The Legal Status of Electronic Bills of Lading in Russia

Generic Issues

i. Please describe the legal status of electronic documents in your local jurisdiction with particular reference todocuments used in international trade. (This will include bills of lading and may also include bills of exchange.)

Russian law does not directly regulate issues related to electronic bills of lading (the "eB/L").

Both bills of lading and bills of exchange, are items of securities as a matter of Russian law. In order that electronic (paperless) bills of lading and bills of exchange be acknowledged as securities, the following
requirements shall be met:

- rights thereunder are fixed in a decision on issuance or other act of the issuer, and

- enforcement and transfer of rights are made in accordance with rules of registration of rights (Art. 142, 143, 149-149.5 of the Civil Code of the Russian Federation (the "CC")).

Art. 149 of the CC envisages that registration of rights under paperless items of security (the "PS") shall be made by a person acting upon instruction of the issuer, or by a person acting on the basis of a contract with the right-holder or other person exercising rights over the security item in accordance with the law. Registration of rights over the PS is a licensed activity; therefore the list of potential registrars shall consist of professional participants of the securities market.

Registration of the bank's rights as provided by the law is obligatory. Therefore a simple electronic acknowledgement from the carrier's side shall not create the bank's rights over the goods.

Non-compliance with registration requirements (unless it is caused by the force-majeure) shall be ground for the right-holder to claim losses. The issuer of the PS and the person instructed by the issuer to register rights over respective PS shall be jointly and severally liable for losses caused by improper registration (except for cases when registration of rights is made by parties acting on the basis of contract with the right-holder or other person exercising rights over the security item).

If the bank is the holder of a paper bill of lading (the "B/L") the position materially differs. Registration of rights under the B/L by a specifically appointed / engaged third party is not required. Existence of rights shall be evidenced by presentation of the original B/L where the holder is either referred to as the consignee (or endorsee), or is the B/L bearer (for "to bearer" B/L).

ii. Please describe briefly the circumstances in which the courts of your local jurisdiction will apply the law of a foreign jurisdiction, for example if a relevant contract of carriage or a relevant financing agreement is subject to a foreign law.

Disputes arising from carriage of goods under the B/L can be considered either by arbitrazh courts (federal courts for commercial disputes), or by arbitrations. Both are entitled to apply foreign law (whether when agreed by the parties, or when applied pursuant to the choice of law / conflict rules). Art. 1191 of the CC provides that when applying foreign law the court shall ascertain the content of its norms in accordance with their official interpretation, practical application and doctrine (scholarship application) in the relevant foreign state. By "the court" the CC understands the "arbitral tribunals" also. For the purposes of ascertaining the content of foreign law, the court shall be entitled to request the Ministry of Justice of the RF, or other competent bodies in the RF and abroad, or shall have the right to appoint experts to give evidence on substantive foreign law. Alternatively, the court can place the burden of proof of the content of foreign law upon the parties. Even if the burden of proof is not placed upon them by a specific court act, participants to the case are entitled to assist the court in ascertainment of the content of the law, inter alia, by presenting documents evidencing the content of the substantive foreign law on which the parties rely for justification of their claims and / or defences.
If, despite the above measures, the content of the foreign law is not ascertained within reasonable period, Russian law shall be applied. The decision on whether evidence of content, official application and practical application of foreign law are sufficient or not shall be made at the judge's / arbitral tribunal's discretion.
The above rules do not affect operation of those imperative Russian law provisions that apply due to an indication directly therein, or due to their special significance (including for ensuring rights and interests of participants of the civil comments protected by a statute). If consequences of application of foreign law may be manifestly in contradiction with public policy of the RF (with due consideration of nature of relationships with foreign element), the respective Russian law provisions shall be applied if necessary.

Refusal to apply foreign law cannot be argued merely by difference in the legal, political or economic system of the respective foreign state and that of the RF (Art. 1193 of the CC).

Specific Questions

1. Under the law of the local jurisdiction, is an original paper B/L a title document giving the holder the right to demand delivery of the goods described in that B/L?

Yes. This is provided by Art. 158(1) of the Merchant Shipping Code of the Russian Federation ("MSC"):

- "Cargo which is carried on the basis of the B/L shall be released by the carrier at the port of delivery upon provision of the original B/L:

- "Named" B/L – to the consignee named in the B/L or to the person to whom the B/L is endorsed upon full endorsement or in other form in accordance with rules provided for assignment;

- "Order" B/L – to the person to whose order the B/L is issued, subject to endorsements to the person referred to in the latest endorsement of the continuous series of endorsements, or to the bearer of the B/L with the last blank endorsement;

- "To bearer" B/L – to the presenter".

2. Assuming that a bank becomes the holder of an original paper B/L (with full legal title or as a secured party) prior to the previous holder's administration, insolvency or liquidation, would the law of the local jurisdiction recognise the rights of the bank so that the bank can enforce its rights under that B/L either against the carrier in relation to goods located in the local jurisdiction or against an administrator or liquidator of the previous holder?

The holder of the original B/L shall be entitled to enforce its rights in relation to goods referred to in the B/L either against the carrier or the cargo (if it is placed to a warehouse / for custody).

Therefore assuming that the bank is a holder of a properly endorsed original B/L, the rights of the bank over the cargo and /or against the carrier shall be recognized.

The fact of the previous holder's administration and / or insolvency and / or liquidation as such shall neither be relevant to, nor be the obstacle for enforcement of rights under the B/L against the carrier. The previous holder may be liable before the bank for invalidity of the endorsement, but not for delivery (nondelivery) of cargo to the bank. Administrator and / or liquidator shall be deemed as the previous holder's (as insolvent party's) representatives, and so shall not be personally liable for debts / upon claims of whatever nature against their principal.

3. Is the law of the local jurisdiction familiar with electronic B/Ls such that these eB/Ls enjoy the same legal status and are as capable of being enforced as paper B/Ls, whether by statute, binding case law or otherwise?

Russian law does not directly regulate issues related to the eB/L. In order that the eB/L be an enforceable instrument it shall comply with requirements for paperless securities. One of the main requirements (see comments in Generic issues above) is an obligatory registration of issuance of the eB/L, transfer (-s) of rights thereunder, etc. Registration shall be made by a third party, non-participant to carriage relationships.

For the moment eB/Ls have not become a common practice for Russian shipping market. Certain carriers (shipping lines) use so said electronic telex-releases (express-releases), which although having elements being analogous to B/L (specifically – order to release the cargo to a concrete person), cannot be however deemed as B/L (and eB/L particularly).

Considering that Russian shipping market gives preference to paper B/Ls, use of eB/L has not been tested by the court practice either.

4. Under the law of the local jurisdiction, would the holder of an eB/L be able to enforce a right to demand delivery of the goods described in that eB/L from the carrier in the same way that a holder of a paper B/L would be?

Pursuant to Art. 158(1) of the Merchant Shipping Code (the "MSC") the carrier upon receipt of the original B/L shall release the cargo to:

- the consignee (under named B/L), or to a person to whom the B/L is endorsed under a named (full) endorsement or endorsed otherwise in accordance with assignment rules;

- the person to whose order the B/L or the person referred to in the latest endorsement of the continuous series of endorsements (under order B/L);

- to the presenter of the B/L (under the bearer B/L).

Although the MSC does not directly limit application of Art. 158 to paper B/L, it may be concluded that "provision / acceptance of an original" shall be possible only when the B/L is executed in hard copy.

It is to be noted that the MSC does not refer to eB/L at all. No provision excludes the use of eB/L (in the order established by the CC for paperless securities), but poses questions how the holder of an eB/L shall act to demand delivery of the goods.

Art. 143(6) of the CC envisages as follows: "Unless otherwise is provided by this Code and the law, or arises from particularities of fixation of rights over paperless securities, such securities shall be regulated by the rules on named securities, and the holder of rights shall be defined in accordance with registered records".

It may be therefore concluded that eB/L shall be a named B/L, and the cargo can be released to the consignee only.

Having in mind that the only evidence of existing right of the eB/L holder shall be registration in respective records by an authorized and licensed third person, enforcement of the eB/L (enforcement of rights over the goods by the eB/L holder) does assume participation of the registrar in eB/L relationships – i.e. of an additional element in comparison with paper B/L. The order of dealing of the rights-holder, the carrier and the registrar, the form of confirmation of rights, the form of redemption of the eB/L are neither regulated by the law, nor clarified by court practice. In any case it is evident that the ways of enforcement of rights under paper and electronic bills of lading shall be different.

5. Under the law of the local jurisdiction would the carrier's acknowledgement (by contract or specific electronic message) that the goods are held to the order of the bank, be sufficient for the bank (as holder of the eB/L) to require the carrier to deliver the goods to its order? Would the bank's rights against the carrier be defeated by a competing claim for the release of the goods from an administrator or liquidator of a previous holder of the eB/L?

In the sense of Art. 142 of the CC the eB/L shall be a paperless item of security provided that:

- rights under the eB/L are fixed in a decision on issuance or other act of the issuer of the eB/L and

- exercising and transfer of these rights shall be possible only in accordance with rules of registration of rights in accordance with Art. 149 of the CC (see comments in Generic issues above).

Registration of rights under paperless items of security shall be made by a person acting upon instruction of the issuer, or by a person acting on the basis of a contract with the right-holder or other person exercising rights over the security item in accordance with the law (Art. 149 of the CC). Registration of rights over the PS is a licensed activity, therefore the list of potential registrar shall constitute of professional participants of the securities market.

Therefore an acknowledgement of the carrier (in whatever form: by a contract or a message) shall not create the bank's rights over the goods if the registration of rights is not properly made.

Another important issue (see also comments to Question 4 above) is that in the light of Art. 143(6) of the CC the eB/L shall be subject to rules on named (and not "to order") securities papers. So, if the bank is not a consignee under the eB/L, transfer of rights over the goods to the bank may be made only under a named endorsement or otherwise in accordance with assignment rules (Art. 158(1) of the MSC).

If transfer of rights over the goods to the bank is properly made and registered, the previous holder of the eB/L shall not be entitled to claim release of goods in its favour. If it acts so, the records on registration and transfer of rights shall be the prima facie evidence of the bank's rights over the goods.

An important reservation shall be made with regard to the above: these comments are based on comprehensive interpretation of the CC and the MSC general rules on securities and bills of lading; this has not been tested by the court practice.

6. Under the law of the local jurisdiction, would the conversion of an eB/L into a paper B/L result in a paper B/L that has the same legal status and force and effect as if it were issued in paper form on the original date of issuance or would the converted paper B/L take effect and come into existence as a paper B/L from the moment of conversion?

Since direct regulation for eB/L does not exist in Russia, any comments with regard to converting of the eB/L to paper are no more than practical interpretation of general rules for the PS and the B/L.

The very first question shall be whether the "conversion" is allowed per se. The law provides no commentsin this respect; therefore it may be assumed that this is allowed in so far as is not explicitly forbidden.

Further question which arises is whether the conversion means cancelation of the eB/L in the relevant registry. If yes, it is clear neither by which document the registrar's functions shall be terminated; nor by which documents the carrier's obligations to issue a "replacing" paper B/L shall be "resumed". As regards the date issue, it would be logical that the effective date should be the date when the electronic record was created (the date of shipment / acceptance of cargo for carriage). However the law gives no answer in this respect.

Another set of questions appears if the eB/L record is not deleted / cancelled at the conversion. Whether such a "new" ("printed") B/L can be deemed as original while the electronic record is saved? If yes – how the number of original B/L shall be defined? Pursuant to Art. 144(1(10)) of the MSC the B/L must contain a reference to the number of original bills of lading. If several original copies are issued by the carrier, each original copy shall clearly refer to the number of issued original copies (Art. 147 of the MSC). This is connected, inter alia, with the holder's right to endorse the B/L. Parallel existence of electronic record and paper copy makes unclear the order of transfer of rights: while it requires registration by a specifically appointed third party as regards the eB/L, endorsements under paper B/L shall be made in writing by the B/L holder.

Lack of regulation and court practice makes provision of clear and definite comments on this question objectively impossible.

7. If any answers to questions 3-6 above would be applicable only to a closed system where all parties have signed a central contract, please state to what extent your answers would be different if the eB/L was in use under an open system with no central contract between the relevant parties.

8. The above comments shall be applicable to both closed and open systems.

Russian procedural law and rules of main arbitration institutions do not limit the list of evidence. The evidence may be any paper, electronic documents, things, explanations of parties, expert opinions, witness statements, audio- and video-records, other documents and materials – all obtained legally.

With this in mind we see no obstacle to recognize the use of an eB/L in the Club system – provided that the court has paper evidence of such use (extracts from the closed system, witness statements, opinions, etc.).

9. Where any of your analysis also applies more broadly to the creation, validity and transfer of negotiable instruments in electronic form please note this in your reply.

The above comments are based on general provisions of the Civil Code of the RF on securities and on general rules of the Merchant Shipping Code of the RF on bills of lading, and shall be applicable also to the creation, validity and transfer of other negotiable instruments in electronic form.