Analysis: A new dawn for electronic bills of lading

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Electronic bills of lading (eB/Ls) have existed for several decades but their take-up has been slow. That is, until the arrival of the Covid-19 pandemic which has considerably accelerated digitalisation globally, shipping being no exception.

Measures introduced by governments to slow the spread of Covid-19 brought numerous unintended consequences for the delivery of cargo. Restrictions on movement significantly delayed the delivery of the bills of lading and led to an increased incidence of vessels arriving at the discharge port before the bills of lading, adding to the global port congestion problem.

At CJC, we are frequently asked to advise on misdelivery claims which usually arise in circumstances where the original paper bills of lading are not available at the discharge port and cargo is released against a letter of indemnity provided by a cargo receiver or charterer. In circumstances where it transpires later that the cargo was delivered not to the lawful holder of the bill of lading but some other party, misdelivery claims may arise with cargo interests suing the carrier for the total loss of the cargo. This can result in large claims, which are often uninsured by P&I given that delivery was not made against the original bill of lading as required by the terms of the policy.

More specifically, a complex dispute arose out of Peru’s removal of the obligation to sight an original paper bill of lading prior to the release of cargo[1] following the adoption of Legislative Decree 1492[2]. Without sight of the original bill, the carrier would be less certain who the correct consignee is to release the cargo to[3]. This increased the risk that the carrier might release the cargo unknowingly to the wrong party and exposed carriers to legal action prompting shipowners to refuse to call at Peru and divert vessels to other countries, giving rise to claims under their charter agreements. While discharge without the presentation of original negotiable bills of lading is established practice in some countries (an example being Russa[4]), the abrupt introduction of this system in Peru caused uncertainty. The situation would have been different had a recognised electronic trading system been in widespread use at the time.

Back to basics – the core functions of bills of lading

Bills of lading generally fulfil three key functions:

– act as a receipt for the shipment of the goods

– provide evidence of the terms of the contract between the carrier and the cargo owner

– serve as a document of title

These functions are conveyed by operation of law, an example being the English Carriage of Goods by Sea Act 1992 (“COGSA”), or by established custom and practice and enable the bill of lading to be transferrable between parties to a commercial transaction.

E-bills of lading and their status

An electronic trading system is a system which is intended to replace paper documents used for the sale of goods and/or their carriage by sea or by combined or other means of transport. Transfer of rights is not by physical endorsement but via contract, such as through novation or assignment. In practical terms, the sender who holds the e-bill transmits an electronic message using a private digital key to the recipient who deciphers it with a public digital key which makes the sender lose its ability to transfer or take delivery.

A key difference is that under English law (and indeed under the laws of most countries) e-bills are treated differently from paper bills[5]. Importantly, the function that the bill is a document of title does not operate by law.

Mandatory provisions such as the Hague (-Visby) Rules[6] which offer well-known rights and protection to both carriers (e.g. defences and the right to limit liability) and cargo interests (e.g. restrictions on the carrier’s ability to exclude or limit its liability) do not apply to e-bills by law. Another difficulty in international transactions is that many countries also do not consider documents which are signed electronically as valid[7].

The law in England and Wales could soon change and has been changing in other countries[8]. On 30 April 2021, the Law Commission published a Consultation Paper seeking submissions on the question of whether electronic trade documents should have the same effect in law as paper bills.[9]

The law does however respect the parties’ freedom of contract. For the time being, electronic trading systems therefore circumvent the unclear status of eB/Ls by way of complex multi-party contracts where all parties to the transaction agree beforehand to treat the e-bill as having additional functions and operating in a particular way or in the same way as a paper bill.

This framework allows the parties to sue one another under the multi-party contract. Exposure is therefore different from that under paper bills – the complex contracts will often involve bespoke clauses whose effect may be untested before the English Courts. Before transitioning to eB/Ls, stakeholders should therefore assess their exposure and if necessary seek legal advice.

How do Clubs approach e-bills?

P&I Liabilities

Before February 2010, the rules of all Clubs of the International Group of P&I Clubs (the IG Group) expressly excluded liabilities for cargo carried under electronic documentation to the extent that such liabilities would not have arisen using paper bills.

While this continues to be the default position, the rules have since been gradually relaxed. Electronic trading systems which have been formally approved by the IG Group are recognised and liabilities covered are subject to usual exclusions[10]. At the time of publication (July 2021), the following seven systems have been approved by the International Group of P&I Clubs for use by its members: essDOCS, Bolero International, E-Title, edoxOnline, CargoX and WAVE. TradeLens has, as of March 2021, become the latest addition. Separate insurance may be required for non-P&I liabilities which may arise from the multi-party agreements for use of eB/Ls such as cyber risks, confidentiality obligations or obligations to maintain computer links etc.

For unapproved trading systems, the default position applies and liabilities are only covered to the extent they would also arise under paper bills. P&I Clubs may cover a liability in their discretion notwithstanding although this is far from guaranteed.

Freight, Demurrage & Defence (“FD&D”)

Depending on the terms and the extent of cover it is possible that FD&D insurance may assist a carrier under an eB/L in covering its litigation or arbitration fees but not for the liability claim itself. This cover is discretionary and will be subject to the legal merits and the member’s exercise of due diligence. Complex proceedings (as may be the case with e-bills given the lack of legal precedent) are perhaps unlikely to be covered.

To eB/L or not to eB/L

The economic reasons for the transition to eB/Ls speak for themselves: One container shipment[11] alone can generate 200 communications[12] and the administrative cost of processing the documentation is estimated to account for between 15% and 20% of the overall cost of transporting the goods. The prospect of reduced administration and costs[13], a secured fast end-to-end documentation process, reduced credit time in financial transactions resulting from instant transmission of information and a reduced risk of fraud and human error make the case for a transition.

From a legal point of view, eB/Ls help avoid the following common situations:

1. Physical bills of lading are not available.

This situation is commonly resolved by the issue of a letter of indemnity (especially if prescribed by the terms of the charter) whereby the Charterer agrees to indemnify the shipowner for any losses caused as a result of delivery of the cargo without the production of a B/L. However, a letter of indemnity is only as valuable as the issuer who grants it and may not be worth the paper it is written on and invalidates P&I cover for claims arising in consequence, even if the letter of indemnity was issued on an IG Group standard letter of indemnity. Alternatively, shipowners have discharged cargo directly into warehouses – which exposes them to claims for damage or theft – or waited for the arrival of the bills which resulted in undue delay.

2. More than one person demands delivery.

This is a red flag and indicates a defect or dispute as to title. eB/Ls help ensure that only the final holder of the eB/L has proof of ownership and is able to demand delivery, although the obligation on the shipowner to verify the person’s identity remains.

3. A Bill of Lading needs to be amended/the destination changed after it has been signed.

The carrier is dependent on information from shippers which may change during the booking process and sometimes after the bills have been issued, primarily in cases where there is a change to the named discharge port. Later amendment requests commonly have to be submitted to the shipping agent, the 3 originals traced, invalidated and cancelled and replaced by a new set of originals.

Changes might impact the credit arrangement. eB/Ls help simplify the process enabling agreed changes to be approved and implemented swiftly.

4. Agents provide unauthorised information on the bill of lading.

With paper bills, local agents at the port are often authorised to complete the paper bills and sign them on the Master’s behalf. In doing this, it is not uncommon for the agents to issue bills which contain inaccurate remarks. eB/Ls provide the shipowner with more ability to verify the information on an eB/L instantaneously.

A transition to a paperless trading system is not without challenges. Operability is limited as the value of the electronic trading system only increases with the number of its users. The increased exposure to cyber-attacks is a problem and is illustrated by the recent Court of Appeal case MSC Mediterranean Shipping Company S.A. v Glencore International AG[14], although the risk may be offset by increasing industry risk awareness and insurance. While an abundance of case law exists which provides certainty around the operation of paper bills, a problem is the absence of case law for situations arising under eB/Ls. As with any technological development more certainty will be introduced by the passage of time as disputes make their way through the courts.

The second time is the charm – full steam ahead for eB/Ls

eB/Ls have been a work-in-progress for many years. Despite the drawbacks of the current paper system, carriers and cargo interests alike are familiar with it, aware of its benefits and its pitfalls, and have been reluctant to make the change. However, as it is becoming increasingly desirable for the shipping industry to reap the benefits that eB/Ls provide, recent market developments indicate that it may now have found the determination to take the plunge.

On this occasion, the transition is being spearheaded by numerous large shipping companies[15] as part of their global agenda to improve operational efficiency. We therefore expect the adoption of eB/Ls to be dominated by commercial dynamics and their use to gradually filter down from the top of the market.

As ever, the law will develop in the area as eB/Ls become more prevalent. Until the law catches up, stakeholders need to be clear on their legal exposure under eB/Ls which will differ from that under paper bills and seek wherever possible to reduce it whilst maintaining adequate insurance.

[1] Section 7.2 of the Decree.

[2] Legislative Decree 1492 – provisions for the reactivation, continuity and efficient operation of the foreign trade logistics chain.

[3] See the letter of the Federation of National Associations of Ship Brokers and Agents of 3 June 2020: https://www.apam-peru.com/web/wp-content/uploads/2020/06/FONASBA-LETTER-TOPRESIDENT-VIZCARRA-REGARDING-DECREE-1492-03.06-F.pdf

[4] See Sucre Export SA v Northern River Shipping Ltd (The Sormovskiy 3068) [1994] 2 Lloyd’s Rep. 266.

[5] But note that COGSA section 1(5) opens the door for legislation to be introduced making COGSA applicable to “an electronic communications network or any other information technology”.

[6] See Article I(b) which provides that the bill of lading should be a document of title. Contrast this with the little used Rotterdam Rules which do contain provisions relating to electronic transport documents.

[7] This is not an issue under English law – see section 7 of the Electronic Communications Act 2000.

[8] Examples include Abu Dhabi Global Market, Bahrain and most recently Singapore which have adopted the UN Commission’s UNCITRAL Model Law on Electronic Transferable Records which enables the legal use of electronic transferable records both domestically and internationally. Korean legislation treats e-bills as having the same effect as paper bills.

[9] See here which also links to the Consultation Paper. The consultation was open until 30 July 2021.

[10] Examples include ante- or post-dated e-bills, delivery without the production of e-bills, discharge at a place other than that specified by the e-bill.

[11] According to research by Maersk and IBM which tracked a container of flowers on a voyage from Kenya to Rotterdam, see https://www.youtube.com/watch?v=dcddYatMCGQ

[12] According to research by Maersk and IBM which tracked a container of avocados on a voyage from Mombasa to Rotterdam

[13] DCSA research suggests that a 50% e-bill adoption by 2030 in the container shipping industry might save the industry more than USD 4 billion per year: https://dcsa.org/wpcontent/uploads/2020/05/20200519-DCSA-taking-on-eBL.pdf

[14] [2017] EWCA Civ 365. Under the port’s voluntary electronic release system carriers provided computer generated pin codes against bills of lading which were sent via email to the relevant receivers or their agents and the port. When receivers came to collect the cargo they discovered that two containers had already been collected by unauthorised persons. The Court held that the pin codes were stolen from the receivers’ computer so it should be the receivers who should bear the loss.

[15] Examples include MSC, Maersk APL, Evergreen, Zim, Hyundai Merchant Marine Co and many others.

This is a guest post by Cecilie Rezutka, associate at maritime law firm Campbell Johnston Clark