All 1 Lord Fox contributions to the Electronic Trade Documents Act 2023

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Mon 7th Nov 2022

Electronic Trade Documents Bill [HL]

Lord Fox Excerpts
Second reading committee
Monday 7th November 2022

(2 years, 1 month ago)

Grand Committee
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Lord Fox Portrait Lord Fox (LD)
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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.

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Lord Parkinson of Whitley Bay Portrait Lord Parkinson of Whitley Bay (Con)
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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 Portrait Lord Fox (LD)
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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 Portrait Lord Parkinson of Whitley Bay (Con)
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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 Portrait Lord Fox (LD)
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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 Portrait Lord Parkinson of Whitley Bay (Con)
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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.