The advantages and disadvantages of e-bills in today’s world is called into question, as the International Group of P&I Clubs approves a third electronic trading system.

By
Barry Stimpson, Jody Wood and Justine Barthe-Dejean, Reed Smith,

Electronic trading systems, or ETS, are online platforms, by which electronic bills of lading can be created and traded. It is crucial to the use of e-bills within the shipping industry that they behave similarly to their paper counterparts, and that their electronic nature does not deprive carriers of their insurances and, in particular, their P&I cover.

Thirty-one percent of the global bulk carrier fleet have moved to electronic documentation

Until recently, only two ETS had obtained approval and confirmation of cover from the International Group of P&I Clubs: Bolero International Ltd and essDOCS Exchange Ltd. However, in October 2015, the Clubs in the International Group informed their members of the approval of a third ETS called e-Title; a slow, but significant development in the area of electronic trading.

While electronic communications are widely used within the shipping industry today – an estimated 47% of the global tanker fleet and 31% of the global bulk carrier fleet have moved to electronic documentation for most, or all, of their trade and finance operations – the use of e-bills has lagged behind. Paper bills have instead remained the preferred sea carriage document, most likely due to the uncertainty of whether e-bills can comprehensively mirror and replicate the evolved matrix of contractual rights, responsibilities and obligations inherent in paper bills of lading.

That said, as in any other area of modern life, the advantages of electronic communications are equally as substantial and varied as the disadvantages. And, notwithstanding the concerns above, they also demand progression.

“The advantages of electronic communications are equally as substantial and as varied as the disadvantages. And, notwithstanding the concerns above, they also demand progression.”

Modern world

Fraud is among one of the first issues to be discussed when it comes to electronic trading in today’s world. Since e-bills are held centrally and securely, and are only accessible by the lawful holder at any one time, e-bills are much less prone to fraud than paper bills. This is because paper bills can be copied or switched and, thereafter, fraudulently pledged or presented by the persons improperly holding themselves out as the lawful holder.

Another issue is time. Just as paper bills are expensive to courier to the world’s discharge ports, they are also slow, particularly when a cargo is traded numerous times while at sea. This gives rise to a host of issues, most of which result in increased expense, such as delay to the vessel or the carrier being required to discharge against letters of intent, for example.

The development of electronic trading also calls into question its mechanics. Unlike paper bills, which are governed by endorsement and lawful possession, e-bills require all parties to a trade to be signed up to the relevant ETS in advance, so that the e-bill can be transferred and traded between them. This means that the free trade enjoyed by paper bills is somewhat fettered.

ETS and e-bills seek to replicate the existing legal framework of paper bills by express contractual agreement. Where parties to a trade have agreed to use e-bills, all of those parties sign up to the relevant ETS’ user agreement, which implements, as between all of them, the rights and obligations associated with paper bills.

Common features

Each of these ETS has their own user agreement, but there are some common features. In particular, e-bills visually replicate paper bills, preserving the often industry; replicate the function of paper bills, including a party’s ability to issue, endorse, recut or surrender the e-bill; replicate the physical transfer of paper bills and, while all parties can view an e-bill, the trading platform restricts access and indorsement to the current lawful holder as the bills as the e-bills securely move from one party to the next; and, can be converted into paper bills, allowing them to be finally traded with parties that have not signed up to the respective ETS platform.

Legal enforcement should also be noted here, as how well an e-bill would hold up as a binding contract in court is still relatively unknown. Although an ETS contractually seeks to replicate the contractual matrix as between the parties to a trade, one area of concern arises out of how e-bills are likely to be viewed by a court or tribunal where the e-bills becomes the subject of legal proceedings. By way of example, might a Court in Indonesia or the People’s Republic of China refuse to acknowledge an e-bill as a binding contract?

These types of difficulties have not yet been tested in court, probably because the use of e-bills has been restricted to trading intra-group and between trusted counterparties. As such, disputes seldom arise and almost certainly never become the subject of formal legal proceedings.

Institutional support

The International Group and BIMCO both continue to support the use of e-bills, and this support is reflected in their policies. In November 2014, BIMCO introduced a new standard charterparty clause, addressing the use of e-bills, which can be summarised as follows:

“At the Charterers’ option, bills of lading, waybills and delivery orders referred to in this Charterparty shall be issued, signed and transmitted in electronic form with the same effect as their paper equivalent. For the purpose of Sub-clause (a) the Owners shall subscribe to and use Electronic (Paperless) Trading Systems as directed by the Charterers, provided such systems are approved by the International Group of P&I Clubs. Any fees incurred in subscribing to or for using such systems shall be for the Charterers’ account. The Charterers agree to hold the Owners harmless in respect of any additional liability arising from the use of the systems referred to in Sub-clause (b), to the extent that such liability does not arise from Owners’ negligence.”

In February 2010, the International Group Clubs informed their members that the use of e-bills would be covered by P&I insurance in the same way as paper bills, providing that the electronic trading platform was approved.

It should be noted, however, that the use of e-bills assumes additional cyber-style risks, such as viruses or hacking, which fall outside traditional P&I cover as non-marine risks, but can be covered by traditional business insurance. Parties signing up to any ETS will therefore incur obligations similar to those contained in software agreements, such as to maintaining IT standards, confidentiality and data protection undertakings.

Despite the clear advantages of instantaneous communication, paper bills are proving resilient to change. This probably has less to do with the traditional and conservative nature of the shipping and trade industry, and more to do with concerns surrounding their ability to mirror the evolved nature of paper bills, which are so fundamental to the industry. As such, it remains to be seen whether the carriage of goods by sea will enter into a brave new, and paperless, world.

Barry Stimpson is a partner at Reed Smith, with more than 20 years of experience handling shipping international trade, offshore energy and construction matters. In 2016, he became the Office Managing Partner of the firm’s Singapore office. He can be contacted on +65 6320 5343 or bstimpson@reedsmith.com. Jody Wood is a counsel in Reed Smith’s Shipping Group, acting for global and regional clients in the shipping, trade and insurance sectors. He can be contacted on +65 6320 5373 or jrwood@reedsmith.com. While Justine joined the same firm in 2014, and is a member of the Energy and Natural Resources Group. Her practice currently focuses on disputes in the shipping and commodities sector. She can be contacted on +65 6320 5349 or jbarthe-dejean@reedsmith.com.