Shipping documents in international trade are a necessary burden that provides a guarantee for the contracting parties. There is little to debate when one describes the bill of lading as the most important document of all. Its key functions include acting as a receipt, as evidence of contract of carriage, and as a document of title. Its weight is indisputable, and it is certainly the first thing that comes to mind when we think about shipping documents.
However, its paper-based form does not reflect its importance as it renders bills of lading susceptible to delays and fraud. Such shortcomings bring about legal implications that have increasingly made its paper format undesirable for the purposes of international freight.
Overview of shortcomings
The issues associated with paper bills of lading include a multitude of business underpinnings amongst which costliness, poor efficiency, excessive use of paper and low security.[1] Some of these commercial concerns implicate the operation of the law and ought to be re-assessed to demonstrate that paper bills of lading do in fact have unfavourable legal effects, not merely business risks such as insolvency as Bowen LJ noted a century ago.[2]
Bills of lading are dependent on possession, meaning that their possession equals the possession of goods and any rights pertaining to the goods, such as the right to accept delivery and resell to third parties, which are also conditional upon it.[3] Even straight bills are no exception as their possession enables the consignee to claim delivery on surrender of the document.[4] Therefore, possession, as a precondition to lay claims to entitlements relating to goods,[5] can be compromised if the bill of lading is delayed or subjected to fraudulent intents. This is especially relevant in the context of the paper-based bills of lading as their format makes them more susceptible to such faults.
Fraud
Bills of lading are commonly issued in sets of three originals, or even six, thus complicating their function as documents that confer constructive possession to the holder. This is because each bill is concurrently an original. The risk of misuse is, hence, increased.[6] This is unsatisfactory as it allows for the possibility of both the endorser and the endorsee to demand delivery and for other parties to falsify one of the bills of lading. Opinions on this practice are split.
One side argues that fraud is an implied commercial risk that comes after the primacy afforded to prevention of insolvency, meaning that multiple bills of lading are imperative in achieving commercial goals.[7] The other side argues that this practice is flawed in so far as a multitude of bona fide parties can come into possession of one part of the bills of lading as a result of some fraudulent intent by the party administering the bills.[8] Importantly, this issue is subject to limited instances of fraud in practice. Besides Glyn Mills, the case of Barber[9] is the only one implicating fraudulent use of one of the bills of lading from the set.
Nonetheless, a set of three or six is not reflective of the document’s importance as it firstly, fails to recognise that the function of the bill of lading as a document of title is the very crux of its commercial appeal[10] and secondly, it creates complexities in distinguishing title to the goods from possession of the bill.[11] If the bill of lading is deemed the key to the subject matter of the contract,[12] namely the goods, and if its possession essentially gives the holder title to the goods,[13] then its paper form should reflect that. Hence, it must be unique and secure, which is certainly not the case if a set of multiple originals is issued in paper format.
The issuing of multiple original paper bills of lading maximises the opportunity for fraudulent behaviour. Fraud can materialise in many ways. Due to various methods of dispatch of the set of bills or mere fraudulent intent, the falsification of a genuine bill is not unlikely.[14]
In Standard Chartered Bank, [15] backdating a bill of lading and then presenting it with fraudulent intent to obtain payment against a letter of credit is illustrative that the trail of a paper-based bill is neither difficult to manipulate, nor does it bear minimal risks that are not worth engaging the law for.[16] In simple terms, even minimal tampering with the bill can result in legal action for misrepresentation, thus suggesting that there is an inherent ease in compromising the authenticity of the bill as a receipt and evidence of contract.
Furthermore, discharging the goods against a forged bill, thus resulting in mis-delivery, is another example. In Motis Exports, [17] it was held that the shipowners were liable even where a clause relieving them of liability was present. This illustrates that the possession of the original bill is irreplaceable, which in turn requires a higher level of security. In reality, the current paper system fails to do that and the practice of issuing sets continues.
Delay
The other issue associated with the use of paper bills of lading is the complications created by the late arrival of the document. Unlike the number of fraud cases, delay of the bill is common.[18] Besides incurring demurrage and storage costs of the cargo that arrives before the bill, as well as related consumer losses,[19] the delay of the bill of lading has important legal consequences.
On the one hand, the consignee is not able to exercise their right to take delivery of the goods, whilst the shipper is hindered from discharging their obligation to release the goods, as they cannot do so without being presented with the bill of lading.[20] Beyond that, if the goods have been agreed to be re-sold to a third party, then the delay of the bill of lading and the subsequent need to put the cargo in storage can devalue the goods,[21] and this could create liabilities towards the third party.
Furthermore, non-availability of the bill of lading has necessitated a practice to take a letter of indemnity to facilitate the delivery of the cargo.[22] The use of letters of indemnity to compensate for the lack of an original bill of lading undermines the centrality of the bill as a facilitator of trade and is far from satisfactory.[23] The creation of this practice is evidential of the ineffectiveness of the paper-based bills of lading.
Equally problematic are the effects of this practice, as the use of this letter can again result in mis-delivery, if a party claiming to be the rightful owner later presents the bill, thus giving rise to a claim for breach of contract or, alternatively, a claim in tort.[24] This issue had been particularly exacerbated during Covid-19 with a rise of delays of paper bills and increased reliance on letters of indemnity.[25]
An additional level of delay is added where letter of credit is engaged, as both the seller and the buyer’s banks ought to examine the bill of lading.[26] The complicated logistics of checking the accuracy of the bills of lading often increases the non-availability of the bill,[27] which yet again interferes with the consignee’s ability to accept the goods. Consequently, demurrage charges are incurred, which further proves that paper bills of lading fail to keep up with the lifecycle of an international transaction.
The issue is particularly relevant in the context of air shipment as the arrival of the goods is significantly quicker than the bill of lading, revealing the growing unsuitability of the transfer of paper-based bills.[28] Based on these points, it is evident that the practical use of paper bills is both inefficient and legally uncertain, and does not satisfy the needs of the modern commercial actor due to the lack of predictability of its arrival.[29]
The ultimate solution should facilitate security and guarantee the uniqueness and speed of the bills of lading, to adequately resolve the two major setbacks of the traditional bills. Could it, then, be blockchain-based?
Blockchain
Besides electronic platforms, the more advanced alternative that offers a suitable environment for the transportation of bills of lading, whilst addressing the current deficits of the paper system, are the so-called blockchain platforms.[30] In simple terms, blockchain is a method whereby data is recorded into timestamped blocks with each block being linked or chained to ensure that the date is interlocked with the previous block.[31] The ultimate objective is to ensure immutability, security and traceability,[32] which are key to resolving the fraud and delay-related issues of paper bills of lading.
For the purposes of this blog, any further assessments of the suitability of blockchain in accommodating for bills of lading are based on the assumption that national legal frameworks are ready to support this technology. That is certainly the case with a number of jurisdictions that actively encourage the use of distributed ledger technology.[33] The following discussion in this article assumes that such jurisdictions would drive the unveiling of the true potential of blockchain-based bills of lading.
Τhe issue of fraud, can be resolved through the technical capabilities of blockchain as the bill would be recorded through secure cryptographic techniques such as timestamping, verification by peers on the platform and a more detailed modification process.[34] This is in stark contrast with the ease that a fraudulent actor will experience if they are to compromise the paper system of bills of lading. The security vested into ledger technology would be beneficial in improving the uniqueness of the bills of lading.[35] This is because blockchains can guarantee the needed level of singularity, which is a necessary precondition for the transfer of title.[36]
This point co-relates to the issues associated with issuing sets of bills that deprive this document of its necessary and indeed expected uniqueness. Additionally, any adjustments to the bill would need to be agreed upon by the members of the platform, which minimises instances of fraudulent back-dating of bills.[37] Even if the practice of issuing sets of bills is preserved for purposes other than ensuring that the consignee receives one, any tampering with the bills would be nearly impossible as the participants on the platform will have identical transactional logs to verify the authenticity of the bills.[38]
Secondly, as the bill of lading would no longer require physical transportation, delays would be significantly reduced. Once the document is uploaded on the platform, its fast distribution should guarantee a higher level of speed, thus preventing the demurrage and storage costs associated with the late arrival of paper bills of lading. Availability of the bill to the consignee is almost instant,[39] thereby making it appropriate to put an end to the use of letter of indemnity and transferring the power back to the bill of lading as the main means of obtaining the cargo upon arrival. Even more so, if a validation delay occurs, it will not impact the ‘arrival’ of the bill nearly as significantly as the traditional methods would as every delay can be sorted through the immutable chain of the ledger.[40]
Thoughts
Overall, blockchain proves superior to both the electronic and paper format of the bills of lading as its technical capabilities effectively address the two main shortcomings of the traditional document. Both security and efficiency are facilitated through the model of operation of distributed ledger technology, which makes it ideal for overcoming misuses of the bill of lading and its non-availability. The only qualification to these findings remains the legal validity of blockchain technology, as it is true that, at present, the law at large is not ready to be transposed to such decentralised systems such as blockchain technology.
On paper, blockchain-based bills of lading will be the ideal solution to overcome the two inherent flaws of paper bills, specifically fraud and delay. The only thing hindering international traders from utilising the full potential of distributed ledger technology to achieve ultimate security and speed of the bill of lading is the development of the law as it is yet to catch up with the novelty of this technology.[41]
Endnotes
[1] Stefan Wunderlich and David Saive, 'The Electronic Bill of Lading: Challenges of Paperless Trade', in J Prieto, AK Das, S Ferretti, A Pinto, and JM Corchado (eds) Blockchain and Applications: International Congress, Springer 2020, 99; Naomi Chetrit, Mayrav Danor, Angelic Shavit, Boaz Yona & Dov Greenbaum, ‘Not Just for Illicity Trade in Contraband Anymore: Using Blockchain to Solve a Millennial-Long Problem with Bills of Lading’ (2018) 22 Va JL & Tec, 69. [2]Sanders Brother v Maclean & Co (1883) 11 QBD 327, 343. [3] Indira Carr, International Trade Law (6th ed. / Indira Carr with contributions on private international law by Peter Stone., Routledge 2017), 177-178. [4] Law Commission, Electronic trade documents: Report and Bill (2022), 45, 69; J I MacWilliam Co Inc v Mediterranean Shipping SA (The Rafaela S) [2005] 2 AC 423; GH Treitel, Francis Martin Baillie Reynolds and Thomas Gilbert Carver, Carver on Bills of Lading (Sweet & Maxwell 2011), 344. [5] Law Commission (n4) 39. [6] Andreas Sioulas, ‘Documentation Fraud: Fraudulent Bills of Lading’ (2013), 8. [7]Sanders (n2) 343. [8]Glyn Mills v East and West India Dock Co (1882) 7 App Cas 591, para 604. [9]Barber v Meyerstein (1870) L.R. 4 H.L. 217. [10] Torsten Schmitz, ‘The Bill of Lading as a Document of Title’ (2011) 10 Journal of International Trade Law and Policy 255. [11] Law Commission (n4) 48. [12]Sanders (n2) 'it is a key which in the hands of the rightful owner is intended to unlock the door of the warehouse, floating or fixed, in which the goods may chance to be'. [13]Sanders (n2) p.341; Cole v North Western Bank (1875) LR 10 CP 354. [14] John Bassindale, ‘Fraud and Bills of Lading’ (1996) JFC 4(1), 33–36; Carr (n3) 181; Rouhshi Low, 'Replacing the Paper Bill of Lading with an Electronic Bill of Lading: Problems and Possible Solutions' (2000) 5 Int'l Trade & Bus L Ann 159. [15]Standard Chartered Bank v Pakistan National Shipping Corporation [2002] UKHL 43; further discussion in Bassindale (n18) 33–36. [16] referring to Bowen LJ in Sanders Brothers v Maclean & Co [1883] 11 QBD 327. [17]Motis Exports Ltd v Dampskibsselskabet AF 1912 Aktieselskab, Akteiselskabet Dampskibsselskabet Svendborg [1999] 1 Lloyd's Rep 837. [18] Beecher (n6) 633; Kelly T. McGowan, ‘The Dematerialisation of the Bill of Lading’ (2007) 7 Hibernian LJ 68, 99; Chetrit (n1) 70. [19] Beecher (n6) 634; ‘E-Bills of Lading', (Norton Rose Fulbright, February 2018) accessed 8 May 2022. [20] Carr (n3) 179-180. [21] Chetrit (n1) 71. [22] Karl Marxen, ‘Electronic bills of lading in international trade transactions - critical remarks on digitalisation and the blockchain technology’ Cov. L.J. 2020, 25(1), 36. [23] Mohd Hwaidi, ‘Switching from paper to electronic bills of lading – Part 1’ JIML 25 (2019) 4, 297–315. [24] Ling Zhu and Xuan Pan, ‘A conceptual analysis of the electronic bill of lading’ J.B.L. 2021, 4, 338; West pandi, ‘Claim Guides - Bills of Lading 2 - Letters of Indemnity’, 2. [25] ‘Coronavirus and Documentary Delays’ (HFW) accessed 6 May 2022; ‘COVID-19 and Bill of Lading Fraud’ (Norton Rose Fulbright, November 2020) accessed 6 May 2022; Squire Patton Bogs, ‘COVID-19: A Time and Voyage Charter Perspective’, 3. [26] UCP 600, art 14(b); Beecher (n6) 632-634. [27] Beecher (n6) 633. [28]Mark Dixon and Bernard Glasson, ‘Electronic Payment Systems for International Trade’ (1999), 3. [29] Burcu Yüksel Ripley, 'Transition to Paperless Trade to Mitigate COVID-19 Impact on International Trade' (University of Aberdeen, 20 April 2020) accessed 7 May 2022.
[30]examples include CargoX, TradeFlow, edoxOnline, TradeLens, Contour, Wave BL, etc. [31] ‘Blockchain Explained’ (Investopedia) accessed 6 May 2022; ‘What Is Blockchain Technology? - IBM Blockchain | IBM’ accessed 6 May 2022; Law Commission, Glossary. [32] WTO, Report on the future of world trade: How digital technologies are transforming global commerce (2018), 7. [33] Law Commission (n4) 13; Law Commission, ‘Smart legal contracts Advice to Government’ (2021), 3. [34] Todd (n41) 33. [35]Koji Takahashi, ‘Blockchain technology and electronic bills of lading’ (2016) 22 JIML, 208-210. [36]Jung-Ho Yang, ‘Applicability of Blockchain based Bill of Lading under the Rotterdam Rules and UNCITRAL Model Law on Electronic Transferable Records’ (2109) JKT 23(6), 113, 125-127. [37] See the discussion above. [38]Takahashi (n56) 113. [39] CARGOX, ‘Reshaping the future of global trade with world’s first blockchain-based bill of lading’, 8. [40] Elnaz Irannezhad and Hamed Faroqi, ‘Addressing Some of Bill of Lading Issues Using the Internet of Things and Blockchain Technologies: A Digitalized Conceptual Framework’ (2021) 0 Maritime Policy & Management 1, s.5. [41]Bury (n37) 237.