Adoption of electronic documents in shipping

E-DOCS, THEIR ADOPTION IN SHIPPING AND CYBER RISKS

One of the main advantages that the electronic revolution brought in business was the development of the EDI (Electronic Database Interchange) systems during the 1970’s, by which the companies were able to create digital documents and distribute them electronically without any human intervention. EDI systems, which replaced the traditional transmission of documents via e-mail or fax, initially appeared during 1970’s mainly in invoicing and ordering while they were later expanded in online shopping, which was invented in 1979 by Michael Aldrich. The big boom, though, happened during 1980’s and 1990’s with the development of the Minitel and the WorldWideWeb. It was so high the adoption of the electronic documents that during 1990’s online megastores appeared such as the well-known Amazon and Ebay (both established in 1995) which were entirely operating basis the “electronic documents”, “electronic funds transfer” and “electronic signatures” systems. With these systems, a client could put an order electronically (e-contract) by clicking an accept button (e-signature) and pay via an online banking system (EFT).

In shipping, various documents such as freight invoices, fixture notes/ recaps and draft contracts were routinely generated and transmitted electronically, though via traditional forms of communication, while several attempts to create e-contracts, such as electronic charter-parties or electronic bills of lading, able to be used purely in electronic form rather than in print-out format, has faced much more challenges and very long delays. In most cases, even nowadays, employees in shipping offices use to print-out the documents, sign them by hand and send an original signed paper-document by courier; a time-consuming process which takes days, if not weeks, to be concluded.

But if everything can be performed so easily through e-documents with the click of a simple button, what is the reason behind their slow adoption in shipping? Don’t people want to make their working life easier and more productive?

  1. Traditions are strong: Shipping is one of the most traditional industries in the world. Since there are high entry barriers (i.e. high required investment, special knowledge etc) the ship-management usually passes from the older generations to the younger ones and this family-oriented approach helps the traditional policies to survive for longer time.

  2. Insufficient regulatory framework for e-documents: Despite the fact that e-documents appeared in 1970’s and highly expanded the coming years, there was not any legal frame to regulate the various standards of document authentication. The first relevant regulation appeared in 1996 from UNCITRAL, the Model Law on Electronic Commerce followed in 2001 by the Model Law on Electronic Signatures and in 2005 the United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005). In shipping, the only convention which regulates E-documents is the UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (the Rotterdam Rules) which was signed in 2009 however it has not yet been into effect since it is only ratified by 4 states (Spain, Cameroon, Togo and Congo).

  3. Late approval from P&I Clubs: Since P&I Clubs cover Owners and/or Charterer’s risks in regards with third party liability as well as defense risks (FD&D), they require from their members to follow the rules of the Club, in order to remain covered. The International Group of P&I Clubs approved an electronic trading system (electronic bill of lading) in 2010 for the first time. Even in this case, the clubs notify their members that if any new liability arise under the eBL, which is not a traditional P&I risk, same will not be covered by the P&I and thus an additional insurance cover may be needed.

  4. English “Common Law” is not favorable to e-documents: The Carriage of Goods by Sea Act 1992 (COGSA ‘92), which is the bible of English Law in shipping, does not apply in electronic documents and therefore holders of e-BLs, for example, cannot rely on COGSA ’92 to pursue claims against the carrier (privity of contract). Also, common law does not fully fit with e-documents. For example, as per common law, the B/L must be presented to the Master for the cargo to be delivered something which was not the case for electronic B/L.

  5. Cost of adoption: Some electronic systems required hardware investment or a high cost/fee of adoption (especially at previous days where the technology costs were higher) and this along with their low market usage discouraged a lot of market participants to take the step to digitalization.

Despite the above difficulties which have delayed shipping to become paperless, it is now apparent that e-documents can be used to digitalise several processes in shipping such as Charter Party contracts, Bills of Lading, trading certificates and administrative works (i.e. insurance, post-fixture/invoicing, legal etc).

Charter Parties: The Chinsay paradigm

The traditional procedure that most people still follow says that Owners and Charterers exchange offers via e-mails and after a fixture is concluded, they have to draft the charter party contract and incorporate what agreed during negotiations, then exchange a copy via e-mail for each party to manually read and make their comments if any, then after both parties confirm that the c/p is found in order, two original documents to be printed and sent by post for each party to sign and return. Everyone understands that this is a very time-consuming procedure and highly relied on manual work so the human errors are not unusual. Due to this reason, it is very common most trades to be performed basis the fixture recap only and the charter party contracts to be prepared and signed even after the conclusion of the charter or in some cases no charter party to be signed between the parties. Despite the fact that the common law also accepts the fixture recaps as proof of what has been agreed between the parties, the risk of a complication in case any dispute arises is high and the fixture recap by itself may not clearly define the situation or give room to misinterpretations.

An effort to digitalize charter party contracts seem to have commenced only by the start of this century. One of such pioneers was Chinsay, established in 2000. Despite the fact that its adoption has been very low, according to their website, major companies have approved or have become members of the platform. Furthermore, recently, in a major development, the Baltic Exchange have partnered with Chinsay in order to create an industry accepted online charter-party management system. With Chinsay, fixture recaps are easily drafted by using standard clauses of ASBA, BIMCO or even company’s clauses, then charter party contract is automatically reviewed by checking the fixture recap, the proforma charterparty and the new charter party and after finally is found in good order the parties can electronically sign the c/p.

Electronic Bills of Lading can bring revolution: Bolero, essDOCS & e-title

A bill of lading has 3 main functions: (a) a receipt of the loaded goods, (b) contract of carriage and (c) document of title. The bill of lading is probably the most important document in global shipping and trading for the loading/carriage and delivery of any cargo. However, the traditional paper B/L does not look efficient any more for the following reasons:

  • - Delayed process: The original B/L is signed by the Master after completion of loading and dispatched to the Shipper who by return sends same to the bank for payment under the L/C. Buyer’s bank may forward to further banks since there may be a chain of intermediate traders between the supplier and the receiver. Finally, it is very usual the B/L not be at destination when the vessel arrives at the discharge port and therefore the cargo cannot be dispatched unless the parties agree for delivery against a Letter of Indemnity given by the Charterers to Carriers. The delay in process is so long and common that most of the cargoes are nowadays delivered against an LOI, however the LOIs do not cover Carrier’s risks in case of mis-delivery.

  • - Documents mishandling: The documents can be manipulated very easily or can be stolen or lost. In case the B/L is stolen or lost the cargo can be discharged against LOI however also in this case the Carrier remains responsible for mis-delivery.

  • - Costs: Cost of documentation is estimated to be around 15% of the cargo’s transportation cost. Also, since paper documents are drafted manually it is not unusual the banks to identify discrepancies which delay the process or increase the costs even more.

In an effort to solve these problems, electronic systems were developed since the end of 1990’s however they were not in use until recently, when the International Group of P&I Clubs finally approved the first two electronic B/L systems in 2010. These are the Bolero and the essDOCS systems. While the e-title system was also approved in 2015.

Bolero was established in 1998 by SWIFT along with partners from the shipping, trading and insurance industries. Except of e-B/L, Bolero offers various electronic document systems in the field of finance, logistics and insurance such as: Electronic Letter of Credits, Electronic Insurance placements and electronic documentary collection (i.e. documents required to be presented for payment under a L/C) which can take place over a common digital network. According to their website, Bolero has partnered with a few major industry players like the International Chamber of Commerce, China Systems, DXC Technology, Institute of Export & International Trade and others.

essDOCS was established in 2005 by two MBA students who found that the paper trade was outdated. essDocs can be used to electronically draft, review and approve documents such as bills of lading, certificates of origin, commercial invoices and trading contracts. Carriers, Charterers and Agents also use essDocs to electronically sign and legally transfer title eB/Ls. All original documents required for trade, shipping and finance can be electronically signed and exchanged in the electronic system. According to essDocs its services are used from a total of about 36,000 customers including major oil companies, top banks and reputable shipping companies.

e-title was established in 2004 by three ex-members of Bolero who invested in a different approach than how Bolero and EssDOCS work. Specifically, e-title is trying to build an electronic mechanism which would not make functional changes to the paper B/L as the other systems actually did. With e-title for the first time the COGSA ’92 is incorporated into the electronic bills of lading and this is a rule changer which might assist for the quicker adoption of electronic B/Ls. On the other hand, Bolero and essDOCS do not incorporate COGSA ’92 but they rely on the principals of novation and attornment for a B/L to be transferred from a holder to holder. Furthermore, e-title for the first time introduced a non-centralized peer to peer electronic system and gave the option to the carriers to use their in-house system (“black-box” as it is called) for generating bills of lading. Furthermore, e-title offers to its clients a membership to its Electronic Title User Group that can be used for resolving any dispute between the parties which use e-title under a predetermined procure.

The electronic Bill of Lading is created on the system and a draft form is exchanged between the carrier and the shipper for their approval. It can incorporate a charter party or other terms mutually agreed between the parties. Once confirmed, the carrier issues the electronic Bill of Lading with a single click of a button. The eB/L is sent by the system to the next party in the chain each time with just another simple click and the system ensures that, like a paper B/L, there can only be one holder of an eB/L at any time. Finally, an electronic B/L can be converted into a paper B/L at any time during the trade. With such procedure, the risk of B/Ls not being available at the discharge port is remote since in various tests it appeared that the process is much quicker. A trade which usually takes about 4-5 days to complete basis paper B/Ls was completed within about 1 hour on essDOCS. Trials on e-title also showed that the eB/Ls arrived to their destination within a day. Even a very complex trade where the paper B/L might take 20 days to complete, with Bolero it was completed in around 4 days.

It is very important to note that there is a legal framework which regulates all systems by which users agree to treat electronic documentation as equivalent of paper documents and confirm that they will not challenge the validity of any electronic transaction on the ground that same was made in paperless form or that it is not signed/sealed. In this respect, Bolero system is regulated by its Rule Book (“Rulebook”), essDOC by its ess-Databridge Services & Users Agreement (DSUA) and e-title by the Electronic Title User Agreement. They are all multilateral agreements between all users of the system and between each user and the system provider itself. It is important for each issuer of an electronic B/L to be signatory to these rules because otherwise the functional equivalence with a paper BL cannot be guaranteed.

Are the concerns for Cyber Risks valid?

Those who negatively criticize the electronic documents mainly focus on the cyber risks which, to their opinion, are much higher than in paper documents. However, even this opinion nowadays appears outdated. In the era that almost all the mobile phones and computers are always connected into the internet, the risk for a cyber attack anyway exists, no matter whether the parties use electronic documents or paper documents. Even the paper documents are stored online in company’s servers or exchanged via emails and therefore the risk also exists for paper documents. Probably in lesser effect but it exists. In order for the service providers of electronic documents to cover their own risks, they take special insurance cover which shall cover their clients in case that any such cyber risk takes place in their server/system. Since this insurance cover does not cover a possible cyber-attack which may take place from the clients’ end, it is highly recommended that such an additional insurance cover to be taken from the clients of electronic services as well.

A look into the (near) future

With the expansion of the blockchain industry, as we analysed in the previous article, e-documents exchanged over the blockchain seems to be the next big thing. This new era is not far from today if we consider that the first blockchain-based e-documents platform was introduced during May 2018, called “eCO” (electronic Certificate of Origin). eCO is used to process Certificates of Origin (and probably other trade-related documents in the future) on a tamper-proof decentralized ledger, which can be accessed by various stakeholders to the platform who will be able to easily authenticate/verify the certificates and other documents instantly. The adoption of eCO looks promising if we consider that it is backed by the Singapore International Chamber of Commerce [SICC]. The exchange of documents through a blockchain network can eliminate actions of fraud and third-party interference or alterations, add security, efficiency and flexibility and lower trade financing and insurance costs.

As we can see, with electronic documents all the archaic paper processes in shipping can be streamlined and simplified. Since, unfortunately, the adoption in our industry is still too low, there is a big room for innovation and improvements. Being part of such an innovation wave, OpenSea team is adopting latest e-docs/e-sign solutions in order to bring a new level of simplicity and higher quality services to our clients. Join us and become the driving force of these changes. The registration form is right below the article.

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