Filling in the Gaps: Contractual Frameworks and their Limitations
10.26
While the technology to achieve widespread digitalisation, in particular DLT, is developing rapidly, the absence of supporting legal frameworks and widely recognised standards for its implementation and use may prove a stumbling block to rapid adoption.[1038] Like the laws of many other jurisdictions, English law does not make explicit provision for electronic alternatives to bills of lading or cargo insurance certificates, either in statute[1039] or case law; thus, there cannot be absolute certainty that their use will achieve the desired effects in legal terms.
Pending the emergence of appropriate laws, solutions under development must rely on private contractual frameworks to establish the parties' rights and duties and to allocate any risks and liabilities. Indeed, all the electronic platforms discussed in section III above rely on such contractual frameworks to achieve the necessary legal effects. In this section, the focus shall be on how these frameworks can achieve the transfer to the financing bank of the rights that such a bank must receive in order to obtain a pledge over the goods financed by the documentary credit arrangement, as well as a direct claim against the insurer should such goods be lost or damaged.A. Contractual Rights Against the Carrier and Rights
Over the Goods Themselves
10.27 Any contractual framework governing the use of digital alternatives to bills of lading must ensure that the transferee receives rights against the carrier, including the same contractual rights as would have been received upon the transfer of a paper bill and the same proprietary rights involving the constructive possession of the underlying goods.
The first of these requires action to be taken on two fronts. First, because there is no certainty that the international conventions regulating contracts of carriage (among them the Hague-Visby Rules)[1040] would apply on their own terms to contracts of carriage that never contemplated the issue of a paper bill of lading,[1041] the multipartite contracts that govern the relationships among users of electronic platforms will normally contain clauses incorporating as contractual terms the provisions of the various conventions that would otherwise have applied to the contract as a matter of law.[1042] Secondly, to ensure that the transferee receives rights of suit against the carrier, the actions undertaken over the relevant electronic system with the object of transferring rights must be such as to amount to a novation—a contract law concept whereby one party to a contract is replaced by a third party, who thus becomes the new party to the contract.[1043]1992, s 1(5) (n 9), which gives the lawful holder of a bill of lading rights of suit against the carrier under English Law, provides that the legislation can be made applicable to digital alternatives through the issue of regulations by the Secretary of State. As no such regulations have been issued, this provision is liable to create considerable uncertainty as to whether COGSA 1992 could ever apply to digital alternatives in their absence. Note that at the time of writing the Law Commission of England and Wales is in the course of preparing a consultation paper, which it expects to publish in spring 2021, proposing law reforms intended to recognize the legal effect of documents of title and negotiable instruments issued in electronic form. See Law Commission, Digital Assets Project, online at accessed 20 February 2021.
As to the second issue raised above, an important function of the paper bill of lading is its ability, as a document of title, to enable its holder to exercise property rights over the underlying goods and/or to express its intention to transfer (or accept the transfer) of those property rights.
The paper bill of lading can perform this function because its ‘holder’ is deemed to have constructive possession of the underlying goods.[1044] Depending upon the intention with which the transfer is effected, delivery of (constructive) possession can transfer to the recipient general or special property rights.color=black face="Times New Roman">[1045] In the absence of a document of title, constructive possession may be transferred in English law by an attornment.[1046] Attornment essentially works as follows: the person entitled to possession of the goods (usually the shipper) communicates to the carrier the intention to transfer the goods to a third party, whereupon the carrier notifies the third party that it is now holding the goods for that third party. From that time, the third party has constructive possession of the goods[1047] and can accordingly transfer the goods to another third party, and so on.10.28
10.29
The property rights themselves are not dealt with in the multipartite contracts as these rights are obtained by operation of the transferee’s contract with the transferor (whether a contract of sale or pledge) wherein the relevant intention is expressed. As an attornment by the carrier to the bank would transfer constructive possession of the goods to the bank,[1048] attornment can put the bank in the position of a pledgee,[1049] thereby making a document of title superfluous. Of course, transfer by this method requires the intervention of the carrier (or its agent) upon each transfer, but, as all transfers are taking place through digital communications, this intervention can be achieved more easily.
10.30
Thus, at least where English law applies, the great majority of the uncertainties surrounding the bank’s position as secured creditor when the paper document of title is abandoned can be addressed by a well-conceived contractual framework and an electronic system designed in full awareness of the steps needed to achieve not only the application of the international conventions regulating contracts of carriage, but also the valid novation and attornment of contractual and proprietary rights.
10.31 Some uncertainties may remain.
Determination of the applicable law would depend on theforum in which any dispute regarding the goods is being decided, and that law may be hard to ascertain in a digital environment with respect to goods that are being transported across borders over long distances. Moreover, whatever the relevant applicable law, it would need to recognise the effects of novation and attornment in order for the suggested solution to operate effectively. In addition, it is uncertain whether, in terms of capital adequacy requirements,[1050] the letter of credit permitting electronic documents would be treated in the same way as if the pledge over the goods were taken through transfer of a paper-based document of title. These uncertainties can only really be resolved if appropriate legislation is adopted. This is the subject of the discussion in section VI.
B. Direct Claim Against the Insurer
10.32 Once a bank has obtained a pledge over the goods, the bank also has an insurable interest in them.[1051] The bank would normally obtain a direct claim against the insurer as a result of the assignment to the bank of a paper cargo insurance certificate,[1052] and, as already noted, even certificates issued electronically are normally printed out and assigned in this way. However, if the full benefits of digitalisation are to be achieved, a method of transferring rights without relying on paper must be devised. Can the desired legal effect (namely, giving the transferee a direct claim against the insurer) be achieved if paper is abandoned?
10.33 Various routes may be open under English law to ensuring that the bank has a direct claim against the insurer. First, where an open- cover insurance contract is in place, in order for it to cover a particular shipment of goods, a declaration of that shipment needs to be made under the open cover.[1053] In the event that the identity ofthe particular financing bank is known ahead of that declaration being made and the certificate issued, its name can be entered as assured or as an additional assured, so that assignment will not be necessary.
Secondly, under section 23(1) of the MIA, the policy must specify the name of the assured or of some other person affecting insurance on his behalf. This indicates that, even if the cover is taken out in the name of another person, the bank, as principal, may be considered an assured if the person effecting the insurance intends to contract as agent on the bank's behalf[1054] at the time that the risk isbound,[1055] and has authority to act as such.[1056] Where the agent enters into the contract of insurance without authority from his principal, that principal may ratify the contract pursuant to section 86 of the MIA, even after he is aware of the loss. For that provision to apply, however, the insurer needs to have been aware that the agent was, or at least might have been, acting for another, because an undisclosed principal cannot ratify.[1057] However, even if the bank is not identified at the time of the declaration pursuant to which the certificate is issued, the bank may nevertheless qualify as an assured by being a member of the class indicated.[1058]
10.34
Statutory law contemplates two other routes to giving the assured a direct claim: an assignment under section 50 of the MIA or an assignment effected in accordance with section 136 of the Law of Property Act 1925 (‘LPA 1925’). As regards the MIA route, two questions may create uncertainty, namely whether, and under what circumstances, electronic data would be considered to constitute a ‘policy’ for the purposes of section 50 of the MIA;[1059] and whether that provision would apply at all to a certificate issued pursuant to a declaration under an open cover.[1060] Provided that the digital evidence of cover is accepted to be a ‘policy’ for the purposes of section 50 of the MIA, there is no reason why it could not be assigned by a method other than indorsement, so long as one is able to show that there was an intention to assign[1061] and that this method was a ‘customary manner’ of same nature as that of the person who later seeks to ratify, or acquiring such an interest at some time during the risk.’ (hereafter Gilman et al, Arnould.) Indeed, in the US, policies may be written ‘for the account of whom it may concern, in which case, ‘if it was the intent of the person taking out the insurance that the interest of the party seeking indemnity be covered, that party actually had an insurable interest, and indemnity is due by the insurer to that party’: see Thomas J Schoenbaum, Admiralty and Maritime Law (5th edn, West 2011) [19—3].
However, by express agreement a person may exclude his ability to rely on a policy intended to cover as assureds a class of persons of which he forms part: see Haberdashers’ Askes Federation Trust v Lakehouse Contracts [2018] EWHC 558 (TCC). Nor will the person attempting to claim under the insurance contract succeed if the insurance purports to compensate a class of persons of which he does not form part, even if he is named as co-insured: see Cruise and Maritime Services International v Navigators Underwriting Agency (The Marco Polo) [2017] EWHC 843 (Comm), where it was held that the general sales agent of a ship’s time charterer could not claim under a policy where it was named as co-insured, as the policy was expressed as indemnifying the assured for ‘losses, costs and expenses incurred as charterers’ (ibid [21]). The court noted that the claimant’s name had been added to the insurance policy ‘at no additional premium’ and ‘without any real thought’ (ibid [28]).assigning.[1062] Where the MIA route is taken, and a claim is made by the bank, the insurer may raise defences that it would have been entitled to raise if the action had been brought in the name of the person by whom, or on behalf of whom, the policy was effected, but only if those defences arise out of the contract itself.[1063]
10.35 Where the LPA 1925 route is selected, the benefit of the insurance contract will be transferred to the assignee, allowing the latter to sue in its own name. The assignment must be absolute and must transfer to the assignee all the legal title to the benefit of the promise assigned.name="_ftnref1064" title="">[1064] The assignment does not create a new contract between the insurer and the transferee, but simply entitles the transferee to the benefit of the insurer's promise under the insurance contract.[1065] An assignment of this kind must observe certain formalities[1066] and is subject to equities that have priority over the assignee's right,[1067] meaning that the insurer may raise against the assignee any defence or right of set-off valid as against the assured, making this route less attractive to an assignee than that available under the MIA, although the same uncertainties do not arise with respect to the application of the LPA 1925.
10.36 Assignment is, therefore, by no means precluded if the paper cargo insurance certificate is abandoned, provided that the appropriate procedural steps are built into the design of the electronic system and the supporting contractual framework identifies the parties' intentions with respect to the effect of each of those steps.
C. Trade Finance Platforms: The Bank's Legal Position
10.37 There are other legal issues that need to be addressed where data are being presented to a financing bank, rather than documents. In particular, consideration must be given to the best way of meeting confidentiality and data-protection obligations. Communication platforms over which authenticated data is shared and where contractual and proprietary entitlements are recorded, as well as the contractual frameworks supporting them, will need to be designed with a view to achieving not only the desired legal effects equivalent to those attendant upon the issue and transfer of relevant documents, but also the fulfilment of any other legal or statutory obligations. For example, in order to transact over we.trade, users must sign up to the we.trade rulebook,[1068] and buyers/sellers obtain access to we.trade via a member bank with whom they have to enter a contractual agreement.[1069] Transactions taking place over the platform are not broadcast to the whole network, but, thanks to a feature in Hyperledger Fabric called ‘Channels’, they are transmitted only to those peers who are members of a particular channel, so that information about a particular trade will be uploaded to a channel of which only the buyer and seller bank nodes are members.[1070] This safeguards confidentiality. Further, personal data is never stored on the blockchain, and only a reference to attached documents (and not the documents themselves) is stored on the blockchain,[1071] enabling compliance with privacy and data-protection requirements.[1072]
VI.