Legal Framework Supporting the Use of Digital Alternatives to Paper Documents in Documentary Credit Arrangements: Gaps and Uncertainties
10.19 The legal framework relating to the performance of obligations under a letter of credit arrangement may be found in the terms of the various contracts between the parties as interpreted and enforced in light of the applicable domestic law.
Documentary credit agreements almost invariably incorporate the terms of the Uniform Customs and Practices on Documentary Credits 2007 (‘UCP 600’).[1023] The UCP 600 contain various provisions focused on the requirements to be satisfied by documents in general[1024] (and certain documents in particular, most notably invoices,[1025] transport documents,[1026] and cargo insurance documents[1027]) in order to be deemed compliant with the credit. Since the adoption in 2002 of the eUCP, which is the electronic presentation supplement to the UCP,[1028] it has been permissible to present to banks under a letter of credit, electronic documents in place of paper ones. Article e1(b) of the eUCP provides that the eUCP shall apply as a supplement to the UCP 600 where the letter of credit indicates that it is subject to the eUCP. Article e2 provides that the eUCP operates alongside the UCP 600, whose provisions therefore remain in effect; that the eUCP prevails in case of conflict with the UCP 600; and that, where permitted by the credit, the beneficiary may elect to present only paper documents, in which case the eUCP will be ousted. Where the eUCP is incorporated into a letter of credit, therefore, the presentation of digital alternatives to paper documents is permitted and may even be required by the credit. Where the credit permits or requires the submission of data, rather than documents, two questions arise. First, what happens if the data submitted do not exactly match the requirements of the credit? Secondly, does the submission of electronic data achieve the same legal effects as those achieved by the presentation of the paper documents being replaced? These questions are answered next.A. Content Compliance
10.20
Article 14(d) of the UCP 600 provides that ‘[d] ata in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit’.[1029] Thus, that provision does not require an exact match, but merely an absence of conflict. Where electronic data is being used in place of paper documents and where the checking is being undertaken by a matching-engine rather than a human agent, however, consideration might need to be given to whether this approach is still optimal. The application of article 14(d) as it presently stands would require the matching-engine to be programmed to declare a match where data from different sources is non-conflicting, although not identical; such an option is only likely to become possible with advances in machine-learning. Alternatively, manual checking of any non-matches by a human agent would need to take place in order to determine whether the ‘non-match report’ was issued as a result of an actual conflict in the data or simply as a result of slightly different, but not conflicting, wording used by different data-issuers. This would mean, however, that the potential benefits of a digital presentation would not be reaped to the full.
10.21
Pending the development of artificial intelligence technologies that are able to recognise actual conflicts, a final option would be to revise the eUCP so that payment is only due upon a transaction-matching application reporting an exact match.
This is similar to article 10 of the URBPO, under which, in the case of a mismatch, payment becomes conditional upon a mismatch acceptance. As indicated above,[1030] collaborative digital document-preparation over electronic platforms, whereby the same data can be used by multiple issuers of documents relating to the same transaction, is already available. In the future, this capability may well evolve to the extent that identical wording in the different documents (or different data sources) becomes the norm. Should this occur, there is an even stronger argument for adopting the URBPO approach of requiring an exact match, subject to any mismatches being waived by human agents.10.22
face="Times New Roman">Another question raised by documentary compliance in electronic presentation derives from the signature requirement in the UCP 600, which applies to both the bill of lading[1031] and the insurance certificate.[1032] The signature requirement is there to ensure that the document presented appears to derive from a particular source (the carrier, in the case of the bill of lading; and the insurer, in the case of the cargo insurance certificate). In the digital world, this question is determined through a process of authentication. Indeed, article e6(f) of the eUCP provides that, in order to be acceptable under the eUCP, the data submitted must be capable of being authenticated. As indicated in the ICC Guide to the previous version of the eUCP,85 a higher level of authentication than is possible for paper documents may be achieved when electronic data are being used, in the sense that determining reliably the source of digitally signed data is achievable with a higher degree of certainty. In other words, if bill of lading data purports to originate from a carrier, the bank would be able to check that the relevant digital signature is one actually associated with that carrier.
However, the eUCP drafters attempted to adapt the standard of facial compliance applicable to paper documents to electronic data with the result that article 3b(iii) of the eUCP refers to the ‘apparent identity' of the data's sender and the ‘apparent source' of the data, and article e7(d)(i) provides that the bank is only obliged to check the ‘apparent authenticity' of the data. Thus, where an electronic presentation is made under the eUCP, the bank's right to reject for non-compliance may give rise to more uncertainty than it would in the paper world, in view of the grey area surrounding ‘authentication'. This raises various questions. What is the meaning of ‘apparent' authenticity when it relates to electronic data? What steps is the bank either obliged, or entitled, to take in order to establish such authenticity? What would be the position if the bank uncovered evidence that the data were false or forged in that they do not derive from the source from which they purport to derive (for example, transport data which are not originated by a bona fide carrier)? Could the bank reject the documentary presentation as non-compliant? Could the beneficiary challenge the rejection on the basis that the data were ‘apparently' authentic when the beneficiary itself was not aware of any lack of authenticity?[1033] [1034]10.23 If the letter of credit requires digitally signed data, thereby enabling the easy verification of the data's source as part of the compliance check, then arguably the data should fail the compliance test if it purports to derive from a source other than its actual originator. However, the reference to ‘apparent' authenticity may muddy the waters in such circumstances and, in the absence of further guidance on this question being provided by the ICC, banks would do well to build appropriate provision into the credit itself.
B.
Legal Effects10.24
The UCP 600 also lays down particular requirements that specific paper documents, including bills of lading[1035] and cargo insurance certificates,[1036] need to satisfy in order to be deemed compliant. In particular, both articles 20 and 28 of the UCP 600 require, where documents are issued in sets of more than one original, that the full set of originals be presented to the bank.[1037] This requirement is in line with banks' need to receive the documents not only for the purpose of checking them for compliance, but also to have transferred to them rights pertinent to their position as secured creditor. The transfer of such rights occurs by operation of laws determining the legal effects of being the ‘holder' of the paper documents in question; laws that enjoy a certain uniformity throughout the world. Unfortunately, laws determining the legal effects of transacting over an online platform have not (yet) been adopted in the majority of jurisdictions.
10.25
Nor does the eUCP specify how the transfer of rights is to be effected where electronic data are being presented in place of paper documents, as the need for the data's originality simply creates a requirement in article e9 for the information to be presented as originally issued. Thus, the eUCP does not address how important rights, normally received by the bank pursuant to the transfer of a bill of lading or the assignment of a cargo insurance certificate, are to be acquired when data rather than documents are being presented. The method for transferring those rights, therefore, needs to be carefully considered when entering into the letter of credit arrangement, and must be built into such arrangements on a case-by-case basis. This will need to be done irrespective of legislation being adopted that recognises the effects of using communication platforms to provide digital alternatives to transferable documents (as discussed in section V below), although the adoption of legislation would arguably provide the bank with greater clarity than it would otherwise be able to achieve without such legislation.
name=bookmark1238>V.
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- Hare C., Neo D. (eds.). Trade Finance: Technology, Innovation and Documentary Credit. Oxford University Press,2021. — 417 p., 2021