BLOCKCHAIN BILL OF LADING: THE WAY FORWARD

Neel Vasant and Devika Radha*

Abstract

“Change is the law of life; those who refuse to change slowly decay and degenerate”

The shipping industry has always been considered to be a very traditional industry, considering the resistance to keeping track with the latest trends and technologies. One such age old practice is that of the traditional paper based bill of lading. A bill of lading plays a very significant role in transactions via sea all over the world and is widely used. This is despite the large number of disadvantages it has. Owing to this particular aspect of a traditional bill of lading, emphasis is laid on the use of electronic bills of lading or blockchain based bills of lading. The authors in this essay try to list down the possible merits and demerits of a blockchain B/L along with the existing and required legal frameworks for its widespread use. It is seen that there is already a fairly well drafted set of model laws that countries could use to adapt to electronic forms of bill of lading and all we need to do is take a step forward.

Key Words: Bill of lading, Shipping, Blockchain.

Introduction

In the field of shipping or maritime law, one undoubtedly comes across the term ‘Bill of Lading’ (hereinafter referred to as B/L). It’s meaning however, most of the law students are ignorant of. The standard definition of a bill of lading is, a ‘piece of document issued by the transporter to the shipper containing specific details of the goods transported via the vessel to the destined port’. In simpler terms, a B/L is a paper document which contains a detailed record of items loaded on the ship. For example, Company A is located in London and it desires to purchases goods in bulk from a supplier company B located in India. In such a scenario the supplier B gives the ordered bulk goods to a shipping company to deliver to A in London. Here, the shipping company will issue a bill of lading on behalf of B and send it to A, which they may use in order to claim the goods at the concerned port.

The reason why B/L  is of utmost importance is because it acts as a proof that the goods are sent to the carrier and also serves as a document giving title of the goods transported. It also solves the problem of submitting all the original documents till the time the seller or the exporter receives the monetary consideration. Whenever goods are sent via sea, it passes through number of countries having different set of rules and regulations. But, a B/L is one document universally accepted by courts of various jurisdictions.

A typical bill of lading contains below mentioned items, which also adds to its widespread use:

  • Sender’s and Receiver’s Name
  • Journey of the Vessel (name of the ports)
  • Vessel’s Name (For identity)
  • Rate of Freight
  • Details of the Cargo (Weight & Volume)

Paper Based Bill Of Lading – Time To Retire?

Paper based B/L has been in use since time immemorial and hence any talk of replacing it with any kind of modern B/L blended with technology invokes knee jerk reactions are. Below mentioned are some of the reasons to convince persons in the shipping industry otherwise:

  • Speed – A traditional B/L is handled hand to hand at different places in the world. This accounts to it being a very slow method of transport. In today’s time when speed of the vessel is drastically increased, the speed of a traditional B/L still remains that of the 1950’s and 60’s.
  • Cost – A traditional B/L is to be presented and showed in hard copy at different places for security reasons. This adds to the overall expense of the carrier as well as the shipper.
  • Fraud – Forging a B/L in order to get the delivery order has been one of the most common crimes in recent past. A paper based B/L can easily be forged with the help of modern-day electronic tools. Moreover, the fact that a traditional B/L is issued in sets increases the possibility of fraud and cheating.

Electronic Bills of Lading

We live in the age of technology where slowly and steadily technology is replacing traditional use of paper. It is high time that the shipping industry also matches the pace of time and replaces paper with digital alternatives. An electronic B/L (hereinafter referred to as e B/L) is nothing but a functional equivalent of a traditional paper B/L. Such type of a bill of lading is created to do away with the demerits of a normal B/L .However, for an e B/L to be accepted and widely used, it has to acquire a traditional B/L’s legal status, thereby meaning that the law of a country needs to acknowledge it as a valid form of B/L. Regardless, various international sales of goods contracts have been concluded and handled automatically by computers as part of Electronic Data Interchange (EDI) networks.

It is a matter of fact that it is very difficult to match the accuracy of a B/L prepared by electronic means. Accuracy of information in a B/L solves half of the disputes between the shipper and the carrier. This will help to reduce of already pending litigations in different courts of the world.

One Step Forward: Blockchain

Everything that glitters is not the gold. An Electronic form of B/L too is plagued by some demerits, which are as below: –

  • Hacking – In this electronic world anything and everything is prone to hacking. No system or technology is free from this hazard. A B/L is considered to be an extremely sensitive document because it being an evidence of title, with many important issues such as the passing of property depending on it, it is difficult to imagine the dangers posed by an unreliable electronic bill of lading and its impacts.
  • Recognition – In India, there is still a big cloud of uncertainty over acceptability of an e B/L. The initial step in order to use an e B/L should be to get the courts’ recognition as a valid legal document.

From the above discussion it becomes clear that an e B/L has its own set of limitations. Now that the shipping industry has embraced the concept of an electronic bill of lading, there has to be more technological advancements to solve the demerits of an e B/L .Several of these issues B/L can be solved if the newly developed technology of blockchain is infused in the e B/L.

The concept of a blockchain B/L is very interesting as the contract or the document is preserved in an online database which is free from any interference from third party and hence the issue of tampering does not come into picture. In the traditional/L, documents change hands very often, which in turn increase the possibility of wrong doings. In a B/L based on blockchain the documents are transported automatically by way of a unique code which takes care of the security issue. The feature of tracking a B/L also comes into picture with such an advanced technology. Hence, a smart bill of lading based on the blockchain technology has the capability of solving the security concerns of the carrier and the shipper.

Below mentioned are the advantages of using a blockchain B/L over traditional or simple e B/L :

  • Secure
  • Fact & Efficient
  • Paperless
  • Cheaper

What Is Blockchain?

Anybody who has been reading about the latest technological trends in banking or investment must have come across the term Blockchain. Originating from the two constituent words ‘block’ and ‘chain’, the Cambridge English Dictionary defines the term as “A system in which a record of transactions made in bitcoin or any another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network”.[1] The mechanism behind is however, not as difficult as the definition to understand. In the simplest sense, it is a chain of blocks, where the ‘blocks’ translate to a set of digital information stored in ‘chai­­ns’, a public database. Every such block has information about a few thousands of transactions, encrypted but accessible to the public.

The concept, first formulated in 1991 by Stuart Haber and W. Scott Stornetta, saw its first real world application when Bitcoin was invented in 2009. Blockchain is emerging to be a secure and largely hack proof system that could be widely used in banking, cryptocurrency, healthcare, property records, smart contracts, supply chains, etc. Recently, it was also tested in the midterm elections of West Virginia and has a potential to eliminate every kind of election fraud.

The system is decentralized into a set of computers, which makes the digital information stored difficult to tamper with and in turn makes the transaction secure, efficient and private. Since the verification of the data entered into the Block is computer based, it eliminates human involvement thereby increasing accuracy and reducing the cost.

How Does A Blockchain  B/Work?

A blockchain B/L system collects all announced transfers of a number of B/Ls into a block at regular intervals through its ledger, which displays the addresses at which the tokens are kept. The ledger operates as a timestamp server. Each of these blocks include a timestamp and a link to the previous block of the chain and the transaction is processed only after several confirmations of the network, so as to ensure that every transaction follows the rules of the network. After the information is stored in the block, it cannot change or be deleted unless the subsequent blocks are also changed and the majority of the network accepts the change/deletion. Therefore, user’s interference in the blockchain looks impossible. Using time stamping and cryptographic techniques, these can single out the earliest transfer of a blockchain B/L as the authorized transfer and void out later unauthorized transfers in the process, enabling blockchain bills of lading to be unique.

Several tests have been conducted by various shippers in the last one year, only to conclude about the remarkable efficiency of the B/L based on blockchain. For example, G2Ocean has completed five different pilot tests of their CargoX Smart B/L, powered by the Blockchain Document Transaction System (BDTS). In another instance, world’s largest container shipping company, Maersk had collaborated with IBM to create a blockchain ledger, an achievement that could be revolutionary in the shipping industry.

Legal Issues Of Blockchain  Bills Of Lading

A traditional B/L is accepted universally as receipt of goods, document of title and as a contractual document. The legal value attached to this document is significant and hence, when one plans to replace the traditional B/L with an electronic one like a blockchain B/L, the most significant question arises as to its legal validity.

The common legal issues that arise in relation to a blockchain B/L , like any other electronic form of B/L  would be related to the following:

Functional Equivalence

The concept of functional equivalence requires that all those functions that are performed by a traditional B/L have to perform by the new substitute as well. This essentially acts as a test to determine whether the substitute can be widely used in the shipping industry. As mentioned earlier, a traditional B/L has the legal validity of being a receipt of goods, a document of title and a contractual document. Additionally, it should also act as evidence of goods carried by sea.

In order for a blockchain B/L to be functionally equivalent to a traditional B/L, it must be provided by the carrier to the shipper and the receiver must be able to access the information regarding the cargo and verify the same. It should be possible to endorse or transfer the same to a third party and should contain evidence or reference to the contract of carriage.

Digital Signature

Various unique identification methods such as access codes and digital signatures are required to be recorded and verified in a digital transaction. These are encrypted to guarantee the genuineness of the document. The most commonly used methods of verification are digital signatures, generally used in smart contracts. They are key to ensure authenticity. How well a technology can identify fraudulent digital credentials is an important aspect that determines its viability in any given industry.

The Hamburg Rules, adopted at the United Nations International Convention on the Carriage of Goods by Sea in 1978 is a set of rules that governs various aspects of international shipment of goods. These rules have taken step towards accepting digital signatures by stipulating that a signature on a B/L may be in electronic form as well, as long as it is consistent with the law of the country where it is being issued.

Existing Legal Framework For Blockchain Bills of Lading

There are three major legal frameworks currently existing that regulate the use of electronic B/Ls such as a blockchain one. The CMI Rules for Electronic Bills of Lading 1990, UNCITRAL MLEC (Model Law on Electronic Commerce) 1996, and the UNCITRAL MLETR (Model Law on Electronic Transferable Records), 2017.  It is to be noted that none of the above laws have force of law; they are mere model laws. A model law is a specimen text that can be used by national legislatures while drafting a statute regarding the relevant subject. The aim of adoption of a model law by international institutions like UNCITRAL is to harmonize and develop international trade law.

The Comité Maritime International (CMI) Rules for Electronic Bills of Lading, 1990, (hereinafter referred to as CMIR) were formulated for governing transactions involving E B/L s. CMIR builds on functional equivalence of an E B/L . Article 4 of CMIR provides for an E B/L governed under the Rules to function as a receipt and also to evidence the carriage contract. The drawbacks of CMIR include use of a Private Key in certain transactions and the system of returning B/L  to the carrier until the cargo is delivered. 

UNCITRAL MLEC is a model provision that deals with electronic documents in general. It is divided into two parts, one which related to electronic commerce generally and the second that is specific to certain areas like carriage of goods by sea. Article 5 Code makes it clear that it gives full legal recognition to an electronically issued B/L whereas Article 16 facilitates the use of electronic documents such as E Bills as receipts. Article 17 on the other hand, deals with the most important aspect of transfer of rights through an electronic document. It stipulates that in order to be a valid transfer of right and obligation, the transfer must have been made through means of data message. Further, a reliable method is to be used to render the message unique.

MLETR is latest set of laws adopted by the UNCITRAL in July 2017. The distinct feature of MLETR is that it accommodates within its purview, the use of all kinds of technologies, be it electronic tokens, registries or distributed ledgers and encourages technological neutrality. It builds on non discrimination against the use of electronic means and considers an electronically transferable record as functionally equivalent to a transferable document or instrument. It contains similar provisions to that if MLEC but fills the loophole by explaining what a reliable method is.

The above set of model laws and especially MLETR provide a suitable legal framework for the use of blockchain technology in B/L s.

The Way Forward

So what exactly is the kind of law that we need in India for legalizing and regulating the use of blockchain B/L? Do we need to alter commercial laws in order to be able to accommodate blockchain B/L or do we need to adopt an entirely new legislation similar to the above mentioned model laws?

There are two major steps to formulating a suitable legal framework for e B/L s in general. Firstly, the legal validity of electronic transactions and digital signatures has to be acknowledged.  Secondly, laws and safety measures have to be put in place to ensure security and privacy of digital instruments. Thirdly, there has to be regulation and substantive laws regarding the rights and obligations of the key players such as network service providers, blockchain technology facilitators, etc. Another significant pre requisite would be robust laws for online crimes, online privacy, online payment, online consumer protection, etcetera.

Therefore, there has to be a statute that defines, validates and regulates all forms of electronic transactions. Additionally, contract and commercial laws need to be changed to accommodate electronic transactions as well as digital signatures.

Countries like Malaysia have completed all the three steps by enacting several independent legislations. Or, one could amend existing laws and regulations to complete the three steps. For example, France has amended its Civil Code to recognize data messages and digital signatures.

Is India Ready?

An Inter-Ministerial Committee was formed under the chairmanship of India’s Economic Affairs Secretary Subhash Chandra Garg in November 2017, to look into the legality of cryptocurrencies and blockchain. It suggested that private cryptocurrencies like Bitcoin be banned in the country and suggested imprisonment and fine for its use. The main reasons cited are the lack of attributes of a currency in case of such cryptocurrencies. The committee did encourage their use, as long as the Reserve Bank of India issues them. This move however, does not affect the validity of blockchain per se. However, for successful advent of blockchain B/L, there has to be a well framed set of laws for its regulation, considering the opposition a blockchain based technology like Bitcoin is facing in India.

 

Conclusion

With the advent of technology, the paperless era seems to be closer. And of all the industries, the shipping and maritime industries, facilitating about 90% of the world’s trade, need to embrace technological innovations. Especially when it’s something like blockchain B/L that could revolutionize the industry. The key to successfully utilizing these advanced technologies is in giving them legal validity. The background may be set in the various model laws enacted by UNCITRAL but there is a need for counties like India, one of the emerging economies of the world, to recognize the potential advantages of embracing blockchain B/L and take a lead in legalizing and regulating them.

*Student, Symbiosis Law School, Pune


This essay has been selected for publication through the 1st NLUO-Ganesh & Co. National Maritime Law Essay Writing Competition, 2019.


[1]Meaning of blockchain in English, at (30th July 2019, 1.15 pm), https://dictionary.cambridge.org/dictionary/english/blockchain.

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