In a discussion with Tianmi Stilphen, Lead of Legal Reform at ICC DSI, we discuss frequently asked questions that arise in discussions about MLETR and its impact on international trade, including its goal and key principles.
Four billion pieces of paper are circulated between the physical and financial supply chains of businesses involved in cross-border trade. A global survey by the International Chamber of Commerce estimated that digitisation could cut trade finance costs by up to US$6 billion in 3-5 years and boost banks' trade finance revenues by 10%.
Moving from traditional paper-based systems to digital has become pivotal. The Model Law on Electronic Transferable Records (MLETR) is a legislative framework developed by the United Nations Commission on International Trade Law (UNCITRAL) with the goal to enable the use and recognition of electronic documents of title to engage in commercial activities.
By aiming to ‘enable the legal use of electronic transferable records both domestically and across borders’, the MLETR applies to electronic transferable records that are functionally equivalent to transferable documents or instruments.
Q: What does UNCITRAL stand for and what is its role in international trade law?
A: The United Nations Commission on International Trade Law (UNCITRAL) serves as the primary legal entity within the United Nations system for international trade law. With a global membership and over five decades of experience, UNCITRAL focuses on modernising and harmonising international business regulations.
Q: What are Electronic Transferable Records (ETR)?
A: ETRs are digital equivalents of traditional transferable documents or instruments, like bills of lading, bills of exchange, promissory notes, and warehouse receipts.
Transferable documents are paper-based documents that give the holder the right to demand fulfilment of specific obligations noted in them. They also allow the holder to transfer this right to someone else by physically handing over the document, making them essential tools in commerce.
An ETR is deemed functionally equivalent to its physical counterpart – a transferable document or instrument – if it includes all necessary information that the physical version would contain. Additionally, the ETR must be managed through a reliable method that ensures:
(a) the record is clearly identified as the ETR;
(b) the record is capable of being subject to control from its creation until it ceases to have validity or effect; and
(c) the integrity of the record is maintained throughout its lifecycle.
Q: What is the goal of MLETR?
A: The primary goal is to facilitate the legal recognition and use of electronic transferable records while avoiding global legal fragmentation. As more countries align, it can then become the norm for cross-border trade which would function as a tool against said fragmentation. The successful alignment of MLETR would enhance legal certainty and boost investor and trader confidence when trading with different countries.
Q: What are the key principles of MLETR?
A: There are three key principles.
(1) technology neutrality, which translates to not discriminating against any specific types of technology.
(2) functional equivalence, allowing electronic documents to serve the same legal function as paper documents, meanwhile allowing case laws applicable to traditional bills of lading remain legally relevant.
(3) non-discrimination between electronic and paper forms. Countries still allows the use of paper format.
MLETR aims to enable the seamless digitalization of trade by ensuring that electronic records can be used and trusted in the same way as their paper counterparts, thereby promoting efficiency, reducing transaction costs, and enhancing the security and traceability of international trade operations. To align these documents with their electronic counterparts, MLETR serves as a model law that offers the legal recognition of their digital equivalence. Seen as a key enabler in facilitating paperless trade, MLETR is key to addressing the challenges and inefficiencies associated with the reliance on paper documentation.
Q: What documents are covered under MLETR?
A: Each jurisdiction’s applicable substantive law (such as commercial code or banking law) should determine which documents or instruments are transferable. An indicative list of transferable documents or instruments, inspired by the Electronic Communications Convention, includes:
- Bills of lading
- Bills of exchange
- Warehouse receipts
- Insurance certificates
- Cheques
- Promissory notes
- Consignment notes
- Airway bills
Q: What are some of the inefficiencies and risks associated with an over-reliance on paper-based systems in cross-border trade?
A: In countries that haven’t aligned with MLETR, paper-based process requirements are one such inefficiency. Legal systems often still require contracts and other significant documents to be physically signed on paper, sometimes with specific requirements such as wet ink for signatures.
Handling paper documents manually is a costly endeavour, in labour, time, and financial costs. For instance, if a single document extends over 200 pages and needs to be duplicated 60 times to comply with various procedural requirements at different stages, such as shipping, customs, and unloading, the costs and labour involved multiply exponentially. On average, a banker spends around two hours a day processing export documents, whereas digitalized records reduce this time by 90%, taking only a fraction of the effort.
Following that, paper documents are highly prone to fraud risk. If multiple copies of a document exist, it can lead to situations where two parties may claim ownership of the same goods using identical reproduction of the document. Absent of a reliable way to verify the authenticity of each paper document, this problem can only be exacerbated.
During COVID-19, these problems grew in magnitude. The need for physical handling and verification of documents often led to delays, miscommunication, and disruption in the supply chain, especially when minimising human interaction was integral to prevent the spread of the virus (per ICC Arbitration data).
Q: How does MLETR address these issues with paper-based trade?
A: By enabling the legal use of electronic documents that are functionally equivalent to paper-based documents, MLETR helps reduce the volume of paperwork, lower transaction time and costs, and minimise the risk of fraud and errors.
Q: How does the alignment of MLETR impact international trade standards?
A: While there is no single global legal framework, alignment with MLETR helps countries align their trade laws with international standards, which facilitates smoother and more secure digital transactions globally. This also sets a new benchmark for digital trade standards, encouraging broader adoption of electronic records and increasing the market competitiveness of practicing countries.
Q: How long will the legal reform process take?
A: In the case of the United Kingdom, the whole process took just under 4 years. Belize completed the process within 1 year from project inception to bill adoption. Valuable lessons have been learnt, which should enable interested countries to achieve legislative reform in less than 18 months.
Q: What challenges have countries faced in aligning with MLETR, and how have they adapted?
A: Challenges vary by country but often include interdepartmental coordination, political resistance, and lack of implementation from the business sector. Success depends on collaborative efforts across government sectors, private sectors, and the banking industry.
Q: How does MLETR address issues of fraud and duplication in digital documents?
A: MLETR ensures that all transferable documents operate within what is termed a ‘reliable system’ to counteract fraud and duplication. Such a system is critical for verifying that a digital document is singular and exclusively controlled from its creation until it ceases to have any legal effect. The main goal is to certify that there is only one valid version of any digital document, which helps prevent illegitimate copies or fraudulent activities.
Q: What challenges are there in defining a ‘reliable system’ under MLETR?
A:Efforts are ongoing to establish clear standards that ensure the singularity and exclusive control of electronic documents. Collaborating with as many countries as possible to develop a set of recommended standards will be helpful in reflecting a broad international consensus. Please stay tuned for more details coming this December.
Countries like United Kingdom, France, Papua New Guinea, Belize, Bahrain, the Abu Dhabi Global Markets in the United Arab Emirates, and Singapore have aligned with MLETR; countries such as China, Japan, and Thailand have begun their alignment processes covering a total of 37% of global GDP, highlighting the widespread impact of digitisation that extends beyond enhancing trade efficiency. View the MLETR tracker to understand where alignment is on a global scale: MLETR Tracker | Cross-Border Paperless Trade Database (digitalizetrade.org)
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Q: What are the 8 stages of MLETR alignment?
A:
[1] MLETR socialisation: Information has been conveyed and socialised with relevant policymakers within the government and ownership of MLETR as an issue has been established within the government.
[2] Political support: Jurisdiction has committed to align to MLETR through public statements, political declarations (G20, G7), or trade agreements.
[3] Domestic analysis: Jurisdiction has identified gaps in legal frameworks relevant to ETRs.
[4] Readiness assessment: Jurisdiction has undertaken or received through technical assistance an assessment of laws requiring amendment.
[5] Stakeholder consultation: Jurisdiction has consulted with stakeholders, including industry.
[6] Legislative drafting: Jurisdiction has drafted legislation to align to MLETR.
[7] Passage of legislation: Draft legislation has passed through relevant parliamentary or executive processes to become law.
[8] Entry into force: Relevant law has entered into force.
Q: What lessons can we draw from the alignment process for digital trade?
A: One of the primary lessons is the importance of communication among government sectors. Often, a significant lack of coordinated communication can hinder the alignment process. Successful digital trade alignment requires the collaborative efforts across various government agencies, as digital economies are not driven by a single sector but are multidisciplinary endeavours.
Q: What is a compelling argument to drive action on issues like digital trade?
A: Financial incentives are often the most persuasive factor in motivating governmental actions. When we can showcase the potential for cost savings and economic growth, stakeholders can gain the attention and cooperation of government bodies. The argument that digitisation leads to cost efficiency – not just in terms of operational expenses but also broader economic benefits – plays an important role in pushing for the alignment and implementation of digital trade frameworks. Find economic impact studies from various countries on the DSI website.
The adoption of electronic documents brings a myriad of advantages; increased operational efficiency, cost savings, improved security, and environmental sustainability. Moving towards ETRs promotes interoperability and standardises trade practices, opening commercial opportunities globally and driving economic expansion.
To gain a more in-depth understanding of the legal environment for digital trade , you can enrol in ICC’s free course which will be released on 12 September. Follow us on LinkedIn for updates.