UNCITRAL Model Law on Electronic Transferable Records: A Brief Introduction

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Background and purpose of the MLETR

The mission of the United Nations Commission on International Trade Law ("UNCITRAL") is "[…] formulating modern, fair, and harmonized rules on commercial transactions" (UNCITRAL website: https://uncitral.un.org/en/texts). Besides international treaties (such as the CISG), UNCITRAL's key tool in advancing this mission are its Model Laws – legislative templates containing model rules which aim to remove legal obstacles to international commerce. Among other areas, UNCITRAL's model legislation has been influential in the fields of cross-border insolvency (UNCITRAL Model Law on Cross-Border Insolvency (1997)) and international commercial arbitration (UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006).
UNICTRAL has also been particularly active in facilitating electronic commerce. UNCITRAL Model Law on Electronic Commerce (1998) and Model Law on Electronic Signatures (2001) have been adopted in many jurisdictions. However, UNCITRAL recognised that legal uncertainties remain in respect of the legal treatment of electronic transferrable records (explained below). This led to the development of the Model Law on Electronic Transferable Records (the "MLETR"), which commenced in 2011 and ended in 2017 with its release.         
To accompany the MLETR and aid its implementation, UNCITRAL has prepared the Explanatory Note (available at https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mletr_ebook_e.pdf). This article draws on the Explanatory Note.

What is an "electronic transferable record"?
Transferable instruments – essentially paper documents entitling the holder to claim the performance of the obligation set out therein – feature regularly in international commerce. Typical instruments, ubiquitous in international trade, include bills of exchange, cheques, promissory notes, consignment notes, bills of lading, warehouse receipts, insurance certificates and air waybills.
An electronic transferable record in the sense of the MLETR is thus an electronically recorded transferable instrument satisfying the following conditions (Article 10 MLETR): "(a) the electronic record contains the information that would be required to be contained in a transferable document or instrument; and (b) a reliable method is used: (i) to identify that electronic record as the electronic transferable record; (ii) to render that electronic record capable of being subject to control from its creation until it ceases to have any effect or validity; and (iii) to retain the integrity of that electronic record." The idea is that parties will be more inclined to use digitised transferable instruments if legal question marks on their legal validity are removed, thus promoting domestic and international commerce.
The MLETR specifically carves out securities (such as shares and bonds) and other investment instruments from its scope of application, since these are typically regulated through existing sectoral legislation on dematerialised securities. The MLETR enables the implementing jurisdictions to specify further potential exclusions.   

General principles and key features of the MLETR
Consistent with the existing UNCITRAL model legislation on electronic commerce, the MLETR follows three general principles:

General principles of the MLETR

non-discrimination

technology neutrality

functional equivalence

"An electronic transferable record shall not be denied legal effect, validity or enforceability on the sole ground that it is in electronic form." (Article 7 (1) MLETR).

 

MLETR is drafted without reference to any specific technological implementation of electronic transferrable records ("a system-neutral approach"). This means that its provisions can apply to various models, "whether based on registry, token, distributed ledger or other technology." Despite never using the term itself, the MLETR thus accommodates the issuance of transferable instruments on a blockchain.

The core provisions of the MLETR establish the functional equivalence of

  1. the information contained in an electronic transferable record with written form, when such is legally required (subject to "the information contained therein [being] accessible so as to be usable for subsequent reference" – Article 8); and
  2. a signature of a person, when such is legally required, with a "reliable method […] used to identify that person and to indicate that person's intention in respect of the information contained in the electronic transferable record" (Article 9).

An additional aspect of this principle is the functional equivalence of the transferable instrument with its electronic counterpart (electronic transferable record).

 

In keeping with its aim of facilitating global commerce, the MLETR provides for non-discrimination of foreign transferable electronic records. Otherwise, the MLETR makes it clear that it does not affect the application of private international law governing a transferable instrument itself. In a similar vein, the MLETR does not affect (national) substantive laws applicable to transferable instruments, i.e. the rights of a bearer of an instrument remain defined through national legislation.
Another important concept used by the MLETR is that of "control". This refers to a functional equivalence of "possession" – a factual status of a physical object – within the realm of electronic transferrable records. There, control of an electronic transferable record is achieved via appropriate technical means, such as a registry system or a distributed ledger. The MLETR defines the transfer of an electronic transferable record – the equivalent of a paper instrument changing hands – as a transfer of control. 

Status
The MLETR, like other UNICTRAL Model Laws, is not a binding legal instrument. Rather, it serves as a template for national legislatures who choose to implement it. So far, the MLETR has been incorporated by Bahrain; an announcement about the adoption of the MLETR has also been made at the ministerial level in Singapore. Among Schoenherr jurisdictions, it has been publicly discussed at the ministry level in the Czech Republic (where a public consultation was also launched) and Slovenia, although neither country has implemented the legislation into their national law as of autumn 2019. As with any model legislation, the effects of the MLETR will be revealed gradually with broader international adoption. As interest in blockchain rises, governments worldwide may well be eager to implement legislation enabling one of the technology's key use cases – trustless transfer of (digitized) common commercial instruments.        

Jurij Lampič

Attorney at Law in cooperation with Schoenherr

T: +386 1 200 09 74
j.lampic@schoenherr.eu

country:

slovenia

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