In 2017 a global container line Maersk developed a paper illustrating how a single shipment of

goods from Kenya to Europe discovering that it involved more than 200 communications
between 30 people and organisations. 1 That paper showed how complicated and transaction
have international trade is. It is not uncommon for good to be chain-sold dozens of times while
goods are still in the opened sea. The key document that allows that is bill of lading. Economic
efficiency is of key importance in such complicated contractual systems and legal framework
should facilitate that efficiency. In his work Ronald Coase emphasised the role of transaction
costs in a firm.2 One of the great examples that he provided was the effect of new technological
advancements on reducing costs.3 Since the invention of paper the way merchants use bills of
lading has not changed much, resulting in slightly ridiculous situation that in a digitalised world
of 21-st century it is still required for bills of lading to be issued in paper. Electronic means of
data exchange have developed dramatically since the rise of blockchain technology in 2008,
stressing that modern world of international trade requires a digital substitution of the paper
documents.4 This essay would critically evaluate how suitable is English law in facilitating that
efficiency in this area.

But is it efficient from the economic perspective?

What is bill of Lading?

In order to start the discussion about the economic efficiency of the English law regarding
contracts of sale with goods shipped across the sea it is important to state bill of lading and
blockchain is. When goods are transferred during an international sale contract, the carrier
1
Maersk Line Named 'Container Operator of the Year' at the Annual Lloyd's List Asia Awards, MAERSK (Oct 27,
2017), https://www.maersk.com/news/2017/10/27/maersk-ine- named-container-operator-of-the-year, accessed
25/01/2020
2
Coase R. H. ‘The nature of the Firm’ (1937), https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-
0335.1937.tb00002.x, accessed 10/02/2020
3
Ibid, at 397
4
The LawTech Delivery Panel, ‘Legal Statement on Cryptoassets and Smart Contracts. UK Jurisdiction Taskforce’
(2019), https://35z8e83m1ih83drye280o9d1-wpengine.netdna-ssl.com/wp-content/uploads/
2019/11/6.6056_JO_Cryptocurrencies_Statement_FINAL_WEB_111119-1.pdf, accessed 12/02/2020
contracted to transfer the goods should issue a document s covering the transport.
Traditionally, bills of lading was the issued document which has its roots in the old lex
mercatoria. The agreement between the parties to the contract would usually establish the
responsibilities of who should arrange the transport and what type of transport documents is
required. The role of bill of ladding as ‘representative’ of goods was established through
customs and mercantile usage.

The modern bill of lading is issued by or on behalf of the carrier to the shipper of the goods and
performs several functions. First of all, it is a receipt, evidencing that the carrier has received
the goods in proper condition. Secondly, it contains the terms of the contract of carriage setting
up the obligations of the carrier and the holder of the bill. Thirdly, if the conditions are satisfied,
it performs the function of a document of title.5 This third function is paramount for this essay
as would be discussed later transfer of the bill of lading often is transfer of property, or in other
words fulfilment of an obligation.

Document of Title

The Function of bill of lading as document of title was acknowledged by common law in
Lickbarrow v Mason in late 18th century holing that: ‘as between the vendor and third persons,
the delivery of a bill of lading is a delivery of the goods themselves… the instrument is in its
nature transferable.’6 Almost a century later in Barber v Meyerstein Lord Hatherley stated that
bill of lading is ‘the key to the warehouse’ adding that ‘for the purpose of conveying a right and
interest in the property [the bill of lading] is the property itself’. 7 In his judgement, his Lordship
added that this is a symbolic function of the bill which has developed over time to facilitate the
dealings with the goods while they are at high seas.8

It is of vital importance to note that this function should be divided into two: transfer of
symbolic or constructive possession and transfer of property in the goods.

‘First, as to the status of the bill of lading as a “document of title” . I. put this expression in
quotation marks, because although it is often used in relation to a bill of lading, it does not
5
Miriam goldby, electronic documents in maritime trade
6
Lickbarrow v Mason (1794) 2 ER 39, Ashhurst LJ at 63
7
Barber v Meyerstein (1870) LR 4 HL 317, Hatherley LJ at 332
8
Ibid, at 329-30
 in this context bear its ordinary meaning. It signifies that in addition to its other
characteristics as a receipt for the goods and as evidence of the contract of carriage
between shipper and shipowner, the bill of lading fulfills two distinct functions.
1.  It is a symbol of constructive possession of the goods which (unlike many such

symbols) can transfer constructive possession by endorsement and transfer: it is a

transferable “key to the warehouse” .
2.  It is a document which, although not itself capable of directly transferring the

property in the goods which it represents, merely by endorsement and delivery,

nevertheless is capable of being part of the mechanism by which property is passed.’ 9
Therefore, even being a prima facie presumption that the transfer of property operates through
the transfer of the Bill of Lading that presumption is rebuttable provided existence of
agreement to the contrary between the parties. Especially in situations where the bill of lading
is made out to the buyers’ order, and possession of it retains with the seller until exchange for
payment, even if goods have already been shipped the property does not pass at that time, but
only on transfer of bill of lading.10

This distinction between these two sub-functions is of an extreme importance. Under English
law, the second sub-function is generally of a greater importance, as property in the goods
passes only if the intention of it to be transferred is present. A prima facie presumption of such
is usually created by the transfer of the bill of lading. However, the first sub-function is more
important for the topic discussed in this work, because the ability of the bill of lading to show
and transfer constructive possession enable the holder not only perform the constructive
‘delivery’ of the goods to the buyer while the actual goods are still in physical possession by the
carrier, but also to use it as a source of credit by pledging the goods, as pledge is a form of
security which requires the creditor to obtain possession the thing pledged.

What is a Blockchain?
The main first occurrence of the blockchain technology in the financial world can be traced back
to 2008 when Satoshi Nakamoto11 developed a person-to-person electronic system that

9
Enichem Spa, Enichemica Spa, Enichem Spa, Vanol International Ltd v Ampelos Shipping Company Ltd [1990] Lloyd’s
Rep 252, at 268
10
See The Kronprinsessan Margareta, the Parana, and other Ships [1921] 1 AC 486, 511-7
11
A person or a group of people commonly believed to be the developers of the Bitcoin, however identity was
never officially confirmed.
allowed the parties to execute secure payments directly avoiding the need for any trusted third
party like banks, called Bitcoin.

In its core Blockchain is a sequence of blocks of encrypted data permanently interconnected with
each other by the means of encryption and distribution among members. Its operation is based on
Proof-of-Work system, each Block is given a unique number- hash, a personal identifier or an
electronic ‘fingerprint’ of the data it contains. On top of this, each block would usually contain a
transaction time-stamp hash which tells where and when the transaction was made. The system
depends upon Distributed Consensus Algorithm: In order to change or enter data to the database
majority of the computers in the system have to agree about the authenticity and legitimacy of
the transaction, so no single computer can make any alterations to the system without consensus,
meaning that transaction are extremely safe and are unable to be altered or deleted after they
appeared on the system.

Blockchain security measures uses Public-Private Key Cryptography. Public Key is a long
randomised number which serves as an address on the blockchain. 12 Private Key is a password
which gives its owner access to their digital assets stored on the blockchain or other means of
interacting with that data.13 Public Key is interconnected with the Private Key allowing the
Public Key to be freely distributed for data to be send on that address and Private Key being the
only way this data can be accessed after the transaction.

After describing essential legal issues and blockchain technology, this essay would proceed
developing the argument if implementation of electronic bills of lading through blockchain with
provide efficiency under current legal framework. First of all, in order to increase efficiency by
reducing transaction costs the new system has to be simpler for the end users: sellers, buyers,
and carriers.

The problem with the current legal framework is that framework was developed around bills of
lading is that key legal rules were developed in late 17-th, 18-th century when bills of lading
were only paper-based. Such approach has significant disadvantages. The most obvious one is
the risk of original document getting lost or delayed in the chain of subsequent sales and
arriving after the ship has reaches the port of destination. Such delays put the carrier in an
12
Similar to name, sort code and account number on banking cards serve as an address of a bank accounts, or like
a SWIFT code.
13
Similar to a PIN-code or CVV code of banking cards.
extremely vulnerable situation, as according to general rules, he is not allowed to surrenders
the cargo without production the original bill, takes liability risks if nonetheless deliver the
goods.14 Even in cases of potentially dangerous goods such as oil, the court denied the
argument that goods can be delivered without the original bill.15 Such reasoning comes from
the idea that surrender of goods without production of original bill constitutes a breach of
obligation and therefore of breach of contract16 and carrier can be held liable for tort of
conversion.17 Moreover, delays of the bill causes damage to perishable cargo and leads to
additional costs to the carters that lead to higher insurance costs and puts large pressure on the
master.

Such additional risks and pressure raise questions to a paramount concept in English Contract
law is freedom of contract or will theory. The concept that provides level of flexibility making
clauses that ‘The Contract shall be governed by and construed in accordance with the laws of
England and Wales’ so popular in commercial world.18 However, courts do not always enforce
contracts as written. As was argued by David Friedman there are three main reasons for that:
the first courts believing that they have better understanding what the terms should have
been; secondly, it is not always clear does the contact exist or what the terms actually are;
thirdly, contracts do not always cover unexpected events.19

One of the main reasoning that court use for not enforcing freedom of contract is ‘unequal
bargaining power’20. It should be stated that that is absolutely true in contracts between a
monopoly and an ordinary person. But is it really the case? Definitely, if an example of a life
essential goods would be used, it is clear that there will be no equal bargaining g power
between the only producer of an life-saving drug and hospital. But in most cases even
monopolies are not able to set a price higher than the value of the good for the protentional
customer. In commercial sale contracts situation of extremely unequal bargaining power is
extremely unlikely as both parties are professional bodies that want to maximise their net

14
See Sze Hai Tong Bank v Rambler Cycle Co [1959] A.C. 576
15
See Hansen-Tangens Rederi III A/S v Total Transport Corp (The Sagona) [1984] 1 Lloyd's Rep. 194
16
See The Stettin (1889) 14 PD 142
17
See note 16
18

19
David D. Friedman, Law’s Order. What Economics Has to Do with Law and Why It Matters, (Princeton University
Press 2001), https://www-degruyter-com.ezphost.dur.ac.uk/view/title/550182?tab_body=toc-62810, accessed
14/02/20
20
Note.19
gains. However, as discussed above, additional pressure and risks that current system put on
the charters may lead to unequal bargaining power and can even be compared to duress.

David Friedman in his work called such situation ‘Bargaining on a Sinking Ship’. 21 Similar, in the
scenario described above, nor the final buyer of the goods nor the charterer of the vessel cased
the problem. However, this work would disagree, in ‘bargaining on a sinking ship’ the captain of
the tug with gain significantly if the owner agrees to pay, in case of late delivery of the bill the
nor the buyer nor the seller would gain anything that would not be seriously outweighed by the
potential risks and costs. The charterer risks to surrender goods to a goods to a random person
and be liable for breach of contract, and the buyer risks to lose perishable cargo, or fail to fulfil
his obligations to a third party in another contract related to the goods on the ship.

Moreover, unlike in ordinary contracts of sale where risks usually passes with property 22 in
maritime contracts risks usually passes on or as from shipment.23 As was sated earlier, generally
in contracts of sale with goods to be shipped the contract if fulfilled when the seller exchanges
bill of lading for consideration with the buyer. 24 Tracing back the idea that each transfer of the
bill takes time and puts additional costs, it also creates ineffective allocation of risk putting
heavier risk burden on the buyer. However, such allocation is a commonly agreed practice,
therefore, arguably treated as efficient by the parties.25

The main reasoning that English courts provide for not recognize electronic bills of lading as
documents if title in the modern world is that there are not tangible assets, and therefore are
not negotiable.26 In defense of the current approach, should be noted that attempts to digitalize
bills of lading started before the emergency of blockchain. Such electronic versions lacked a
very important property of the paper ones- there was no ordinary means to ensure that there is
only one holder of the copy of the document. Courts were not able to provide such documents
21
Ibid.
22
Section 20 of the Sale of Goods Act staes: ‘Unless otherwise agreed, the goods remain at the seller’s risk until the
property in them is transferred to the buyer’
23
See Baats et. al., Maritime Law. (4th ed. Informa Law from Routledge 2018)
24
Ibid.
25
Such practice evolved through mercantile usage into Incoterms® 2010 Rules.
26
See Glencore Inyternational v MSC Mediterranean Shipping Company [2017] EWCA Civ 365
with the full status of the paper bill of lading as it would open the floodgate for protentional
fraud

The document-of-title function allows bills of lading, to remain its vital importance in modern
international trade as it enables the holder to sell the goods while they are still in the hands of
the carrier or pledge them to obtain credit.