EDI and the
Traditional Bill of Lading

by: Edmund Greiner

University of Cape Town: LLB Research Option, 1997

Introduction
The ocean bill of lading has developed over the ages at the behest of commercial convenience from a document of description to a document of title representing those goods it describes. In the last 20 years however the marketplace has seemed to loose confidence in the Bill of Lading due to it's failure to adapt to technological advancements along with the modern market and the shipping industry. As a result it has lost its commercial credibility.

This paper investigates the reason's for its demise and explores the latest developments which are attempting to bring the Bill of lading in line with modern day practice focusing on the use of Electronic data interchange ( EDI ). EDI is the transfer of standard business documents via computer networks, which is extensively used by multi-national corporations who are looking to be able to extend their networks to all their trading partners. EDI is already extensively used in the shipping industry to transfer various other documents, such as sea waybills, and it is hoped that the development of an electronic Bill of Lading will once again instill the commercial confidence that it enjoyed in the past.

The Evolution of the Bill of Lading

...by the custom of merchants a Bill of Lading was transferable by endorsement, and capable of transferring title to the goods.1

During its early history the bill of lading was an appendage to the charter party and of the contract of carriage. The function of the bill of lading was to acknowledge receipt of the cargo delivered to the shipowner, master, or charterer of the vessel and to summarise the principal terms of the contract of freight. It was the practice in England in the 16 Century for the shipowner to acknowledge through the ships master that amongst other things it would, in accordance with the bill of lading, deliver the goods received to the person designated in good condition.2 The decline of the custom of the shipper to accompany the goods necessitated the development of a document with which the consignee could claim the goods. The Bill of Lading became that document, entitling the holder thereof to delivery of the goods as well as control thereof in transit. Trade in Europe was facilitated in the 19 century by good overland transport routes, which enabled the Bill of Lading to arrive at the port of shipment prior to the goods. By the mid 19 century, European Commercial Codes sanctioned the assignment or transfer of a Bill of Lading by endorsement or delivery, conveying to the assignee thereof the rights as well as the disabilities of the assignor.3

The Bill of Lading developed into an abstract document of title, conveying to a lawful good faith holder a better right of title then the transferor (at least in American Law 4). Thus banks were assured that on paying out on a Bill of Lading it had security in holding the Bill of Lading,5 and that they would have recourse against the carrier if the goods were not as described in the Bill of Lading.6

The English ocean Bill of Lading was considerably less abstract and incorporated rather fewer possessory rights. The contract between the shipper and carrier controlled all subsequent rights. English law was premised on the principal of nemo dat quod non habet.7 Thus the rights acquired by the consignee were measured by the rights conveyed to the shipper originally. In 1855 the Bill of Lading Act was enacted. In attempting to undo the decision in Grant v Norway,8 section 3 of the Act stated that the Bill of Lading representing goods to have been shipped shall be conclusive evidence of such shipment as against the master or any other person signing the same, notwithstanding that these goods had not been shipped.

Carriers began to include wide disclaimer clauses exempting the carrier from almost all liability. As a result legislative and treaty law was enacted in order to obtain a compromise between the interests of the shipper and the carrier. Many jurisdictions, as is the case in South Africa, make such rules mandatory applicable with respect to contracts of carriage.9 The Hague-Visby rules have been widely ratified as opposed to the Hamburg Rules as the latter is said to favour cargo-shipping nations vis a vis cargo carrying nations.

The treaties resulted in the Bill of Lading to be seen as a fair document of title. This is important as fairness, certainty and merchantability 10 are seen to be prerequisites from a banking perspective for a negotiable document.11 The value of a negotiable Bill of Lading has however declined in the last two decades. Bankers' decision to issue credit nowadays is rarely based on a clean Bill of Lading, instead banks are more inclined to accept freight forwarders cargo receipts and waybills.12 These documents, as do Bill of Lading, perform the functions of a receipt and evidence of the terms of the contract of carriage, they are however neither a document of title nor a negotiable undertaking. The consignee can be named on the waybill, but the shipper has the right to change his instructions as to who is entitled to receive the goods any time up until delivery.13

Demise of the traditional Bill of Lading?
What has brought about this change of attitude in the commercial world?

It appears that a number of events have resulted in the Bill of Lading losing its merchantability. Amongst these, discussed briefly below, are the rapid advancements made in respect of technology, coupled with the advent of containerised shipping.

Different types of cargo and methods of shipment entail distinct Bill of Lading practices. Most bulk carriers are not likely to issue many bills of lading, so the master or captain could reasonably be expected to sign each bill. The same cannot be said for cargo and container vessels where hundreds of bills of lading may be issued, and in any event the majority of these are issued by freight forwarders who act as carriers in their own right.14

The paper trail which is generated using a paper bill of lading is extremely costly and results in a slow rather than an efficient means of transfer as banks would require. The cost of producing all these documents in a paper format is estimated to be approximately 10% of the invoice value of the goods and the weight of all the documents for the consignments aboard a single vessel is estimated to be in the region of 40 kilograms.15

This brings one to the next problem. Their bulk makes them too slow. Containerisation and other changes in ship design and navigation have greatly enhanced the speed and efficiency with which goods can be transported. Furthermore it is not uncommon, especially with respect to bulk cargoes, such as oil, that the cargo will be sold many times over while still in transit, requiring this vast array of documents to be couriered around the world for endorsement. The result is that the cargo often arrives at the port of discharge prior to the relevant documentation. This results in delays , deterioration of the cargo and demurrage costs as the cargo will often not be released to the consignee unless the relevant documents are presented.16 This is especially true with respect to Bulk cargoes.

Another inherent risk in transferring bulk cargoes using paper Bills of lading according to Kozolchyk 17 is that an endorser / transferor may become insolvent prior to the endorsee / transferee acquiring possession of the bill of lading. In such a situation, it is not uncommon for the trustee of the transferor to claim the cargo as an asset in that estate, thereby tendering subsequent negotiation of the bill, and thereby the goods uncertain.

Another disturbing trend which has emerged is the practice of carriers to deliver goods without the production of a Bill of Lading in exchange for an indemnity by one of the traders involved in the transactions.

It appears ultimately that the paper Bill's inability to be translated into an electronic format has lead to its decreased usage. One need only look at the increased use of sea waybills in the form of EDI transactions by carriers instead to confirm this. As mentioned, a sea waybill is neither a negotiable instrument, nor a document of title. They are frequently used with respect to straight consignments, where it is not intended that the cargo will be sold in transit, which is often the case with containersed cargo. Initial booking information is given to the carrier by the shippers computer. The sea waybill is then issued by the carriers computer, which automatically assess the best possible loading scheme. Once the date of arrival at the port of discharge is confirmed by an electronic message to the shipper, the shipper has a duty to inform the carrier of an assignee who is authorised to take possession of the cargo. To take delivery, the assignee need merely identify himself.18 There is no need for any paper documentation at all, and the necessary documentation will always be at the port of discharge prior to the goods. Since waybills are not documents of title however they cannot act as security, there being nothing in law to prevent the shipper from selling the goods to another party. This problem was somewhat overcome with the development of the "cargo key receipt" (CKR ), which contained a no disposal clause, preventing the shipper from onselling the goods.19 Waybills are however effectively limited to straight consignments, and thus it appears that it would be impossible to do without the negotiable bill of lading, especially with respect to bulk cargoes. This said, and bearing in mind the disadvantages associated with the conventional paper bill of lading which has lead to the loss of confidence in this document within the commercial world, it is necessary that an acceptable electronic format be created.

The "Electronic" Bill of lading
There is definitely a great deal of commercial pressure on carriers and all those involved in contracts of carriage to adopt EDI practice. The adoption of EDI would greatly reduce the problems with respect to a paper bill of lading discussed above, especially with regard to late arrival of the documents as well as reduce costs greatly.20 Furthermore, since these transactions are almost instantaneous (to be discussed later), the uncertainty with respect to whom actually has control of the goods while they are in transit would almost certainly be allayed.

The industry is not afraid to use EDI, as evidenced from the wide use of Electronic sea waybills. So what has prevented the development and use of an EDI based bill of lading? The major stumbling block, apart from what I believe to be relatively minor issues in comparison, which I will deal with briefly, is presented by the requirement that a bill of lading be negotiable; how is it possible to mimic the legal functions of a negotiable document of title without issuing and transferring a signed paper bill of lading?

PRELIMINARY LEGAL ISSUES
EDI is certainly a viable means for facilitating binding contractual relationships. Those parties wishing to use, and make such agreements binding, do so through underlying agreements declaring themselves to be contractually bound.21 Notwithstanding this, the law is very unclear whether or not EDI contracts are legally enforceable, and as there are no reported cases on EDI, parties contract in a "world of legal uncertainty".22 The legal obstacles identified by most authors, as well as the United Nations Commission on International Trade Law ( UNCITRAL ) are briefly set out below.

The Requirement of "Writing"
The laws of the major trading nations generally recognise a wide range of commercial transactions as being valid and enforceable without a specific requirement to reduce them to a written form. Certain legislation and regulations, however, do use terminology which demands the existence of a "writing". Such requirements relate to certain categories of transactions, for example:23

• those which need to be enforceable against third parties
• where a legal right conferring title is embodied in the physical transfer of the document itself;
• where the legislative intent is to protect a particular category of persons
• where it is a requirement imposed by a regulatory authority or a part of a public procedure.

The UNCITRAL study noted that writings functions in contract law included evidence that an agreement exists.24

The CMI Rules,25 as well as the UNCITRAL 26 model law obviate this problem by stating that electronic Messages are to be treated in the same fashion as traditional writing. It is then just a matter of enacting these regulations within municipal laws. Freiburn points out that as EDI transactions are the "digital analogs" of written contracts, i.e. their electronic equivalents, and as such should be as enforceable as a paper contracts, provided they can be properly authenticated.27

Authentication
The most common form of authentication is a manual signature. Signatures identify the parties, and on a contract is evidence of their intention to be bound.28 In most countries signatures are restricted by the courts to manual signatures. EDI transactions can be electronically signed by containing within their data streams of algorithms which authenticate the identity of the sender, which can be read by means of an electronic "key". The UNCITRAL model law broadens the definition to include electronic signatures,29 as does the Uniform Commercial Code which allows any symbol or signature if the intent is to authenticate.30

Evidence
According to Livermore and Euarjai 31 two of the most vexing questions that have arisen with respect to data messages are whether they are documents 32 and can they be accepted as evidence. Article 4 of the UNCITRAL model law resolves this problem by providing that information shall not be denied effectiveness, validity or enforceability solely on the ground that it is in the form of a data message. By the same token Article 8 prevents the use of the best evidence rule and hearsay rule to alter the legal recognition and evidential worth of such messages.

Contract Formation Issues
It is trite law that any contract must reflect the real or apparent intentions of the parties. In the "perfect" EDI environment businesses would set up their machines to act automatically on the receipt of data.33 This raises the question whether these computer generated messages and responses fulfil the requirements of offer and acceptance. Some commentators have pointed out that a message may be corrupted, but the receiver thereof may still be able to infer a valid offer, which could result in contractual terms that neither party intended.34

The CMI rules make allowance for this by requiring all messages to be verified, and in so doing eliminating the possibility of error messages. It seems obvious that such verification will have to be done by humans.35

The issue of when a contract is formed does not create any significant or novel problems. There is no case law on the point, but most commentators accept that the general rule should be applied; that is that contracts are formed when and where acceptance is communicated by the offeree to the offeror.36 EDI messages are seen to be instantaneous, and hence the contract would be formed when the offeree's electronic message was actually communicated to the offero.37 It may be however, that in certain instances EDI will not be instantaneous, in the event say of the offeree's message being held in a mailbox. This issue, although in the context of telexes, was raised in the case of Brinkibon Ltd v Stahag Stahl GnbH 38 where the court stated that:

No universal rule can cover all such cases: they must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgement as to where the risks should lie.

In respect of all the above issues, there seems to be no special bar to the recognition of alternative means of conveying information, and the courts readily accept electronic messages in the place of written documents.39

EDI AND NEGOTIABILITY
Chandler states, and correctly I believe, that if EDI negotiability is possible, then most other commercial functions can be undertaken by EDI as well. In terms of contracts of carriage, it is the only function of a bill of lading which has not yet been covered by EDI transactions; evidence of the contract of carriage and receipt of the goods are covered by sea waybills as discussed above. The bill of lading has developed into an abstract representation of the material goods through merchant and commercial practice.40 Chandler points out that like money, a paper bill of lading has no real value of it's own, it's value exists only so long as there is confidence that it will be redeemed for the material promised.41 Thus he argues that an EDI bill of lading will have to be able to replicate its paper forerunners function in such a manner that it installs confidence in all parties concerned.

There are two key issues then as I see it. Firstly there must be a means for parties to endorse an electronic bill of lading in such a way that parties to the contract can be identified, thus indicating their consent to the terms of the contract. Secondly there must be a method of keeping track of subsequent endorsements. The former can be accomplished by an electronic signature, and the latter through a form of registry.

SEADOCS: The First attempt to go Electronic 42
The SEADOCS registry was the first attempt to facilitate an electronic Bill of lading. It was a project of INTERTANKO ( International Association of Independent Tanker Owners ) and Chase Manhattan Bank.

The system used a bank as a central registry, or more accurately described in this case as depository. The shipper deposited the paper bill of lading with the bank The shipper was then issued with a code, similar to that of a pin code. The sale of the goods required the shipper to notify the bank as to the buyers name. The shipper provided the endorsee with a portion of the code, which it then communicated to the bank who physically endorsed the bill of lading. When the goods arrived at port, SEADOCS was to have transmitted an identifying code to the ships master, as well as to the last endorsee. The use of this code allowed the endorsee to obtain the goods.

The system was not an EDI system in the true sense of the word as communication was done by telex. There were no operational problems with SEADOCS, however it failed to attract a sufficient number of traders and financial institutions to survive. This was due to the fact that commodity traders were unwilling to record their transactions in a central registry which could be subject to inspection by competitors, and tax authorities, and banks were not comfortable with the exclusive control of the registry by one of it's competitors. Furthermore the insurance costs with respect to a central registry would be formidable. Chandler estimates that even one error in ten thousand, which is very good quality control, could result in a loss of $20 Million or more. The question of who bears the risk is still not clearly defined.

The CMI Rules for Electronic Bills of Lading 43
In 1990 the CMI published a set of model rules, which are an expansion of the United Nations Rules for Electronic Data Interchange, in order to govern electronic bills of lading. Unlike trade networks such as SWIFT and SEADOCS, the CMI rules are open to any party willing to abide by them. They have no force of law and are strictly voluntary.44 There is still uncertainty however whether; even if the parties agree that the rules are applicable and thus precluding the parties from raising the defence that the contract is not in writing, this will have any effect in law. This uncertainty relates to the fact that certain municipal laws require a contract of carriage to be in writing, and parties are by law unable to contract out of these mandatory regimes.45

The CMI rules do not make use of a central registry such as in SEADOCS and Bolero,46 instead this function is fulfilled by the carrier. The rules do not specify any format of messaging that ought to be used, although rule 3(b) favours the use of UN/EDIFACT 47 messaging.

The transactions under the CMI rules would follow most of the same steps as under the present paper based transactions, thereby retaining current procedures. A simple transaction under these rules is illustrated by the following example.48 Once the parties have agreed to adopt the CMI rules, the shipper delivers the goods to the carrier. The carrier notifies the shipper of such receipt electronically. This message includes; the shippers name, a description of the goods along with any reservations, just as if a paper bill were being used; the location and date that the goods were received, the terms of the contract of carriage and the "Private Key" that will allow the holder thereof to transact future sales. The "Private Key" is simply a method of verifying or authenticating the message. Other means of security, such as passwords, access codes etc would still be necessary. The shipper confirms to the carrier that he has received the message. As mentioned previously all messages are required by the rules to be confirmed.

Both the carrier and the shipper have the responsibility of ensuring the security of the private key. The holder of the private key has the right to claim delivery and direct the carrier as to the identity of the consignee or any subject as if he held a paper Bill of Lading.

Passing these rights, i.e. negotiating the Bill of Lading, is carried out by notification ( from the holder of the private key ) to the carrier of the holders intent to transfer. This notification is accompanied by use of the private key. The carrier once again confirms this message and transmits all the information, apart from the private key to the prospective new holder. After the new holder has confirmed in a message that he has accepted the terms, the previous key is cancelled, and a new one issued to the holder. The advantages of having the carrier as the registry are that it is a lot less costly and complex system, furthermore such a system would make the carrier privy to each transfer, unlike a central registry where the carrier is unaware who the holder of the Bill of Lading until it is "presented".49 Furthermore companies, especially the carriers would prefer this system, as it is easier to maintain privacy, an issue over which there is of much concern.

Upon the request of the holder the carrier must issue periodic updates regarding the date and place of shipment once the goods have been loaded onto the vessel. The carrier has a duty to notify the holder of the expected date of and location of delivery. The holder is then under a duty to inform the carrier to whom it should release the goods. If the freight has been paid the carrier will release the goods to the assignee upon identification. Upon delivery of the goods the "Private Key" is nullified. The carrier avoids liability as long as it can show that it "exercised reasonable care" in ascertaining the identity of the consignee.50 The private key is also nullified if the holder requests a paper Bill of Lading.51

Faber 52 points out that the CMI rules make no provision for the authentication of electronic bills. The private key is used by the shipper or consignee to give instructions to the carrier. For authentication purposes, to replace a signature, Faber suggests using a public key system. This means that all parties will use a secret code particular to each party to encrypt the Bill of Lading which can be identified through the use of the public key.

Bolero 53
Bolero is the latest experiment in the use of electronic Bill's of Lading. It is being conducted by a consortium of carriers, traders, banks and telecommunications companies, funded in part by the European Commission.

The parties to the scheme enter a form of club in that their agreements to use electronic communication are incorporated into a set of rules which bind all the members. It is envisaged that later, persons not privy to this agreement will be able to access Bolero. Bolero incorporates the CMI rules for electronic messaging, however it employs a central registry as opposed to a private one. Endorsement of the Bill of Lading is carried out by the parties themselves, but not via direct communication with each other. There are two registries. One receives the messages from the parties and passes them on to the designated party. It is this registry that keeps a record of the holders of the electronic bill.

The second registry is involved in the process of authentication. It keeps a registry of the public key used to decrypt the messages sent by the members.

A typical transaction works as follows: The carrier receives the shipping instructions electronically, and creates a Bolero Bill of Lading (BBL). This is then digitally signed by the carrier and is sent back to the carrier via the registry. The registry then:

1. authenticates the message by checking the carriers digital signature and by adding it's own electronic signature,
2. sets up a record of the BBL, giving it a unique reference number and,
3. passes it on to the shipper. Once the shipper confirms that he accepts the BBL via the registry, he becomes the first recorded holder.

If the shipper or any current holder wishes to transfer the BBL then they would send a transfer request to the proposed new holder via the registry. If the proposed new holder accepts the BBL he will become the new holder.

The registry thus keeps a record of all transactions with respect to the BBL so it is easy to determine who the final holder is. The system has been altered so that the carrier is now involved in each subsequent endorsement of the BBL. The registry which passes on the information is said to be the agent of the carrier, and as such says Faber, there is an attornment of the terms and conditions of the contract of carriage.

Security and the Future
Much concern has been expressed as to the ability to provide secure electronic transactions. How can one prevent such information travelling on the information super highway being pilfered by hackers, thereby compromising the secracy with which carriers and traders guard jealously, as well as preventing the goods falling into the wrong hands.

People tend to believe that the information passed via computer networks and data lines can be easily intercepted and read. Although possible, it is not easy, certainly not as easy as forging a paper bill of lading. The transactions are "secured" in very much the same way as transactions on the internet are. GE Information services have recently developed a system of safely transmitting EDI documnets between users. The product uses secret key cryptology in a mutual authentication code or double challenge environment to make sure that the transmission is secure. It also boasts a dynamic session key that encrypts the session itself to secure the content of the transmission.

The product is based on a so-called mutual authentication model, according to Berry. A firewall server first requests a user's ID code, which constitutes a "secret key" generated by GEIS-supplied software. When the server matches the code with that of an approved user, the server then requests a password only the user knows, sort of like the personal identification number (PIN) that accompanies a consumer's ATM card. This process establishes a secure pipe for the business transaction.54 One interesting aspect of the product is that the secret key is good only for a single encrypted session. The session key is never seen on the Internet, making it difficult for hackers to crack the code. Also, the firm administers all of its customers' keys. The Bolero system operates in a similar fashion.

Once this secure pipeline has been created information, such as the orivate key can be freely transmitted. The private key is transmitted as a garbled message which would require the reciever thereof to have the same software to decode it, thus ensuring safety.

Conclusion
It seems inevitable that market pressure will force all parties concerned in maritime trade to switch to EDI. It would make perfect sense to do so, as form what we have seen above it would save costs which may be incurred due to the delay of documents as well a costs incurred in the creation and transport of such documents. Furthermore as transfer is, in most cases, instantaneous, it would limit if not eradicate the concern of an endorsee who has given consideration for a Bill of Lading that the endorser may become insolvent prior to him physically receiving the Bill of Lading.

However if there is to be expansion on the current use of EDI to include negotiable documents of title, as opposed to a mere receipt function, then their must be legal certainty with respect to their operation. No bank will accept such documents as security otherwise. In other words they must inspire confidence in their use. As it stands the International Chamber of Commerce, which in terms of UCP500 lays down provisions as to the types of bills of lading and other documents that will be acceptable for the purposes of triggering payment, does not contemplate the use of electronic Bill's of Lading as such a document.

The issues of whether an electronic Bill of Lading can be said to be a document, or can be said to be signed, are able to be dealt with through legislative intervention. In any event, as most authors point out, the courts would more then likely defer to commercial practice. With respect to the issue of negotiability, it appears as if the EDI is able to electronically mimic the process and function of a Bill of Lading. The issue which remains unsolved, and which would concern all parties to an EDI contract, is how liability is to be determined for losses due to a system failure. The CMI rules place a heavy duty on the carrier without clearly articulating the liability between the parties. The central registry adopted by SEADOCS and Bolero is, in the light of the insurance argument not really viable. Furthermore carriers are not willing to have their transactions recorded in a central registry over which they do not have control for the reasons articulated earlier. I believe that treaty or legislative intervention to clearly articulate the limits of each parties liability is necessary. If this can be achieved together with legal recognition of that an Electronic Bill of Lading is equivalent to it's paper counterpart, then the way is clear for the Bill of Lading to once again regain it's place in the commercial world as a fair, certain and merchantable document.

References

Chandler, George "The Electronic Transfer of Bills of Lading" Journal of Maritime Law and Commerce 20 1989 at 571-579

Chandler, George Maritime Electronic Commerce for the Twenty-First Century. Paper delivered at the centenary of the Comite Maritime International 1997 (50 pages)

Faber, Diana "Electronic Bills of Lading" Lloyds Maritime and Commercial Law Quarterly, May 1996 at 232-244

Faber, Diana The Use of EDI in International Trade: Implications for Traders, Banks, Carriers and Insurers, Paper delivered at 10th BILETA Conference on Electronic Communications, Glasgow 1995

Freibrun, Eric S, Electronic Data Interchange and the Law 1993

Holford, Mark The Paper Bill of Lading Unravels with Bolero 1996

Kelly, Richard Brett "The CMI Charts a Course on the Sea of Electronic Data Interchange: Rules for Electronic Bills of Lading" Tulane Maritime Law Journal , Spring 1992 at 349-375

Kozolchyk, Boris "Evolution of the Ocean Bill of Lading from a Banking Law Perspective" Journal of Maritime Law and Commerce 23 1992 at 161-245

Livermore, John and Euarjai, Krailerk "Electronic Bills Of Lading, A Progress Report" Journal of Maritime Law and Commerce 1997 28 at 55-59

Myburgh, Paul "Bits, Bytes and Bills of Lading: EDI and New Zealand Maritime Law", New Zealand Law Journal, September 1993 at 324-330

Richard Hill and Ian Walden, The Draft UNCITRAL Model Law for Electronic Commerce: issues and solutions.

RETURN TO "ELECTRONIC DOCUMENT INTERCHANGE" HOME PAGE