope it will be useful. I will, of course, look to see whether it is worth writing on further points ahead of the Special Public Bill Committee, although I would be grateful to noble Lords for recognising that that is the place to go into some of the deeper detail. I am always happy to speak to noble Lords ahead of that committee if it would be useful.
I agree with my noble friend Lord Holmes that there are many opportunities for technological solutions. One of the underlying principles of the Bill is that it is technology neutral. It would run counter to the objectives of the Bill if it were to prescribe or mandate a particular electronic trade document system. That would be likely to stifle innovation and risk excluding participants on the basis that their system does not satisfy the Bill’s requirements. The Bill does not specify what constitutes a reliable system or mandate a particular type of system. Rather it sets out various factors that a court may take into account when determining reliability. The Bill therefore offers some guidance on how to assess the reliability of electronic systems. We have been working closely with industry, which is developing standards to ensure reliability and verifiable authentication of electronic trade documents.
Lord Fox (LD)
One issue that is worth investigating further is who is the arbiter of reliability when it comes down to a system. Is it the buyer, the seller, a third party or some accreditation body that says it is reliable?
Lord Parkinson of Whitley Bay (Con)
If I may, I will accept the noble Lord’s invitation to look at this in Committee because it is worthy of the deeper scrutiny that that affords.
A number of noble Lords understandably referred to the United Nations Commission on International Trade Law, or UNCITRAL, and its Model Law on Electronic Transferable Records, or MLETR, which is the international attempt to provide a legal framework for electronic trade documentation that can be adapted and adopted by individual jurisdictions. In developing its recommendations for reform, the Law Commission was particularly cognisant of this model law. The recommendations have been developed with a keen awareness of it, aligning with it where possible and integrating its spirit and objectives into the particularities of the law of the UK. As such, the provisions of the Bill are broadly compatible with the MLETR, but are drafted to cater for the nuances and specificities of UK law.
For example, the Bill expressly and clearly provides that electronic trade documents are capable of possession, while the MLETR provides that control is a functional equivalent to the fact of possession. It is clearer and more direct to extend the application of the concept of possession itself, rather than to use control as a functional equivalent to the fact of possession. That is something that the noble Lord, Lord Fox, touched on in his remarks about restrictions on control.
Within this Bill, control is a question of fact, as reflected by Clause 2(3)(a), which did not feature in the Law Commission’s draft Bill. The Bill does not define possession; it is a common law concept, which is highly flexible. Again, noble Lords will want to discuss this area in Committee, but the Law Commission’s advice, based on extensive research and consultation, is that it would be difficult, if not impossible, to set out in legislation what constitutes possession of an electronic trade document because possession is a fact-specific concept that has always been notoriously difficult to define in abstract terms. Furthermore, it would be impractical to frame legislation to cover the full range of possible solutions that could arise in relation to possessing electronic trade documents, particularly given the potential for technology to develop and give rise to different forms of control and therefore possession. I look forward to discussing this in greater detail in Committee.
The noble Lord, Lord Fox, asked about the territorial extent of the Bill, particularly in relation to Northern Ireland. The Bill is intended to apply UK-wide, as the issues concerning the legal blocker to possessing electronic documents are broadly the same. Apart from the provision in Clause 3(4), which extends only to Scotland and relates to the interaction between the Bill and the Moveable Transactions (Scotland) Bill, the Bill extends UK-wide. It is reserved in relation to Northern Ireland on the basis that the Bill deals with the reserved matter of trade with any place outside the United Kingdom. We have agreed with officials in the Northern Ireland Executive that the legislative consent Motion process is not therefore engaged.
Lord Fox (LD)
Is this Bill compatible with the Northern Ireland protocol? Is it compatible with the unique position that Northern Ireland has within the United Kingdom in having an open border with the EU?
Lord Parkinson of Whitley Bay (Con)
We do not expect the Bill to have any impact on the operation of the Northern Ireland protocol. It is a measure to digitise business-to-business trade documents. It will allow businesses to use electronic trade documents when buying and selling internationally, and the benefits will be realised irrespective of whether trade is internal to the UK market or is global.
The noble Lord, Lord Fox, also asked some further questions about other jurisdictions. DCMS and the Department for International Trade agreed the digital economy agreement with Singapore, which includes a memorandum of understanding that put in place a pilot project to explore and text the interoperability of electronic trade documents.
The noble Viscount, Lord Waverley, asked about digital ID and e-signatures. I certainly agree that digital signatures and digital ID are areas that would benefit from harmonisation. As noble Lords stated, this Bill is merely the first foundational step towards digitisation and interoperability. The Bill is very specific in removing the legal blocker to possession of electronic trade documents; that really is its core purpose. We want to remove an obstacle for UK businesses that trade internationally. In giving electronic trade documents legal effect, we can unlock their current and future potential.
I will of course consult the Official Report of the debate to see whether there are any further points on which it might be useful to follow up before Committee. I look forward to the further scrutiny that this modest but important Bill will receive then. I am very grateful to noble Lords for their remarks and the questions that they have raised today.