Digitalization

"Just because we cannot see clearly the end of the road, that is no reason for not setting out on the essential journey. On the contrary, great change predominates the world, and unless we move with change we will become its victims."¹²

——Robert F. Kennedy

The industrial logic of value chains facilitates in breaking down production by dividing labor, thereby producing efficiently as a result of specialization, and then putting everything back together through trade.¹³ Although all modes of transport contribute to the linkage of these stages, maritime transport undertakes 80% of the total trade volume. ¹⁴ Thus, unsurprisingly, the improvement of the maritime transport system has received considerable attention. At present, one of the most promising ways to improve efficiency is by introducing digitalization into the branch.

Despite the constant calls from the maritime transport sector to embrace digitalization, the process thereof lags behind. One of the main obstacles holding back digitalization in maritime transport is the lack of certainty in the current legal framework owing to the absence of universally recognized means for vesting an electronic document the same legal effect as the corresponding paper document. To cope with this challenge, two issues need to be addressed.

The first is the full replacement of the functions of maritime documents into an electronic environment, which includes their functions as evidence, valuable papers, and negotiable instruments. The second is related to the application of digitalization, such as the formation of digital documents, recognition of electronic signatures, and authentication. By illustrating the process of maritime transport and roles of transport documents therein, the first section may be

12 The Quotable Lawyer § 18.19, at 38 (David S. Sharager and Elizabeth Frost eds.,1986) (citing Robert F. Kennedy's farewell statement, Warsaw, Poland, which was reported in the N.Y. Times, July 2, 1964).

13 Quitzau, Jörn et al. Shipping in an era of digital transformation. No. 25e. Strategy 2030-Capital and Life in the Next Generation, 2018, p.18.

14 United Nations Conference on Trade and Development, Review of Maritime Transport 2017, UN, 2017, see Executive Summary.

able to shed light on the special characteristics of maritime transport documents. Based on the context provided by the first section, the second section focuses on the general issues regarding the digitalization of documents, including the content of digitalization and legislation impediments.

A. Maritime Transport

Maritime transport is the integrated component in global freight transportation, and it is one of the cornerstones of globalization.¹⁵ Each day, thousands of ships sail the seas to bring large amounts of cargo from one country to another. To date, maritime transport is the only available means to move cargo across great distances in an inexpensive and efficient manner.

A highly developed maritime transport service enables “products from all over the world to be procured in any country by means of low-cost services, while any country could supply products of its country throughout the world.”¹⁶ Not only do the rise and decline of the maritime transport lie with the well-being of the global economy, but the opposite also applies:

the cost and safety of maritime transport service, to a large extent, accounts for the price of the end product and affects traders’ confidence in global markets.¹⁷ Since the maritime industry has transformed over the last few decades, the following part shortly illustrates the process of international seaborne trade and the role played by maritime transport documents. Closely examining the current maritime transport can help reader understand the digitalization of maritime transport documents as the next breaking point for the shipping industry and world trade.

15 Hoffmann, Jan, and Shashi Kumar, Globalisation–the maritime nexus. The handbook of maritime economics and business, Informa Law from Routledge, 2013, p. 65.

16 OECD Doc. No. DSTIIDOTIMTC(99)7, “Strategies for the GATS 2000 Negotiations- Contribution of the OECD Maritime Transport Committee” (May 17, 1999), p. 5.

17 See Korinek, Jane, and Patricia Sourdin. “Maritime transport costs and their impact on trade”, Organization for Economic Co-operation and Development TAD/TC/WP (2009) 7 (2009). “A ten percent increase in maritime transport costs is estimated to decrease trade by six to eight percent, other things being equal.”

I. International Seaborne Trade 1. Maritime Transport Service

As Sir Walter Raleigh said, “all trade is world trade; all world trade is maritime trade.”

Although this statement was made five centuries ago when the rail and air transport system did not exist, this formulation remains somewhat true today. With over 80% of global trade by volume and more than 70% of its value being carried on board ships and handled by seaports worldwide, maritime transport is the backbone of world trade and prosperity.¹⁸ The essence of maritime transport is the safe and accurate physical transfer of the traded goods from one place to another passing through water, but the maritime transport service has a wider spectrum of functions in virtue of its close link to global trade. According to the General Agreement on Trade in Service (GATS), the overall maritime transport service can be classified into three groups: a) transport services, b) auxiliary services, and c) port services.¹⁹ Transport services is the main part of maritime transport services and can be divided into three categories: passenger transport, liner, and non-liner freight transport.²⁰ Among these three categories, liner and non-liner freight transport fulfill the shippers’ variable needs for transporting goods with container ships or tankers, whereas passenger transport is conducted by cruise ships and ferries and exercises only remote influence on freight transport.²¹ As this study focuses on international freight transport, passenger transport is not investigated.

Although the liner and non-liner shipping are both freight transport, they represent different types of seaborne trade. These two services can be distinguished by the cargo they carry and customers they serve. Liner vessels transport mostly small parcels of general goods, which include manufactured and semi-manufactured goods, and they are responsible for several shippers at the same time. Liner shipping is an organization-intensive business because

18 Supra note 14.

19 See World Trade Organization, Services Sectoral Classification List, MTN. GNS/W/120, available at http://tsdb.wto.org/Includes/docs/W120_E.doc.

20 UNCTAD, Maritime Transportation, Guidelines for Importers, Chapter 4; OECD Doc. No. DSTI/DOT(2001)3, March 8, 2002, p. 12.

21 Rasmussen, Neils, Le Transport Maritime International/ International Maritime Shipping (Montreal: Center d'Etudes en Administration Internationale (CETAI), Ecole des Hautes Etudes Commerciales (HEC), 1994), p. 34.

various types and amounts of goods from numerous shippers must be transported in every voyage,. Therefore, a freight forwarder or non-vessel operating common carrier (nvocc) is usually required to act as the agent of a group of shippers. The freight forwarder or nvocc’s duty is to consolidate the shipments and negotiate the transport with the carrier on behalf of all shippers. Depending on the circumstances, the transport contract can be evidenced either in a Master Bill of Lading (MBL) issued by the shipping companies or a House Bill of Lading (HBL) issued by the agent. If the former is issued, the consignee can receive the goods directly from the shipping company (carrier); otherwise, the consignee must exchange the HBL for a delivery order before he/she can take delivery of the goods.

Contrary to liner shipping, non-liner shipping handles dominantly bulk cargo, which is single cargo in large volumes, and it is only responsible for a single shipper. Consequently, the shipper does not seek an ocean transport intermediary to reserve a space on board a vessel;

instead, the shipper prefers to hire a shipbroker to charter an entire vessel for his/her use.²² In this scenario, the transport contractual relationship between the shipper and carrier is bound under a charterparty. Thus, the shipper is also known as charterer; the carrier, shipowner. A bill of lading (B/L) is still issued to prove each voyage, but it must comply with the charterparty, so it is named Bill of Lading under Charterparty. Another distinction is the resale of goods in bulk shipping. Unlike liner shipping, the resale of goods on a voyage is common practice for bulk shipping.²³ In certain cases, especially in crude oil trade, goods are purchased in transit by middlemen who have no intention to obtain the cargo but only wish to resell them.²⁴ Sometimes, the goods can be sold many times that the original shipper eventually reacquires them under a “circle” contract.²⁵ To suffice this commercial need, the B/L in non-liner shipping is usually negotiable and, thus, grants the transfer of ownership of the goods through endorsement.

22 Todd, Paul. Principles of the carriage of goods by sea, Routledge, 2015, on p. 4.

23 Ibid on p. 360.

24 See A/S Hansen-Tangens Rederi III v Total Transport Corp (The Sagona) [1984] 1 Lloyd’s Rep 194, 201. “When the master of the Sagona, who had been commanding tankers for 14 years, was asked how often an original B/L had been presented to him prior to discharge, he answered: ‘I have never seen it’.”

25 Treitel, Guenter Heinz, Francis Martin Baillie Reynolds, and Thomas Gilbert Carver. Carver on bills of lading. Vol. 16.

Sweet & Maxwell, 2011, p. 236.

In addition, auxiliary and port services are equally indispensable to provide an interface between shipping and commerce. These services include cargo handling, storage and warehousing, customs clearance, container and depot, and freight forwarding as well as navigation, maintenance, and repair of vessels. A special document issued for these processes is the warehouse receipt, which is issued by a public or terminal warehouse company to certify the storage of goods. The warehouse receipt is special because it indicates ownership of the stored goods and, as such, can be used as collateral for a loan.²⁶ The warehouse receipt can also be issued in either non-negotiable or negotiable form. In the latter, the warehouse receipt, like negotiable bills of lading (B/Ls), can be transferred by endorsement. In light of this characteristic, warehouse receipts are often used as financial instruments to facilitate business.

2. Delivery and Payment

Delivery and payment are the most essential elements in the international sale of goods.²⁷ Completing delivery and payment simultaneously is usually impossible, so parties in an international transaction must spend considerable time to negotiate the main delivery and payment terms.²⁸ When the consignor and consignee of a transaction are part of one enterprise, the negotiation of delivery and payment is straightforward. However, this type of transaction composes only a small proportion of international trade. Owing to the arm’s length principle,²⁹ even sister companies must arrange an agreement that can stand up to legal scrutiny. In this sense, the seller and buyer not only determine the price and number of the goods but also specify which of the parties thereto should arrange the seaborne transport and, therefore, which should enter into a contract with a carrier.³⁰ The carrier then acts as an important nexus between the buyer and seller.

Upon arranging the transport of the agreed goods, the transport contractual relationship is

26 Brigham, Eugene F., and Joel F. Houston. Fundamentals of financial management. Cengage Learning, 2012, on p. 197.

27 Nelson, Brian. Law and ethics in global business: how to integrate law and ethics into corporate governance around the world. Routledge, 2013, on p. 65.

28 Baatz, Yvonne, ed. Maritime law. CRC Press, 2014, on p. 94.

29 In the arm’s length principle, the buyers and sellers of a product act independently and do not have any relationship. The concept of this principle assures that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party. It also assures third parties that the buyer and seller are not colluding.

30 Packard, William V., SEA-TRADING, VOLUME 3: TRADING. 1986, on p. 2.

evidenced in the form of a booking note, a shipping note, a B/L, or other documents.³¹ Given the circumstances that the seller should arrange the shipment, he can, after concluding a contract with the carrier, send a copy of the agreed transport terms to the buyer and inform him about the crucial information. Such information includes, inter alia, the name of the vessel, port of discharge, and number and type of packages. As soon as the consignee (in this case, the buyer) receives the goods and the payment is cleared, the transaction is completed. However, in an international context wherein parties are normally distant and may not know each other, divergence can occur in delivery and payment. A seller will be reluctant to release the cargo if he is uncertain of his payment, and the buyer will be equally unwilling to pay unless the goods are in safe hands and proven to be in good condition. Five primary methods of payment are used for international transactions, namely, cash-in-advance, letters of credit (L/Cs), documentary collections, open account, and consignment.³² These payment methods range from the buyer paying cash in advance (cash-in-advance) to transferring the ownership of goods before payment (consignment/open account). In the event that the buyer and seller have built profound mutual trust or are simply part of the same enterprise, payment methods in favor of only one party can be adopted. Unfortunately, not all parties in international transactions share this degree of trust. More often, transactions occur between parties with limited trust. In this case, the method of transfer of goods and money must be chosen carefully so that the seller and buyer are convinced that their contract will be respected. For both parties to feel assured, a satisfactory alternative is to invite trusted banks to play the role of an intermediary. To be an intermediary, banks usually take possession of the critical documents in the transaction and arrange the sequence of the exchange. In documentary collections, the bank acquires documents of title and valuable paper, which in most cases are B/Ls and the bill of exchange (draft). The B/Ls are issued by the carrier³³ to the shipper, and the original must be surrendered to the shipping company in exchange for the goods. Considering the nature of the B/L, the bank

31 Documents containing contractual terms accepted by the carrier are often regarded as binding contracts between shipper and carrier. See MSC Mediterranean Shipping Co S.A. v BRE Metro Ltd (1985) 2 Lloyd’s Rep 239, on p. 240 (“contract of affreightment contained in a liner booking note”); George Kallis (Manufacturers) Ltd v Success Insurance Ltd (1985) 2 Lloyd’s Rep. 8 at 11 (contract of affreightment contained in shipping note).

32 Guide, Trade Finance. “A Quick Reference for US Exporters (April 2008), Washington: US Department of Commerce.”

International Trade Administration.

33 The issuer of B/L can be the carrier, captain, or agents of carrier.

first instructs the buyer to fulfill his/her obligation in the draft, and after having successfully collected the payment, the bank forwards the B/L to the buyer and remits the proceeds to the seller (see Figure 1). Thus, the seller can retain control of the goods via the bank until his/her receipt of payment is certain, and the buyer can be sure of the delivery because the bank guarantees the transfer of B/Ls.

Figure 1. Documentary Collection: Procedure

A similar mechanism is L/Cs. Instead of relying on the bank to collect the payment from the buyer, the payment in the letter of credit (L/C) is secured by another bank known as the issuing bank. When adapting this mechanism, the buyer must first establish credit in the issuing bank. The issuing bank then makes a commitment of payment to the seller. Such a commitment is embodied in the form of L/C, which states that the payment will be made as soon as the terms and conditions stated therein are met. Examining the goods on the spot is impracticable for either of the banks, so the L/C requires the submission of certain documents to substantiate the shipment of goods. The required documents include B/Ls, receipt or invoice of the goods,

certificate of origin of the goods, and insurance papers (either a policy or certificate). After issuance, the L/C will be delivered to the bank of the seller, which is also known as the advising bank or notifying bank because this bank is primarily responsible for authenticating the L/C and notifying the seller that an L/C has opened. The advising bank is not responsible for the payment of the credit as the debt relationship exists solely between the issuing bank and the beneficiary (i.e., “seller”). The condition and shipment of the goods are examined entirely on the basis of the description provided by the B/Ls, so the bank must be meticulous about the compliance of the B/Ls with the documents and usually requires a clean B/L.³⁴ As long as qualified documents under the L/C are submitted, the issuing bank must pay the seller unconditionally by releasing the amount of funds stated on the L/C to the advising bank. The buyer then receives the B/L and subsequently hands it over to the carrier in exchange for the goods. The modus operandi of an L/C is depicted in Figure 2.

Figure 2 Letter of Credit: Procedure

34 A type of B/L is free from any adverse remarks or notations, and it is made by the shipping company about the condition, packaging, or quantity of the goods being shipped.

Among the aforementioned payment methods, L/Cs and documentary collections are the most efficient mechanisms to mitigate the risks in international trade and provide satisfactory terms to both parties in the transaction. As such, they are the most widely employed financing tools, and they are preferred especially in large transactions.³⁵ By assessing the transaction process, the credibility of these two methods comes from, inter alia, the transport documents because the transport documents can prove the ownership, quantity, and quality of the carried goods. Assuming that the buyer can take delivery of the goods without surrendering the ownership document, this situation either leaves the seller with improper risk, as the buyer can take possession of the goods without receiving the document of title, or give the buyer additional burden by demanding higher credit from the bank because the bank has no security at all under this circumstance. Either way burdens the trade and causes inconvenience to the trading parties. As a result, the transport documents provide indispensable connectivity between the commercial parties and constitute an essential link in international trade.

3. Cargo Insurance

In international seaborne trade, the transported goods must be insured against damage or loss for the period of the carriage. Either the seller or buyer can place insurance for the cargo depending on the terms of agreement in their sales contract. Whoever concluded an insurance contract with the insurer will be receiving a document that indicates the terms of the insurance contract and the person who has a claim under it. This document can be a policy or a certificate of insurance, and both are available for assignment without asking for the permission of the insurer.³⁶ The assignability of the documents allow the real owner of the cargo to receive cover from the damage or loss of the goods, and it is extremely useful for international seaborne trade.

For example, when the seller and buyer agree on a CIF term³⁷, the seller should be responsible

35 Klotz, James M. International sales agreements: an annotated drafting and negotiating guide. Kluwer Law International, 2008, at 121. See also Niepmann, Friederike, and Tim Schmidt-Eisenlohr. “=International trade, risk and the role of banks, Journal of International Economics 107 (2017): on pp.111–126.

35 Klotz, James M. International sales agreements: an annotated drafting and negotiating guide. Kluwer Law International, 2008, at 121. See also Niepmann, Friederike, and Tim Schmidt-Eisenlohr. “=International trade, risk and the role of banks, Journal of International Economics 107 (2017): on pp.111–126.