Physical and Electronic Formats for Bills: Legal Requirements

9.05 The following provisions of the UK's Bills of Exchange Act 1882^[863] (‘BEA’) support the con­clusion that a bill must be something tangible, on which words could be written so as to create a permanent tangible record, and physically deliverable from hand to hand in order to confer and acquire rights thereon.

(1)                         A bill of exchange is an unconditional order in writing, addressed by one person to an­other, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.

9.06 ‘Written’ is defined in section 2 to ‘include... printed’ and ‘writing’ to ‘include... print.’ This is a non-exhaustive definition, which is arguably expanded by another non-exhaustive def­inition in schedule 1 to the Interpretation Act 1978,^[864] under which:

‘Writing’ includes typing, printing, lithography, photography and other modes of repre­senting or reproducing words in a visible form...

9.07 With respect to the requirement of a signature, section 91 of the BEA provides:

(1)    Where, by this Act, any instrument or writing is required to be signed by any person it is not necessary that he should sign it with his own hand, but it is sufficient if his signature is written thereon by some other person by or under his authority.

(2)    In the case of a corporation, where, by this Act, any instrument or writing is required to be signed, it is sufficient if the instrument or writing be sealed with the corporate seal.

9.08 A creative interpretation might treat words in a permanent record that are ‘visible’ on a computer screen as satisfaction of the writing requirements.^[865] To that end, the signature requirement is not drafted so as necessarily to be limited to a handwritten one.

For example, a ‘bearer, to whom a bill may be payable, is defined in section 2 of the BEA to 9.09 ‘mean... the person in possession of a bill or note which is payable to bearer’. Otherwise, under section 3(1) of the BEA, which is reproduced above, a bill is payable ‘to the order of a specified person’ namely the ‘payee’. For his or her part, under section 2 of the BEA, ‘the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof’ is termed the ‘holder.’ According to the same provision,^[866] ‘indorsement’ means an indorsement com­pleted by delivery; ‘issue’ means the first delivery of a bill or note, complete in form to a person who takes it as a holder; and ‘delivery’ in turn means transfer of possession, actual or constructive, from one person to another.

Furthermore, according to BEA, s 21(1), with the exception of the acceptance, ‘[e]very con-         9.10

tract on a bill, whether it be the drawer’s, the acceptor’s, or an indorser’s, is incomplete and revocable, until delivery of the instrument in order to give effect thereto’ and, under BEA, s 31, ‘[a] bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill’;^[867] ‘[a] bill payable to bearer is negotiated by delivery’;^[868] and ‘a bill payable to order is negotiated by the indorsement of the holder completed by delivery’.^[869]

Finally, BEA, s 52(4) provides that ‘[w]here the holder of a bill presents it for payment, he 9.11 shall exhibit the bill to the person from whom he demands payment, and when a bill is paid the holder shall forthwith deliver it up to the party paying it’.

Needless to say, in the present electronic age, the adequacy and fitness of a method of pay-          9.12

ment and credit premised on writing and delivery has been questioned.

Indeed, then and now, it has been possible for a customer to authorise its bank to either pay 9.13 or collect on designated dates. Hence, the crux of the issue has been the second question - namely the desirability of, or need for (as well as the feasibility of), an electronic negotiable instrument. Peter Ellinger was hesitant as to the desirability of, or need for, an electronic negotiable instrument, as he doubted that the operation of the bills market ‘in London and elsewhere... [was] so defective as to call for an expensive and fundamental reform’.^[872] As for its feasibility, he was of the opinion that it may ‘be possible to create' or dispatch ‘a bill of ex­change or promissory note by the use of an EFT network'.^[873] However, he concluded that:^[874]

Once such an instrument reached its destination it would have to be treated as a document.

To be used as a negotiable instrument, it would have to be transferred by indorsement and delivery; it would have to be presented for acceptance and for payment, and if dis­honoured, might have to be protested.... The true question is whether such instrument may be replaced altogether by deferred payment EFTs of a negotiable character. Such an EFT would then be produced, transmitted, transferred and retired through the relevant network.

9.14 To that end, Peter Ellinger identified four legal problems or objections.^[875] The first is that ‘a bill...

9.15 ‘Electronification'—namely, the elimination of physical processing and delivery—will en­hance efficiency and speed. While it introduces its own risks (such as hacking), the chance is that, particularly if proper technology is used, electronification will also enhance security and reduce errors. Accordingly, at this point in time, a strong case can be made for the desir­ability of bringing the negotiable instrument into the ambit of electronic banking as much as possible.^[876] The four issues raised by Peter Ellinger relate to two points. First, the perceived incompatibility among the hardware systems required for the negotiable instrument to evolve from its issue, indorsement, acceptance, presentment, and protest. Second, the legal requirements as to the tangible nature of the instrument. As for the first point, technology has made enormous headway, so far translated into projects relating to cheques. As for the second, the law need not remain static and ought to be adjusted to changing circumstances.

9.16"Times New Roman"'> One area in which ‘signature' and ‘delivery' play a fundamental role is in the conflict of laws rules applicable to bills of exchange. In principle, according to BEA, s 72, ‘[w]here a bill drawn in one country is negotiated, accepted, or payable in another', both the validity ‘as regards requisites in form' and ‘interpretation' of the contract on a bill is determined by reference to the law of the place where the contract is made.

[signer] for a good consideration: and as soon as these circumstances take place the contract is complete’.^[877] In the United States, §214 of the Second Restatement of the Law of Conflicts of Laws^[878] provides that the law of the place of delivery determines the obli­gations of a drawer and indorser and the law of the place of payment determines the ob­ligations of the acceptor. For its part, article 4(1) of the Convention for the Settlement of Certain Conflicts of Laws in Connection with Bills of Exchange and Promissory Notes,^[879] like the US Restatement, states that ‘[t]he effects of the obligations of the ac­ceptor of a bill... are determined by the law of the place in which these instruments are payable’. At the same time, article 4(2) provides that ‘[t]he effects of the signatures of the other parties liable on a bill... are determined by the law of the country in which is situated the place where the signatures are affixed’. Hence, to establish certainty for the law that will govern the electronic bill, functional equivalents to both ‘signature’ and ‘delivery’ must be formulated.

9.17

A preliminary question is whether UNCITRAL Model Law on Electronic Commerce^[880] (‘LEC’) does not provide a framework for addressing the issue at hand. Thus, according to article 5, ‘[information shall not be denied legal effect, validity or enforceability solely on the grounds that it is in the form of a data message’ and, under article 6(1), ‘[w]here the law requires information to be in writing, that requirement is met by a data message if the information contained therein is accessible so as to be usable for subsequent reference’.

Where the law requires a signature of a person, that requirement is met in relation to a data message if:

(a)    a method is used to identify that person and to indicate that person’s approval of the information contained in the data message; and

(b)    that method is as reliable as was appropriate for the purpose for which the data mes­sage was generated or communicated, in the light of all the circumstances, including any relevant agreement.

9.18

Finally, article 8 goes on to provide that:

(1) Where the law requires information to be presented or retained in its original form, that requirement is met by a data message if:

(a)    there exists a reliable assurance as to the integrity of the information from the time when it was first generated in its final form, as a data message or otherwise; and

(b)    where it is required that information be presented, that information is capable of being displayed to the person to whom it is to be presented.

(3)             For the purposes of subparagraph (a) of paragraph (1):

(a)    the criteria for assessing integrity shall be whether the information has remained complete and unaltered, apart from the addition of any endorsement and any change which arises in the normal course of communication, storage and dis­play; and

(b)    the standard of reliability required shall be assessed in the light of the pur­pose for which the information was generated and in the light of all the relevant circumstances.

9.19 According to the Guide to Enactment of the UNCITRAL Model Law on Electronic Commerce,^[882] ‘[a]rticle 8 is pertinent to... negotiable instruments, in which the notion of uniqueness of an original is particularly relevant’. Accordingly, this statutory framework resolves any doubt not only as to the mere possibility of an electronic bill but also as to its possible compliance with the ‘writing’ and ‘signature’ requirements as well. However, this statutory framework does not address the issues pertaining specifically to negotiable in­struments, including bills of exchange, such as possession and delivery. True, a sympathetic court could treat exclusive control of the electronic bill as the equivalent of possession and the irrevocable electronic transmission as tantamount to physical delivery; nonetheless, this approach may not be adequate to accommodate the diverse requirements governing the electronification of bills.

9.20 Regrettably, negotiable instruments are excluded from the coverage of the United Nations Conventions on the Use of Electronic Communications in International Contracts (2007).^[883] The drafters observed that ‘issues raised by negotiable instruments... in particular the need for ensuring their uniqueness, go beyond simply ensuring the equivalence between paper and electronic forms’^[884] so that ‘special rules would need to be devised’ to resolve ‘the particular difficulty of creating an electronic equivalent of paper-based negoti­ability’.^[885] They thus concluded that ‘finding a solution for this problem requires a combin­ation of legal, technological and business solutions, which had not been fully developed and tested’.^[886]

9.21 Accordingly, the useful starting point for the ‘electronification’ of bills of exchange in particular is UNCITRAL’s Model Law on Electronic Transferable Records (‘LETR’).^[887] Ironically, a footnote to article 1(3) leaves open the possibility of excluding bills from what otherwise seems to be a proper framework for the creation and transfer of an electronic bill. Thus, under article 2 of the LETR, an ‘electronic record' is defined to mean ‘informa­tion generated, communicated, received or stored by electronic means'. According to article 10(1), this then becomes an ‘electronic transferable record', when:

(a)    [It] contains the information that would be required to be contained in a transferable document or instrument; and

(b)             A reliable method is used:

(i)                                 to identify that electronic record as the electronic transferable record;

(ii)    to render that electronic record capable of being subject to control from its cre­ation until it ceases to have any effect or validity; and

(iii)                              to retain the integrity of that electronic record.

9.22

9.23

Starting from this perspective, the ensuing discussion as to the need for statutory and regu­latory changes is however inspired primarily by legislative innovations made in the US fo­cusing on the cheque, being a bill of exchange drawn on a bank and payable on demand.^[888] The cheque experience teaches us that it is too simplistic to deal with the issues at hand as involving a choice between the physical or electronic bill, or even, as to whether an elec­tronic bill can be accommodated by law while still retaining all the features of a negoti­able instrument. Rather, the infinite number of participants spread throughout the globe and their diverse stage of technological development militates against the feasibility of a common, universal, and worldwide technological platform. Hence, the law ought to ac­commodate not only the possibility of an electronic bill but also the potential conversion of a physical bill to an electronic one and vice versa in the life of such an instrument.

9.24

It is noteworthy that a deferred EFT in the form of electronic Deferred Payment Undertaking (‘DPU') already exists as a payment and credit instrument in international trade. However, the DPU is also known as a Deferred Payment Credit (‘DPC') and has been used in lieu of an accepted bill in a letter of credit transaction, particularly with the view of avoiding stamping requirements on bills.^[889] In Banco Santander v Banque Paribas² when the issuing bank's DPU's fell due, having taken an assignment of proceeds from the beneficiary upon a complying documentary presentation (so as to effectively dis­count the issuing bank's DPC and prepay the beneficiary), the confirming bank was re­fused reimbursement by the issuing bank on the basis of the beneficiary's fraud. The Court of Appeal upheld the issuing bank's defence, thereby treating it as a mere assignee of the credit's proceeds and not in the position of a holder in due course.

9.25 UCP 60 0^{[890] [891]} purported to overrule Banco Santander by providing in article 12(b) that ‘by nominating a bank to... incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase... a deferred payment undertaking incurred by that nominated bank'. Article 7(c) goes even further by providing that ‘an issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by... deferred payment is due on maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary.' In the United States, UCC § 5-109(a)(1) is to the same effect:

(a) If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudu­lent, or honour of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant:

(1) the issuer shall honour the presentation, if honour is demanded by (i) a nom­inated person who has given value in good faith and without notice of forgery or material fraud, (ii) a confirmer who has honoured its confirmation in good faith, (iii) a holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person, or (iv) an assignee of the issuer's or nominated person's deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person.

9.26 However, at the most, these provisions provide limited negotiability on a DPU in favour of a nominated bank in a letter of credit transaction. Neither full negotiability nor negotiability outside this specific letter of credit context is envisaged.

600' (2011) 5 International Business Law Journal 569; Klaus Vorpeil, ‘Bank Payment Obligations: Alternative Means of Settlement in International Trade' [2014] International Business Law Journal 41; Koji Takahashi, ‘The Introduction of Article 12(b) in the UCP 600: Was it Really a Step Forward?' [2009] Journal of International Banking Law and Regulation 285; Carlo R W de Meijer and Manoj Menon, ‘Bank Payment Obligation: The Missing Link?' (2012) 6 Journal of Payments Strategy & Systems 232; Giovanni Profazio, and Jason Chuah, ‘An Analysis of Acceptance and Deferred Payment Credits in Civil and Common Law' (2007) 13 Journal of International Maritime Law 330; and Alan L Tyree, ‘Deferred Payment Letters of Credit' (2013) 24 Journal of Banking and Finance Law and Practice 66.

In contrast, this chapter, even as it focuses on international trade, is designed to address the issue of negotiability for electronic bills in a comprehensive way as a matter of the law of negotiable instruments. Its argument is premised on the enhanced role of party autonomy, provided by the quickening pace of innovative technological developments, that must be accommodated by reformed harmonised national laws. It is written with the view of enhancing the potential of the existing framework within which international trade finance has been conducted.

9.27

III.