It’s a digital world – Embracing technology in trade finance | Sullivan and Worcester


Following Sullivan’s recognition as Trade leader for innovation by Global Trade Review (GTR) for its recent contributions to the digitization of trade finance, this is an opportune time to recap the progress that has been made in this space over the past 18 months.

The various local and global lockdowns imposed by the COVID-19 pandemic, which no one could have foreseen in early 2020, have firmly highlighted the challenges of operating a paper-based industry – such as financing of international trade – on the 21st century and the practicalities of obtaining original documents (eg, bills of lading and warehouse receipts) and wet ink signatures in a world where many work from home. Considering how the industry has adapted, one thing has become clear: there is certainly room to improve the way business transactions are conducted in the future.

Despite the skepticism that has previously been raised by some about the risk of losing the “human element” to automated processes, especially when it comes to reviewing documentation and making transactions, the pandemic has highlighted the need to adopt technology where appropriate. Indeed, much of this technology was already in development and use, but has been catapulted to the fore from March 2020. This will only serve to help the industry, allowing it to operate more efficiently. and better protect themselves from market disruptions.

In this blog post, we take a brief look at a few key ways to digitize commerce, noting some projects we’ve been working on over the past year: electronic signatures; electronic payment companies; blockchain technology; artificial intelligence; and digital rules.

Electronic signatures

Although English law has recognized electronic signatures for some time, the pandemic has certainly accelerated their use. While virtual signatures have become the norm for many transactions, electronic signatures can take many forms. Some examples include wet ink scanned signatures, typed signatures, mouse click, authentication codes, and multi-party signatures made using electronic signature platforms. As such, it is essential that the parties exercise due diligence to ensure that electronic signatures, and in particular the proposed method of transaction, are considered valid in the jurisdiction where enforcement is sought. This is particularly important when the documentation needs to be recorded or attested, thereby adding to the list of legal and practical considerations. In our experience, for example, some African jurisdictions still require wet ink signatures for documents to be stamped and registered. Therefore, it is always recommended to seek local legal advice, where appropriate.

Electronic payment companies (ePU)

While English law is well suited to adapt to business realities, as evidenced by its recognition of electronic signatures, it is fair to say that there are some instances where it is overwhelmed by the technology available. The use of promissory notes (PN) and bills of exchange (BE) are good examples, as these two instruments cannot currently be used in electronic form. This is not surprising given that the drafters of the Bills of Exchange Act 1882, which governs FNs and BEs, clearly could not have envisioned the digitalization of commerce or anticipated that the industry would move away from documentation. paper.

For this reason, the International Trade & Forfaiting Association (ITFA) launched its Digital Negotiable Instruments (DNI) Initiative, which aims to fully digitize a substantial equivalent of PRs and BEs, exploiting the latest innovations, including electronic signatures and distributed ledger technology (DLT). As part of the DNI initiative, launched last year, ITFA, among others, lobbied the UK government for a change in the law.

After conferring with ITFA, the International Chamber of Commerce (CPI) UK and other stakeholders, the Law Commission of England and Wales recently announced a consultation on proposed legislative reforms to recognize electronic versions of PNs, BOs and other business documents, some of which are title deeds.[1] This would place interests currently based on contract law under the protection of the law. In short, the transfer of possession of such business documents is currently limited to physical paper documents. The proposed reforms would see electronic business documents and transfer of possession via an electronic system recognized under English law. At this stage, a draft law on electronic business documents has been prepared, which should be submitted to Parliament for its legislative program, the first estimate of which is 2022.

That said, while the proposals presented in the Law Commission’s consultation paper present interesting opportunities, for the time being, viable contractual workarounds are being sought. We were delighted to collaborate with ITFA on the development of the ePU, a functional electronic equivalent of BOs and PNs that seeks to fill some of the gaps in existing legislation.

Blockchain technology

Blockchain, a type of DLT that has been around for over a decade, allows transactions to be recorded in an encoded format that secures data. There are many benefits to using this technology, including simplifying the processes by which exporters / importers (and their banks) can access relevant information, record transactions and make payments. Indeed, the proposed move away from paper would arguably make transactions more secure and less prone to fraud, potentially alleviating costs and operational burdens for banks for manual document verification and compliance checks.

There are a number of service providers on the market offering digital solutions to the problems of traditional paper commerce. Typically, these platforms are designed to match ‘business data’, such as data relating to a purchase order, invoice, or shipping details from a logistics provider, linking participants to the process. platform and transactions and simplifying the way documents and information are shared.

By way of illustration, once the electronic business data is successfully matched on the platform, a buyer’s bank should be able to provide an irrevocable payment commitment (IPU) in favor of the supplier to mitigate the risk of non-payment, which can then be resold by the supplier to a bank in exchange for prepayment. A PIU is a promise from the buyer to the financier to pay the amount owed to the seller as a result of the sale of goods or services and the creation of debts. It usually includes a waiver by the buyer of all defenses against its obligation to pay the seller and essentially separates the commitment to pay from the underlying transaction.

We recently advised on a revised regulation and legal framework for platform provider Marco Polo developed in collaboration with TradeIX and ITFA. The rulebook is seen as an important step towards realizing the benefits of the digitization of payments in commerce.

Artificial Intelligence (AI)

AI is also used in several ways in relation to contracts with the aim of simplifying the documentation process where possible. One such method is document automation whereby contracts are created from databases of clauses, which could potentially be used as a template for commodity transactions, for example simplified bilateral facility agreements accompanied by ” an assignment of contractual rights or a pledge on the goods as collateral, as required. Another is “smart contracts”, which are essentially self-executing automated transactions written in computer code.

Digital rulers

In an effort to embrace the technology and enable banks to accept electronic documents and data, the ICC Banking Commission is also looking to update existing rules or create new ones. It has already started this process by publishing its 2019 electronic supplements to the Uniform Rules for Collections (URC 522) and to the Uniform Rules of Use and Practice for Documentary Credits (UCP 600).[2]

It also develops uniform rules for digital business transactions (URDTT) with Geoffrey Wynne, head of Sullivan’s trade and export finance group, as co-chair of the drafting group. URDTT, currently subject to the approval of ICC National Committees, will cover the use of electronic records to process digital business transactions with adoption expected later this year. The rules will seek to address: (i) how parties can submit electronic records to prove an obligation to sell or pay for goods; (ii) how electronic data relating to digital business transactions should match; and (iii) what if it is not.

The past 18 months have been characterized by renewed focus and an increased willingness to embrace the technological solutions available in certain key areas of commerce. Nevertheless, it is important to keep in mind that digitization does not offer solutions to all the problems faced by the industry. Despite the many advances made to date, we anticipate that the transformation of trade and trade finance will bring new challenges and, of course, new technologies as they emerge.

We, as a firm, are proud to have been part of what has been an exciting time for the trade finance and commodities industry and our involvement with ITFA, ICC and the Commission of right on the current consultation. It remains to be seen to what extent new technologies will be adopted by industry. One thing is clear: the focus must remain on sustaining momentum over the coming months and years.

[1] See the consultation document of the Law Commission – Digital assets: electronic commercial documents. The consultation ends on July 30, 2021.

[2] The ICC intends to review these rules if further updates are needed at the end of this year.



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