Electronic Bills of Lading and Functional Equivalence
|John Livermore||and||Krailerk Euarjai|
|University of Tasmania||Office of the Council of State, Thailand|
Merchants are increasingly using computers to facilitate international transactions, and many observers believe that full-fledged electronic commerce is nearing reality. At present, the business community uses a system known as electronic data interchange (EDI). Because EDI is both quick and efficient, the shipping industry is expected to benefit greatly from its adoption, particularly in the areas of bills of lading. Unfortunately, numerous technical and legal obstacles have slowed the introduction of EDI, with the chief impediment being the law's insistence on paper-based documentation.
Recently, however, several significant steps have been taken to promote the use of EDI. The purpose of this paper is to briefly describe these developments.
Keywords: UNCITRAL Model Law on EDI, EDI, bill of lading, negotiability,CMI Rules for Electronic Bills 1990, Bolero,Carriage of Goods by Sea Act 1991, Utah Digital Signature Act 1995, Australian Sea Documents Bill 1996
The authors would wish to express thanks for advice and copies of relevant articles to Professor Tony Davies, Director of the Electronic Commerce Innovation Centre, University of Wales, Cardiff, United Kingdom
This is a Refereed Article published on 30 June 1998.
Citation: Livermore J et al, 'Electronic Bills of Lading and Functional Equivalence', 1998 (2) The Journal of Information, Law and Technology (JILT). <http://elj.warwick.ac.uk/jilt/ecomm/98_2liv/>. New citation as at 1/1/04: <http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1998_2/livermore/>.
International trade is now making extensive and increasing use of computer technology to facilitate international transactions, and moving toward electronic commerce. The computerised system which is currently developed for trading purposes is electronic data interchange (EDI). For example, an EDI system called 'SWIFT' is used in international commerce by the banking industry for the communication of commercial letters of credit among banks worldwide. In the shipping industry, EDI systems have been developed in order to replace traditional paper shipping documents, in particular bills of lading, because the most important advantages of EDI lies in its speed. However, there are a number of obstacles to the use of EDI for electronic bills of lading, both in terms of computer technology development and legal issues. The major obstacle to the use of electronic bills of lading is the legal requirement of paper-based documentations. A related issue is in what way electronic messages must be conveyed in order to meet the requirements of bills of lading which, at present, must be signed documents.
Moreover, since a bill of lading has an important function as a document of title to the goods shipped, there is value in itself as security to banks and it entitles its holder to sell the goods while in transit. This function of paper bills of lading is not easily incorporated in electronically generated documents.
This paper discusses the legal obstacles to the use of EDI systems for electronic bills of lading, in particular, problems concerning the function of paper bills of lading as negotiable documents of title. The first part of the paper will examine the proposals by the UNCITRAL Working Group on EDI to overcome this problem, known as 'the functional equivalence approach'. Secondly, the paper will look at other attempts to facilitate the use of electronic bills of lading, such as the CMI Rules and Bolero Project. Lastly, solutions to the problems which may arise from the use of electronic bills of lading will be discussed.
2. The UNCITRAL Model Law on Legal Aspects of Electronic Data Interchange (EDI) and Related Means of Communication
The United Nations Commission on International Trade Law (UNCITRAL) is attempting to develop uniform international rules that would validate and encourage the use of EDI. In 1995, UNCITRAL adopted the draft Model Law on Legal Aspects of Electronic Data Interchange (EDI) and Related Means of Communication. The Model Law is intended to serve as a model to countries in order to create uniform law and practice involving the use of computerised systems in international trade. The objectives of the Model Law are essential to improve the efficiency in international trade since it will, if adopted by a large number of countries, enable and facilitate the use of EDI and the related means of communication and providing equal treatment to users of paper-based documentation and to users of computer-based information. The Model Law was finalised and approved in the UNCITRAL twenty-ninth session, 28 May to 14 June 1996. The Model Law is before the United Nations General Assembly and is currently awaiting approval.
The Model Law applies to any kind of information that is transferred in the form of a data message used in commercial activities. Ocean bills of lading are one kind of document within the scope of the Model Law. However, the legal aspects of bills of lading are key issues of the Model Law developments, as noted in the UNCITRAL Working Group on EDI of its thirtieth session, 26 February - 8 March 1996. This reported that future work could focus on EDI transport documents, with particular emphasis on maritime electronic bills of lading and the possibility of their use in the context of the existing national and international legislation dealing with maritime transport (UN 1995b).
It should be noted, however, that the Model Law has no legal force of its own. Its provisions will have legal enforcement only if they are enacted in national law. For this reason UNCITRAL also adopted a Guide to enactment of the Model Law (UN 1996).
'Electronic Data Interchange' or 'EDI', as defined by the Model Law, means the electronic transfer from computer to computer of information using an agreed standard to structure the information . The main issues related to EDI which have been discussed internationally and solutions proposed by the Model Law are:
- legal recognition of data messages;
- writing or a 'document' requirement;
- signature requirement; and
- document of title and negotiability.
The Model Law is based on the recognition that legal requirements for the use of paper documents are the main obstacle to the development of EDI. EDI itself cannot be regarded as an equivalent of a paper document, both in nature and legal aspects. Therefore, the Model Law introduced a new approach known as 'functional equivalence approach' which is based on an analysis of the functions of paper-based requirements and determining how those functions could be fulfilled through EDI.
The first question is whether a data message can be treated as a document and whether it be accepted as evidence in courts. In many countries, (both civil law and common law systems), computerised records are generally admissible as evidence. For example, the English courts have recognised other means of passing on information than paper documents. In Derby & Co v. Weldon (No 9) (1991) Vinelott J. held that the database of a computer, in so far as it contained information capable of being retrieved and converted into readable form and whether stored in the computer or record in backup file, is a document for the purposes of the High Court rules governing discovery of documents.
The 'best evidence rule' requires presentation of the best available evidence. In the case where there is an original document, a data message may not be accepted as the best evidence and may be considered as hearsay evidence. However, in the case where there is no original document, a data message or a computer print-out could be considered as the best available evidence .
A solution to the problem given by the Model Law is provided in article 4 that information should not be denied effectiveness, validity or enforceability solely on the grounds that it is in the form of a data message . Article 8 also provides in reference to admissibility and evidential value of data messages in any legal proceedings, that nothing in the application of the rules of evidence shall apply so as to prevent the admission of a data message in evidence on the ground that it is a data message, or if it is the best evidence that the person adducing it could reasonably be expected to obtain, on the grounds that it is not in its original form. Article 8 is intended to make it clear that no matter how the 'best evidence' or 'hearsay' rules apply to data messages, they will not alter the legal recognition and evidential value of such data messages.
The requirement of a 'writing' or a 'document' is imposed or implied by laws in most jurisdictions. In Australia, for example, the Carriage of Goods by Sea Act 1991 (Cwlth) defines the term 'contract of carriage' as 'a contract of carriage covered by a bill of lading or any similar document of title …' The definition of 'document' provided in Section 25 of the Acts Interpretation Act 1901 (Cwlth) includes:
'(a) any paper or other material on which there is writing;
(b) any paper or other material on which there are marks, figures … having a meaning for persons qualified to interpret them; and
(c) any article or material form with sounds images or writings are capable of being reproduced with or without the aid of any other article or device.'
Even though the meaning of document is not limited only to a paper document, in so far as ocean bills of lading are concerned, the Australian bills of lading legislation may cover bills of lading in paper form since the law requires them to be signed .
As already noted, the English court have held that the database of a computer is a document for the purposes of the High Court rules. This, however, may not satisfy the requirement of 'writing'. Since the definition of 'writing' in the Interpretation Act 1978 (UK) includes 'typing, printing, lithography, photography and other modes of representing or reproducing words in visible form', an electronic message itself is not visible and cannot be included in the meaning of 'writing'. Therefore, if a document is required to be written, such an electronic message is not a document. One observer presents a view that since electronic communication is more common, the word 'document' should be more generously construed .
The Model law expressly gives electronic transmissions the same legal status as writings. Article 5 provides that where a rule of law (national laws) requires information to be in writing or to be presented in writing, or provides for certain consequences if it is not, a data message satisfies that rule if the information contained therein is accessible so as to be useable for subsequent reference.
The most common form of authentication required by domestic and international law is a manual signature. The function of signature is very significant not only because it authenticates parties to a contract but also evidences an intention to be legally bound. Authentication of a transmission by a signature is an indication to the recipient and third parties of the origin of the document and the intention of the party who issues that document.
The Hamburg Rules (Article 14 rule 3) (Under the UN Convention on the Carriage of Goods by Sea, 1978) provide for signature 'in writing, printed in facsimile, perforated, stamped, in symbols, or made by any other mechanical or electronic means, if not inconsistent with the law of the country where the bill of lading is issued' . Most provisions of the Australian bills of lading legislation require a signature.
The word 'signature' appears to be restricted by the courts to manual signatures. Consequently it is not certain that the courts will include an electronic form of authentication as a 'signature' so that this uncertainty could only be resolved by legislation. A facsimile signature was accepted as a signature by the High Court of Australia in Electronic Rentals Pty Ltd v. Anderson (1971). The area is not entirely clear. In Molodyski v. Vema Australia Pty Ltd (1980) the issue was whether a fax of a signed document amounted to a document signed by the sender (the offerer) which was then signed by the recipient (offeree) amounted to a binding signed agreement. Cohn J (obiter) stated that whether delivery by fax of a signed document is as effective as delivery of the original signed agreement depends on the intention of the signatory. If the signatory intends the facsimile signature to be used to authenticate the document and regarded as one's signature, then the document is to be regarded as a copy duly signed.
In Twyman Pastoral Co Pty Ltd v. Anburn Pty Ltd Young J assumed, not deciding, that a fax could not meet both the writing and signature requirements. In contrast to these two decisions, in NM Superannuation Pty Ltd v. Baker and Others (1989) Cohen J (obiter) suggested that a faxed signature was not the original signature and so might not be adequate where a signature was required. In this case the issue did not require decision as there was no signature required in the matter at issue.
In the context of EDI systems, signature or other authentication can be done in many ways, for instance;
- by using secret digital codes, similar to PIN numbers used for automatic teller machines;
- by using more complex systems of public keys cryptography which provides a mathematical scheme for arranging computer data;
- by using 'digital signature' as in the Utah Digital Signatures Act 1996 (see 3.4); or
- by using a specific computer software such as 'PenOp' where a person signs the computer screen and the software encrypts the signature.
The question as to which electronic signatures technology is appropriate for electronic bills of lading is beyond the limited scope of this paper. However, one point to be made is that these methods of authentication may technically verify the origin of the messages but may not meet the legal requirement for signature.
The Model Law explicitly gives appropriate technical solutions the same legal validity as a traditional signature and allows the parties to agree on specific means. Article 6 of the Model Law provides:
'Where a rule of law requires a signature, or provides for certain consequences in the absence of a signature, that rule shall be satisfied in relation to a data message if:
- method is used to identify the originator of the data message and to indicate the originator's approval of the information contained therein; and
- that method is reliable as was appropriate for the purpose for which the data message was generated or communicated, in the light of all circumstances, including any agreement between the originator and the addressee of the data message.'
According to this article, the Model Law does not require a specific technique of signature, any electronic signature technologies can be introduced in the future as appropriate without changing the law.
Negotiable document of title is a key function of bills of lading. A question concerning document of title and negotiability in an electronic bills of lading context is whether negotiability and transferability of rights in goods can be accommodated in electronic bills.
The UNCITRAL Working Group on EDI has not yet finished its study on this problem. A planning of future work on EDI is a discussion on negotiability and transferability of rights in goods concerning maritime bills of lading. This study will consider a number of recommendations and proposals by countries and international organisations. An interesting proposal was noted by the United States of America and raised as an issue for the consideration of the Working Group.
'It should be borne in mind that what is being 'transferred' is not the paper or EDI message (that being just the medium), but the rights and/or title to the subject of the transaction.(UN 1995c)'
The outcome of the last and most important issue of the functional equivalence approach is still awaited and should be added to the final text of the Model Law.
Apart from the extensive work of the UNCITRAL on EDI uniformity in international trade, there have also been other efforts by countries and other organisations to facilitate the use of EDI for bills of lading. For example, UN/EDIFACT (Electronic Data Interchange for Administration, Commerce and Transport) has developed the standard electronic messages that are necessary to create an electronic bill of lading. The Committee Maritime International (CMI) has provided a set of rules for the use of electronic bills. There are also supporting rules by the International Chamber of Commerce (ICC); the provisions related to the use of electronic bills of lading in INCOTERMS 1990 and UCP 500 .
The Comite Maritime International (CMI) adopted Rules for Electronic Bills of Lading in 1990. The CMI Rules are voluntary so they will apply only if the parties to a contract of carriage agree so, the Rules then operate by incorporation into the contract. The CMI Rules provide for a private registry system for electronic messages as bills of lading. This is distinct from a central registry system such as that set up by Project Bolero (see 3.2).
The CMI rules are operated by the carrier issuing to the shipper an electronic bill of lading using electronic messages together with a private code or 'key', possession of which entitles the holder to control the goods. This right of control is passed to other interests after notification by the shipper to the carrier who cancels the original key and gives a new key to the new person entitled to control of the goods. In this way the key holder should have the same rights as the bill of lading holder.
The CMI Rules provide a solution to legal requirements of writing and signature that the carrier, shipper and all subsequent parties utilising these procedures agree that any national or local law, custom or practice requiring the contract of carriage to be evidenced in writing and signed, is satisfied by these procedures. In agreeing to adopt these Rules (Rule 11), the parties shall be taken to have agreed not to raise the defence that this contract is not in writing.
The CMI Rules are currently a useful set of rules that establish a procedural basis for the use of electronic bills of lading. However, the Rules lack provisions dealing with the issues of what constitutes an actual receipt of an offer and subsequent acceptance. The Rules also have no guideline in the event of system failure .
The most recent project on electronic bills of lading is a pilot project called Bolero (Bills of Lading for Europe) . The project is being operated by a business consortium of shipping companies, banks and telecommunications companies and aims to replace paper-based shipping documents with an online computerised registry.
The project attempts to address the special legal issues that arise when paper negotiable documents are converted into electronic form. In particular, Bolero's initial focus is the use of EDI systems as negotiable bills of lading. The processes used in the project are based on the CMI Rules for Electronic Bills of Lading. The replacing of paper-based international trade documents with EDI messages will result in saving time and costs and also increase levels of security against fraud and a reduction in the possibility of error.
The Bolero services are based on the exchange of EDI messages between a central service known as the 'registry' and users. The users, normally are carriers, shippers, freight forwarders and banks, will send and receive messages from the central registry by means of a computer workstation. Users also will be able to exchange messages directly between themselves. The central registry will contain details of shipping documents contained in a 'consignment record'. Access to these details will validate and authenticate messages received, and automatically generate messages to other users in response to messages received.
Under the Bolero project, there are strong security controls and procedures to protect the integrity and prove the authenticity of electronic messages. The particularly important security feature is the use of digital signature techniques. These authenticate the message sender and prevent modification of transactions in transit.
The Carriage of Goods by Sea Act 1992 (UK) replaced the Bills of Lading Act 1855 and generally deals with title to sue problems. Nevertheless, the Act also provides an open provision to extend its applications to cases where an EDI systems is used. Section 1 (5) allows the Secretary of State to make provisions for information given by means other than in writing to be equivalent and effective as if it had been given in a written document .
The Utah Digital Signature Act 1995 (the '1995 Utah Act') appears to be the first legislation in the world authorising the use of digital signatures. The 1995 Utah Act specifies the use of public key encryption and defines a scheme for licensing certification authorities. Digital signatures are created and verified by means of 'cryptography', the branch of applied mathematics that is concerned with transforming messages into seemingly unintelligible forms and back again. For digital signatures, two different keys are generally used, one for creating a digital signature or transforming data into a seemingly unintelligible form, and another key for verifying a digital signature or returning the message to its original form. The keys of a cryptosystem for digital signatures are termed the 'private key', which is known only to the signer and used to create the digital signature, and the 'public key', which is ordinarily more widely known and is used to verify the digital signature. A recipient must have the corresponding public key in order to verify that a digital signature is the signer's .
The Utah Digital Signature Act 1995, although it does not expressly apply to bills of lading, has very extensive objectives to adopt rules governing the effect of digital signature which may be used in various kinds of documents. However, the main objective of the Act as provided in 'Part 4. Effect of a Digital Signature', is that 'This part provides that a digital signature has about the same legal effects as handwritten signature on paper.' Therefore, the Act should be studied for the possibility of adoption at international level in order to facilitate the use of electronic bills of lading.
The Australian Sea-Carriage Documents Bill 1996 is the latest attempt to bring electronic bills of lading into practice. The Australian Federal government has had before it the proposals for reform of bills of lading legislation since 1992 and to eliminate some legal problems incorporated in bills of lading . Recommendations made by the Attorney-General's Department Discussion Paper suggested that any reform of the legislation should include a provision to cover cases where EDI systems are used and the UNCITRAL functional equivalence approach should be examined with a view to its applicability to electronic bills of lading.
As the result of the proposals for reform of bills of lading legislation, the Federal government presented the Sea-Carriage Documents Bill to the Federal Parliament in March 1996. The Standing Committee of Attorneys-General had also approved provisions in the draft model bill and agreed to implement legislation in each state as soon as practicable.
The Bill contains provisions on 'electronic and computerised sea-carriage documents' which are based on the UNCITRAL Model Law . The Bill defines the meaning of 'data message' exactly as in the Model Law. Section 6 of the Bill provides:
'6. (1) This Act applies, with necessary changes, in relation to a sea-carriage document in the form of a data message in the same way as it applies in relation to a written sea-carriage document.
(2) This Act applies, with necessary changes, in relation to the communication of a sea- carriage document by means of a data message in the same way as it applies in relation to the communication of a sea-carriage document by other means …'
International efforts to replace traditional paper bills of lading with an EDI system still have a long way to go. Even though there are a number of rules that support the use of electronic bills of lading and also projects that actually operate electronic bills of lading in practice, there is still a lack of international confidence in the use of electronic bills. This is because one of the distinguishing features of international trade is that a large number of parties may be involved in a single shipment of goods. In addition to the buyer and the seller, contracts of carriage can easily involve several banks in different countries, insurance companies, carriers, forwarders, port and customs authorities. Each of these parties may have a documentary requirement so that it is particularly difficult to devise a comprehensive EDI system for bills of lading.
In relation to electronic bills of lading, it remains a question whether a centralised registry approach, such as the Bolero project, can work on more than a limited basis. However, the UNCITRAL Working Group on EDI considered that the work undertaken within the CMI, or the Bolero project, was aimed at facilitating the use of EDI transport documents but did not, in general, deal with the legal effect of EDI transport documents (UN 1995b). Thus, particular attention needs to be given to the future work of UNCITRAL which could bring legal support to the new methods being developed in the field of 'electronic transfer of rights'.
 An abridged version of this paper was published in; Livermore J, Euarjai K, ‘Electronic Bills of Lading: A Progress Report’ 28 (1) Journal of Maritime Law and Commerce 55 (1997).
 SWIFT (Society for Worldwide Inter-bank Financial Telecommunications) was established to 'facilitate the transmission of bank-to-bank financial transaction messages'. More than a million messages per day are transmitted on SWIFT's global telecommunication network, including letters of credit and bank guarantees.
 For History and Purpose of the Model Law see UN (1995)
For a comprehensive international review of EDI and bills of lading see Yiannapoulos, AN (ed) (1995), Faber (1996) and Chandler (1989)
 For the text see (UN 1995a).
The Model Law has been submitted to the United Nations General Assembly and is currently awaiting final approval. For descriptions of its history and purpose, see (UN 1996) and Hill & Walden (1996)
 The Model Law, article 2 (b). For more definitions of EDI see Benjamin W (1989); The BT Electronic Commerce Innovation Centre (1996).
 It should be noted that in some jurisdictions amendment has already been made to the law of evidence in order to support the use of EDI. For example, the Malaysian Evidence (Amendment) Act 1993 (an Act to amend the Evidence Act 1950) defines 'document' as: 'any matter expressed, described, or howsoever represented, upon any substance, material, thing or article, including any matter embodied in a disc, tape, film, sound track or other device whatsoever, by means of - (a) letters, figures, marks, symbols, signals, or other forms of expression, description, or representation whatsoever; …'
 ‘Data message’ means information generated, stored or communicated by electronic, optical or analogous means including, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex and telecopy.
 Revised Discussion Paper: Proposals for Reform of Australian Bills of Lading Legislation, Attorney-General's Department of Australia, Canberra, 1994 p.28.
See bills of lading legislation in Australia; New South Wales - The Sale of Goods Act 1923; Queensland - The Mercantile Acts 1867; South Australia - The Mercantile Law Act 1936; Tasmania - The Bills of Lading Act 1857; Victoria - The Goods Act 1958; Western Australia - by ordinance an Act to Amend the Law relating to Bills of Lading, 20 Vic No 7 (WA); Northern Territory - The Bills of Lading Act 1859 (SA), adopted by section 7 of the Northern Territory Acceptance Act 1910 (Cwlth).
 Faber (1996). The author refers to J.H. Tucker & Co. Ltd. V. Board of Trade  1. W.L.R. 655, 658, where Vaisey, J. stated that he was interpreting the word 'document' 'in the ordinary sense in which the business uses it': at the time of the case this would only have meant materialised documents.
 INCOTERMS 1990 Article A.8 Proof of delivery, transport document or equivalent electronic message provides: ‘Where the seller and the buyer have agreed to communicate electronically, the document referred to in the preceding paragraphs may be replaced by an equivalent electronic data interchange (EDI) message.’
UCP 500 Article 20 provides that a document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication.
 For comments on the CMI Rules see, for example, The CMI Charts a Course on the Sea of Electronic Data Interchange: Rules for Electronic Bills of Lading, 16 Tul. Mar, L.J. (1992).
 The project started in April 1994 and the operating system had been created in June 1995. Users of the project are based in the UK, the Netherlands, Sweden, Hong Kong and the US. The trials lasted until mid-September 1995 and were generally considered a great success. For more details on Bolero see: Trading in tune with Bolero, Banking Technology, October 1994, p.48; Bolero trade steps, The Banker, 145(828), 1995 p.72. Bolero is further described in Cottrill (1996, p. 22); Nelson (1995); and Talmor (1995, p. 72).
 According to estimates published by the Bolero consortium, use of the service could lead to administrative cost reductions of up to 40 per cent resulting in a saving of ECU 54,000 million on a global basis. See Trading in tune with Bolero, at p. 48.
 Section 1(5) - (6) of the Carriage of Goods by Sea Act 1992 (UK). For a further discussion see Howard (1993), and Reynolds, (1993).
 Utah Code ann. ss46-3-101 et seq. The Act was adopted in February 1995 and took effect on May 1, 1995. The amended Utah Act came into effect on May 1, 1996. Full text of the Act, Introductory Commentary and other details are available on the internet - Utah Digital Signature Law homepage at <http://www.commerce.state.ut.us/web/commerce/digsig/act.htm> (June 1996)The Act's drafting history and general operation are further described in Kennedy & Davids, 1996, at S4, and Semerad, 1995, at D1. Similar laws can now be found in a number of other states, including California, Florida, and Washington.
 Utah Digital Signature Act Utah Code Annotated Title 46, Chapter 3 (1996) Part 1. Short Title, Interpretation, and Definitions ‘103. Definitions: (16) ‘Key pair’ means a private key and its corresponding public key in an asymmetric cryptosystem, keys which have the property that the public key can verify a digital signature that the private key creates.’
 Revised Discussion Paper, note 10. To date the Bill has not yet been enacted and none of the States or Territories have moved to adopt it in their own bills of lading legislation.
 In this it differs from the Carriage of Goods by Sea Act 1992 (UK); see ss 6,7 of the Bill. Compare with the Carriage of Goods by Sea Act 1992 (UK) s1(5) - (6).