Electronic Bills of Lading: A Quiet Revolution

In the early 1990s an organization known as the Comite Maritime International (CMI) initially adopted a set of rules based on electronic information transfer dealing with carriage of goods by sea and transport documents. [See the Web site of the Comite Maritime International, http://www.comitemaritime.org/, including the rules governing electronic bills of lading set forth at www.comitemaritime.org/cmidocs/rulesebla.html.]

At least one commentator has pilloried the CMI rules for their lack of consistency with COGSA and the Hague/Visby rules [Georgios I. Zekos, The Contractual Role of Documents Issued under the CMI Draft Instrument on Transport Law 2001, 35 J. Mar. L. & Com. at 99, 111 et seq.]. The CMI rules, however, broke with tradition and recognized that buyers and sellers engaged in international trade needed a faster, better and cheaper way to communicate with one another, memorialize shipping terms and complete international trade transactions.

The CMI rules depend upon a voluntary contractual agreement among the parties. The rules include a methodology for confirming acceptance by the carrier upon receipt of goods and the use of a private, electronically coded key that the carrier then generates and delivers to the shipper. Once the shipper confirms receipt of the key, the shipper becomes the holder. Under the CMI rules, the holder is the only party that has the ability to convey the goods. Holding the private key is equivalent to holding a negotiable, tangible bill of lading. The shipper, as the holder, is then in a position to communicate with the buyer/consignee of the goods and upon completion of satisfactory financial arrangements can transfer control over the goods to the buyer/consignee by notifying the carrier. The carrier generates a new electronic key for the benefit of the buyer/assignee known only to the buyer/assignee to protect the integrity of the control process. Once the new key is issued, the buyer/ assignee becomes the holder and thereafter has the right to direct the carrier as to the disposition of goods. Because the transmittals are in electronic form, the transfer of the private key from one entity to another is limited only by the speed with which the parties can arrange financing and complete the other conditions necessary to justify the transfer of ownership. To facilitate the extension of credit in secured transactions, a lender can become the holder until arrangements satisfactory to the lender are in place that control the disbursement of loan proceeds and the deposit of the goods at a place where the lender's lien is perfected. Thereupon, the lender can quickly vest its borrower with control over the goods. Not surprisingly, the parties retain the right to obtain a tangible bill of lading in substitution and cancellation of the electronic record at any time.

The CMI arrangement promises flexibility, efficiency and cost savings compared with the customary, but cumbersome, paper process. The disadvantages are, of course, that each party must agree to be bound by the CMI rules and those rules may be at odds with a large body of existing law with respect to disputes. Nonetheless, the CMI system is in place and has been popular enough that CMI updated its rules in December 2001.

In 1996, a private consortium of European banks, insurance companies and corporations established a proprietary set of rules governing the shipment of goods and the issuance of bill of lading-like documents, which are now popularly known as the Bolero Rules (Bill of Lading Europe Rules). Parties that wish to avail themselves of the benefits of the Bolero electronic trading community subscribe to a centralized service, pay a membership fee and agree to be bound by the Bolero rulebook. The Bolero system, which chooses to be bound by English law, also has an electronic key component at the heart of its system. The holder of the key has the right to possession and control of the cargo covered by the electronic bill of lading. The Bolero system relies upon a central registry, which generates private keys for each user that pays a membership fee and subscribes to the system. Messages using encrypted keys are sent through the central registry to verify validity and allow parties who are members of the program to trade messages with one another with a reasonable expectation that the messages will remain confidential and secure [See generally http://www.bolero.net/.] Once a bill of lading is issued, the right of possession to the underlying goods is held, or controlled, by the party with the private key. If the goods need to be transferred, the Bolero system circumvents the need for endorsement of a tangible bill of lading (since none exists) by issuing a new contract between the carrier and the new holder. The Bolero registry, which acts as an agent for the carrier, confirms that the carrier holds the goods for the benefit of the new holder as soon as the holder acknowledges receipt of the key. To the extent that the goods need to be delivered or consigned to a party that is not a member of the Bolero network, the rules provide for the electronic key holder to request and obtain a written bill of lading, which can then be handled in conformity with historical practices for tangible bills of lading.

Regional carriers, corporations and even some U.S. governmental agencies have also established specialized proprietary systems to expedite and minimize paperwork associated with the shipment of goods. In many cases, these arrangements are designed only to harness the speed and convenience of the Internet to provide an electronic means for submitting information to carriers to facilitate preprinting bills of lading. In other cases, groups of buyers and sellers that deal with one another on a regular and recurring basis have set up closed systems to control the process of delivering and shipping goods and to provide for payment. [A search of the Internet under "electronic bills of lading" shows that railroads, trucking companies and large superstore retailers in the United States and Canada, among others, have established such special-purpose, limited-use, proprietary systems.]

In the 1990s, the United Nations Commission on International Law (UNCITRAL) turned its attention to bills of lading issues. UNCITRAL recognized that electronic data interchanges (EDI), like the SWIFT (Society for Worldwide Interbank Financial Telecommunications) system commonly used in international commerce by the banking industry for commercial letters of credit, and other electronic trading, was already well established and provided a basis for the expansion of electronic trade agreements. In 1995, UNCITRAL adopted a model law to facilitate international trade that included provisions dealing with ocean bills of lading [United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce with Guide to Enactment, 1996, amended 1998, including Part II thereof dealing with the Carriage of Goods, www.uncitral.org/en-index.htm]. It should be noted in passing that UNCITRAL laws have no legal force or effect on their own; they must be enacted into national law to be effective. [Livermore J et al., "Electronic Bills of Lading and Functional Equivalence," 1998 (2) The Journal of Information, Law and Technology (JILT), http://elj.warwick.ac.uk/jilt/ecomm/98_2liv/.] As in other cases, the key to the UNCITRAL electronic bills of lading system is the use of secret digital codes and public key cryptography.

One of the side effects of the spread of electronic bills of lading was the formation in 2001 of a task force to review and revise Article 7 of the Uniform Commercial Code. Several drafts and meetings later, the working group in 2003 promulgated revised Article 7. According to the prefatory note, the purpose of revised Article 7 is to “provide a framework for the further development of electronic documents of title and to update the Article for modern times in light of state, federal and international developments.” [See Introductory Paragraph to the Prefatory Notice to Article 7 (hereinafter "revised Article 7") as revised and promulgated in 2003 by the National Conference of Commissioners on Uniform State Laws (NCCUSL)]. Although revised Article 7 introduces a number of amendments and modifications in addition to those dealing with electronic bills of lading, the key concept underlying the revisions relating to electronic bills of lading is the concept of “control.” Control is defined in R7-106, as that which is “equivalent to possession and endorsement of a tangible document of title.” [For ease of reference, sections in revised Article 7 or in associated revisions of other articles of the Uniform Commercial Code are referenced herein with a capital "R" in front of the relevant section.] The drafters made an obvious effort to conform the provisions governing electronic documents of title to those of their paper counterparts to ensure that parties relying on revised Article 7 would be entitled to the benefit of existing case law relating to documents of title.

Before we touch on some of the other significant changes incorporated into revised Article 7, it may be useful to consider the benefits of an electronic bill of lading system. In a paper-based system, even if no lender is involved, a cumbersome process takes place in which the shipper, who is selling the goods, delivers them to a carrier. After inspecting the goods to verify that they comply with the shipper's description, the carrier generates a bill of lading. The bill of lading is either negotiable, for situations in which the goods may be sold to one or more persons through negotiation of the instrument itself during the transit of the goods, or non-negotiable, for situations in which title to the goods passes to the consignee when the goods are delivered to the carrier. The holder of a negotiable bill of lading retains the power to negotiate the bill and deliver the goods to a third party, but negotiation requires possession and endorsement of the bill of lading itself. This requirement sometimes created problems when international bills of lading were issued in sets or with multiple counterparts and only one counterpart of the set was negotiated to a bona fide purchaser for value. When a lender or other secured party that wants to hold a bill of lading for security is involved, the complications in the delivery of the bill of lading to the secured party, especially in the case of negotiable bills of lading, and redelivery to the borrower or to the borrower's customer, are numerous and both time consuming and expensive to overcome. An effective and efficient electronic system, on the other hand, transmits the information relating to the bill of lading so quickly that it is a simple matter to show the lender as a secured party on the electronic record. Once appropriate arrangements are in place and the borrower has satisfied applicable covenants or conditions, the lender can then easily and instantaneously transfer control of the electronic bill of lading to the borrower or to a customer of the borrower.

The drafters clearly had these benefits in mind when they incorporated the following changes, among others, into revised Article 7:

Revised definitions:

“Bearer” now includes a person in control of a negotiable electronic document of title [UCC R1-201].

“Delivery” with respect to an electronic document of title means “voluntary transfer of control” [UCC R1-201].

“Holder” now includes the person in control of a negotiable electronic document of title [UCC R1-201].

Control is the “conceptual equivalent to possession and endorsement of a tangible document of title” and provisions that incorporate the concept are sprinkled throughout new Article 7, but the drafters made it clear that the rules governing electronic documents of title are the same or as similar as possible to existing rules for tangible documents of title [Revised Article 7 Prefatory Note, third paragraph].

Some of the more interesting provisions that the drafters incorporated into revised Article 7 include the following:

1) Section R7-103 makes it clear that federal law still controls, but specifies that Article 7 provisions modify, limit and supersede the federal Electronic Signatures in Global and National Commerce Act (15 U.S.C. '7001 et seq.), which allows a state to modify provisions of that Act.

2) Section R7-105 provides that documents issued in one medium, tangible or electronic, may be re-issued in the other and specifies who is entitled to request or require such re-issuance.

3) Section R7-106 specifies that with respect to electronic documents of title, the person has control if “a system employed for evidencing the transfer of interests in the electronic document reliably establishes that person as the person to which the electronic document was issued or transferred.” With respect to electronic documents of title, only a single, authoritative copy of the document may exist and it must be unique, identifiable and with certain limited exceptions, unalterable. As the preliminary comments in R7-106(a) point out, control substitutes for the concept of endorsement and possession of a tangible document of title. Only one person is entitled to control an electronic document at any time. The drafters took note of CMI, Bolero and other existing systems and observed that the marketplace had developed systems of identification based on passwords or other encryption methods, including registry systems (Official Comment, Note 3, UCC R7-106). Revised Article 7 leaves the development of the technology and business practices to ensure compliance with the requirements of control under R7-106(a) to the market at large. Importantly, the provisions of revised Article 7 are clear that parties may not contract for control. The test for control is a factual one that depends upon compliance with R7-106(a). The comments to the text point out that most electronic systems currently rely upon closed registration systems to which all of the participating parties are members, but note that commerce will undoubtedly develop open systems in which participants need not necessarily be signatories to a master agreement (Official Comment, Note 3, UCC R7-106). The drafters anticipate that R7-106(a) will be flexible enough to accommodate the technological innovations that will undoubtedly continue in this area.

4) Section R7-303 incorporates the concept of protection from liability for a carrier that delivers to a person other than the consignee of a bill of lading, provided the party in control of the electronic bill of lading authorizes such delivery.

5) Section R7-304 acknowledges that tangible documents of title may still be issued in sets in some international trade situations, but makes it clear that electronic bills of lading may not be issued in a set; there can only be a single, authoritative electronic bill of lading at any time.

6) Section R7-501 includes the rules governing negotiation of electronic documents of title and explicitly provides that negotiation is effected only by delivery of the document to another person.

In addition to establishing a platform for electronic bills of lading, revised Article 7 deals with other changes for electronic documents of title like warehouse receipts. It also contains numerous clarifications and corrections of other Article 7 provisions. Because references and definitions used in Article 7 are contained in other sections of the Code, the revisions also incorporate changes to those sections and provide accommodations depending on whether states have adopted revised Article 1.

According to the Web site of the National Conference of Commissioners on Uniform State Laws, eight states have already adopted revised Article 7 (www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-ucc7.asp). It should be noted, however, that the move to facilitate the use of electronic bills of lading and other documents of title is not without its detractors, especially in connection with international shipping transactions. In addition to the risk of loss by theft, fire and other perils of the sea, the purchaser of international goods and the purchaser's lender run the risks in the United States of using an electronic system that is not yet universally recognized or endorsed by the courts or adopted by specific state legislation. Nonetheless, commercial enterprises will continue to drive merchants to rely increasingly on electronic bills of lading in domestic and international shipping transactions. As long as the economic gains and time savings outweigh the increased cost of the uncertainty associated with the new systems, those who trade in goods will continue to rely upon and develop the electronic systems. As with many revolutions, economic dislocation at the individual participant level forces change, which translates into innovation; rule makers then move to adopt regulations to govern the arrangements that are already in place. Although we can be certain that controversies will arise in unanticipated ways because of disputes among parties using electronic bills of lading, the switch from paper-based to electronic systems will probably characterize most international and domestic bill of lading transactions in the near future.

Ever since the Medici family of Florence popularized the use of written documents to facilitate trade between city states and nations in the 15th century, letters of credit and their progeny, bills of lading, warehouse receipts and similar instruments of title, have consisted of written documents. Commercially effective and reasonably efficient for hundreds of years, letters of credit and documents of title in tangible form have become increasingly outmoded because of economic and temporal constraints. A recent article in The Wall Street Journal estimated that at least 5% of the cost of all international trade transactions was attributable solely to the cost of documentation [Gabriel Kahn, "Financing Goes Just-in-Time," The Wall Street Journal, June 4, 2004, Section A, p. 10]. With the growth of international trade and the relocation of manufacturing from industrialized nations to countries with cheaper labor costs, international shipments have increased dramatically as cost-conscious businesses search for increased efficiency. The historic standard of a 2-week turnaround for a written letter of credit for a secured bill of lading transaction and the cost of associated paperwork have created a need for a cheaper, faster system. Not surprisingly, merchants have found opportunities to use the Internet and other electronic arrangements to help solve this problem. This article will describe some of the alternative electronic bill of lading arrangements that have arisen since the 1990s for shipping goods internationally and the impetus that their spread provided to a Uniform Commercial Code working group that responded by overhauling and updating Article 7 to make it more reflective of modern trade practice.

Although a number of U.S. statutes deal with domestic shipping contracts and bills of lading, including the Bills of Lading Act [Federal Bills of Lading Act of 1916, 49 USCA 80113 (1997 and supp. 2004)], the most common set of rules that secured lending practitioners in the United States typically refer to in connection with bills of lading are those contained in Article 7 of the Uniform Commercial Code. International shipments, however, are governed by an extensive and well-developed set of rules that have existed for many years. Some like the Hague/Visby rules, which relate specifically to bills of lading, date back to 1924. [Rules (the Hague Rules) adopted by the International Law Association in September 1921 at a meeting in the Hague, Netherlands and adopted in 1924 as the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading as amended by the Protocol to Amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading 1968 (the Visby Amendments).]

These rules served as the basis for the Carriage of Goods by Sea Act (COGSA) that was initially adopted in the United States in 1936 [46 App USCA '1300-1315 (2004)]. COGSA and a counterpart statute in the United Kingdom govern many disputes relating to the ocean bills of lading in international shipping contracts. These statutes and associated rules and case law helped guide the original drafters of Article 7 of the Uniform Commercial Code.

In the early 1990s an organization known as the Comite Maritime International (CMI) initially adopted a set of rules based on electronic information transfer dealing with carriage of goods by sea and transport documents. [See the Web site of the Comite Maritime International, http://www.comitemaritime.org/, including the rules governing electronic bills of lading set forth at www.comitemaritime.org/cmidocs/rulesebla.html.]

At least one commentator has pilloried the CMI rules for their lack of consistency with COGSA and the Hague/Visby rules [Georgios I. Zekos, The Contractual Role of Documents Issued under the CMI Draft Instrument on Transport Law 2001, 35 J. Mar. L. & Com. at 99, 111 et seq.]. The CMI rules, however, broke with tradition and recognized that buyers and sellers engaged in international trade needed a faster, better and cheaper way to communicate with one another, memorialize shipping terms and complete international trade transactions.

The CMI rules depend upon a voluntary contractual agreement among the parties. The rules include a methodology for confirming acceptance by the carrier upon receipt of goods and the use of a private, electronically coded key that the carrier then generates and delivers to the shipper. Once the shipper confirms receipt of the key, the shipper becomes the holder. Under the CMI rules, the holder is the only party that has the ability to convey the goods. Holding the private key is equivalent to holding a negotiable, tangible bill of lading. The shipper, as the holder, is then in a position to communicate with the buyer/consignee of the goods and upon completion of satisfactory financial arrangements can transfer control over the goods to the buyer/consignee by notifying the carrier. The carrier generates a new electronic key for the benefit of the buyer/assignee known only to the buyer/assignee to protect the integrity of the control process. Once the new key is issued, the buyer/ assignee becomes the holder and thereafter has the right to direct the carrier as to the disposition of goods. Because the transmittals are in electronic form, the transfer of the private key from one entity to another is limited only by the speed with which the parties can arrange financing and complete the other conditions necessary to justify the transfer of ownership. To facilitate the extension of credit in secured transactions, a lender can become the holder until arrangements satisfactory to the lender are in place that control the disbursement of loan proceeds and the deposit of the goods at a place where the lender's lien is perfected. Thereupon, the lender can quickly vest its borrower with control over the goods. Not surprisingly, the parties retain the right to obtain a tangible bill of lading in substitution and cancellation of the electronic record at any time.

The CMI arrangement promises flexibility, efficiency and cost savings compared with the customary, but cumbersome, paper process. The disadvantages are, of course, that each party must agree to be bound by the CMI rules and those rules may be at odds with a large body of existing law with respect to disputes. Nonetheless, the CMI system is in place and has been popular enough that CMI updated its rules in December 2001.

In 1996, a private consortium of European banks, insurance companies and corporations established a proprietary set of rules governing the shipment of goods and the issuance of bill of lading-like documents, which are now popularly known as the Bolero Rules (Bill of Lading Europe Rules). Parties that wish to avail themselves of the benefits of the Bolero electronic trading community subscribe to a centralized service, pay a membership fee and agree to be bound by the Bolero rulebook. The Bolero system, which chooses to be bound by English law, also has an electronic key component at the heart of its system. The holder of the key has the right to possession and control of the cargo covered by the electronic bill of lading. The Bolero system relies upon a central registry, which generates private keys for each user that pays a membership fee and subscribes to the system. Messages using encrypted keys are sent through the central registry to verify validity and allow parties who are members of the program to trade messages with one another with a reasonable expectation that the messages will remain confidential and secure [See generally http://www.bolero.net/.] Once a bill of lading is issued, the right of possession to the underlying goods is held, or controlled, by the party with the private key. If the goods need to be transferred, the Bolero system circumvents the need for endorsement of a tangible bill of lading (since none exists) by issuing a new contract between the carrier and the new holder. The Bolero registry, which acts as an agent for the carrier, confirms that the carrier holds the goods for the benefit of the new holder as soon as the holder acknowledges receipt of the key. To the extent that the goods need to be delivered or consigned to a party that is not a member of the Bolero network, the rules provide for the electronic key holder to request and obtain a written bill of lading, which can then be handled in conformity with historical practices for tangible bills of lading.

Regional carriers, corporations and even some U.S. governmental agencies have also established specialized proprietary systems to expedite and minimize paperwork associated with the shipment of goods. In many cases, these arrangements are designed only to harness the speed and convenience of the Internet to provide an electronic means for submitting information to carriers to facilitate preprinting bills of lading. In other cases, groups of buyers and sellers that deal with one another on a regular and recurring basis have set up closed systems to control the process of delivering and shipping goods and to provide for payment. [A search of the Internet under "electronic bills of lading" shows that railroads, trucking companies and large superstore retailers in the United States and Canada, among others, have established such special-purpose, limited-use, proprietary systems.]

In the 1990s, the United Nations Commission on International Law (UNCITRAL) turned its attention to bills of lading issues. UNCITRAL recognized that electronic data interchanges (EDI), like the SWIFT (Society for Worldwide Interbank Financial Telecommunications) system commonly used in international commerce by the banking industry for commercial letters of credit, and other electronic trading, was already well established and provided a basis for the expansion of electronic trade agreements. In 1995, UNCITRAL adopted a model law to facilitate international trade that included provisions dealing with ocean bills of lading [United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce with Guide to Enactment, 1996, amended 1998, including Part II thereof dealing with the Carriage of Goods, www.uncitral.org/en-index.htm]. It should be noted in passing that UNCITRAL laws have no legal force or effect on their own; they must be enacted into national law to be effective. [Livermore J et al., "Electronic Bills of Lading and Functional Equivalence," 1998 (2) The Journal of Information, Law and Technology (JILT), http://elj.warwick.ac.uk/jilt/ecomm/98_2liv/.] As in other cases, the key to the UNCITRAL electronic bills of lading system is the use of secret digital codes and public key cryptography.

One of the side effects of the spread of electronic bills of lading was the formation in 2001 of a task force to review and revise Article 7 of the Uniform Commercial Code. Several drafts and meetings later, the working group in 2003 promulgated revised Article 7. According to the prefatory note, the purpose of revised Article 7 is to “provide a framework for the further development of electronic documents of title and to update the Article for modern times in light of state, federal and international developments.” [See Introductory Paragraph to the Prefatory Notice to Article 7 (hereinafter "revised Article 7") as revised and promulgated in 2003 by the National Conference of Commissioners on Uniform State Laws (NCCUSL)]. Although revised Article 7 introduces a number of amendments and modifications in addition to those dealing with electronic bills of lading, the key concept underlying the revisions relating to electronic bills of lading is the concept of “control.” Control is defined in R7-106, as that which is “equivalent to possession and endorsement of a tangible document of title.” [For ease of reference, sections in revised Article 7 or in associated revisions of other articles of the Uniform Commercial Code are referenced herein with a capital "R" in front of the relevant section.] The drafters made an obvious effort to conform the provisions governing electronic documents of title to those of their paper counterparts to ensure that parties relying on revised Article 7 would be entitled to the benefit of existing case law relating to documents of title.

Before we touch on some of the other significant changes incorporated into revised Article 7, it may be useful to consider the benefits of an electronic bill of lading system. In a paper-based system, even if no lender is involved, a cumbersome process takes place in which the shipper, who is selling the goods, delivers them to a carrier. After inspecting the goods to verify that they comply with the shipper's description, the carrier generates a bill of lading. The bill of lading is either negotiable, for situations in which the goods may be sold to one or more persons through negotiation of the instrument itself during the transit of the goods, or non-negotiable, for situations in which title to the goods passes to the consignee when the goods are delivered to the carrier. The holder of a negotiable bill of lading retains the power to negotiate the bill and deliver the goods to a third party, but negotiation requires possession and endorsement of the bill of lading itself. This requirement sometimes created problems when international bills of lading were issued in sets or with multiple counterparts and only one counterpart of the set was negotiated to a bona fide purchaser for value. When a lender or other secured party that wants to hold a bill of lading for security is involved, the complications in the delivery of the bill of lading to the secured party, especially in the case of negotiable bills of lading, and redelivery to the borrower or to the borrower's customer, are numerous and both time consuming and expensive to overcome. An effective and efficient electronic system, on the other hand, transmits the information relating to the bill of lading so quickly that it is a simple matter to show the lender as a secured party on the electronic record. Once appropriate arrangements are in place and the borrower has satisfied applicable covenants or conditions, the lender can then easily and instantaneously transfer control of the electronic bill of lading to the borrower or to a customer of the borrower.

The drafters clearly had these benefits in mind when they incorporated the following changes, among others, into revised Article 7:

Revised definitions:

“Bearer” now includes a person in control of a negotiable electronic document of title [UCC R1-201].

“Delivery” with respect to an electronic document of title means “voluntary transfer of control” [UCC R1-201].

“Holder” now includes the person in control of a negotiable electronic document of title [UCC R1-201].

Control is the “conceptual equivalent to possession and endorsement of a tangible document of title” and provisions that incorporate the concept are sprinkled throughout new Article 7, but the drafters made it clear that the rules governing electronic documents of title are the same or as similar as possible to existing rules for tangible documents of title [Revised Article 7 Prefatory Note, third paragraph].

Some of the more interesting provisions that the drafters incorporated into revised Article 7 include the following:

1) Section R7-103 makes it clear that federal law still controls, but specifies that Article 7 provisions modify, limit and supersede the federal Electronic Signatures in Global and National Commerce Act (15 U.S.C. '7001 et seq.), which allows a state to modify provisions of that Act.

2) Section R7-105 provides that documents issued in one medium, tangible or electronic, may be re-issued in the other and specifies who is entitled to request or require such re-issuance.

3) Section R7-106 specifies that with respect to electronic documents of title, the person has control if “a system employed for evidencing the transfer of interests in the electronic document reliably establishes that person as the person to which the electronic document was issued or transferred.” With respect to electronic documents of title, only a single, authoritative copy of the document may exist and it must be unique, identifiable and with certain limited exceptions, unalterable. As the preliminary comments in R7-106(a) point out, control substitutes for the concept of endorsement and possession of a tangible document of title. Only one person is entitled to control an electronic document at any time. The drafters took note of CMI, Bolero and other existing systems and observed that the marketplace had developed systems of identification based on passwords or other encryption methods, including registry systems (Official Comment, Note 3, UCC R7-106). Revised Article 7 leaves the development of the technology and business practices to ensure compliance with the requirements of control under R7-106(a) to the market at large. Importantly, the provisions of revised Article 7 are clear that parties may not contract for control. The test for control is a factual one that depends upon compliance with R7-106(a). The comments to the text point out that most electronic systems currently rely upon closed registration systems to which all of the participating parties are members, but note that commerce will undoubtedly develop open systems in which participants need not necessarily be signatories to a master agreement (Official Comment, Note 3, UCC R7-106). The drafters anticipate that R7-106(a) will be flexible enough to accommodate the technological innovations that will undoubtedly continue in this area.

4) Section R7-303 incorporates the concept of protection from liability for a carrier that delivers to a person other than the consignee of a bill of lading, provided the party in control of the electronic bill of lading authorizes such delivery.

5) Section R7-304 acknowledges that tangible documents of title may still be issued in sets in some international trade situations, but makes it clear that electronic bills of lading may not be issued in a set; there can only be a single, authoritative electronic bill of lading at any time.

6) Section R7-501 includes the rules governing negotiation of electronic documents of title and explicitly provides that negotiation is effected only by delivery of the document to another person.

In addition to establishing a platform for electronic bills of lading, revised Article 7 deals with other changes for electronic documents of title like warehouse receipts. It also contains numerous clarifications and corrections of other Article 7 provisions. Because references and definitions used in Article 7 are contained in other sections of the Code, the revisions also incorporate changes to those sections and provide accommodations depending on whether states have adopted revised Article 1.

According to the Web site of the National Conference of Commissioners on Uniform State Laws, eight states have already adopted revised Article 7 (www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-ucc7.asp). It should be noted, however, that the move to facilitate the use of electronic bills of lading and other documents of title is not without its detractors, especially in connection with international shipping transactions. In addition to the risk of loss by theft, fire and other perils of the sea, the purchaser of international goods and the purchaser's lender run the risks in the United States of using an electronic system that is not yet universally recognized or endorsed by the courts or adopted by specific state legislation. Nonetheless, commercial enterprises will continue to drive merchants to rely increasingly on electronic bills of lading in domestic and international shipping transactions. As long as the economic gains and time savings outweigh the increased cost of the uncertainty associated with the new systems, those who trade in goods will continue to rely upon and develop the electronic systems. As with many revolutions, economic dislocation at the individual participant level forces change, which translates into innovation; rule makers then move to adopt regulations to govern the arrangements that are already in place. Although we can be certain that controversies will arise in unanticipated ways because of disputes among parties using electronic bills of lading, the switch from paper-based to electronic systems will probably characterize most international and domestic bill of lading transactions in the near future.