In December 2022, ITFA (the International Trade and Forfaiting Association) launched the Uniform Rules for Transferable Electronic Payment Obligations (URTEPO).¹ URTEPO was, in some ways, seen as an update of the Uniform Rules for Forfaiting (URF 800)² which had been published by the ICC as a means of standardising how forfaiting transactions were conducted in both the primary market (where the transaction was created) and the secondary market (where a forfaiting transaction could be sold on to another investor). URF 800 had, in addition, forms of documentation for both the primary and secondary market. URF 800 continues to be available. URTEPO has a different purpose although taking some concepts from URF 800 into the electronic world.

The two sets of rules can sit side by side. However, the key question now is what can be done with URTEPO in the increasing move towards the digitalisation of trade and trade finance transactions? In the first of two articles looking at the framework supporting the digitalisation of trade, this article provides a practical guide.

When the United Nations Commission on International Trade Law (UNCITRAL) promulgated the Model Law on Transferable Electronic Records (MLETR) in around 2016, there was some scepticism as to what its use could be, and which countries might adopt MLETR. Indeed, take up was slow and initially only Bahrain adopted it.³ The pandemic followed, as did increasing concerns about fraud and suddenly there was increased take up in one form or another of MLETR. This was led by Singapore and Abu Dhabi as examples.

Running in parallel to this was the adoption of the ICC rules for digital trade transactions (URDTT) which were designed to agree how to evidence a trade transaction by electronic records and more importantly the payment obligation for that trade transaction. This was thought to be ahead of its time and take up has been very limited.⁴

What has been described as a “game changer” was the UK’s adoption of a variation of MLETR called the Electronic Trade Documents Act (ETDA) which came into force in September 2023.⁵ ETDA is discussed in more detail below.

In summary, ETDA allowed for the creation of electronic documents for specific trade documents, including bills of lading and warehouse receipts in relation to goods and promissory notes, as well as promissory notes and bills of exchange in relation to payment for goods. This route is being followed by France and other countries are seeking to embrace MLETR in different ways.

However, it was the call for the increased digitisation of trade, the use of electronic records rather than paper and the speed of processing that has concentrated the minds of all, going forward.

“URTEPO can be used so long as the payment obligation is both digital and transferable”
Geoffrey Wynne, Sullivan & Worcester UK LLP

In particular, the concept of being able to create a digital payment obligation for goods and services and then being able to transfer it, is where URTEPO has its true purpose.

URTEPO is not concerned with the creation of a payment obligation. It allows for a payment obligation to be created by any means possible (including specifically under ETDA – so electronic promissory notes and bills of exchange – electronic Negotiable Instruments (eNIs) are ideal payment obligations). URTEPO can be used so long as the payment obligation is both digital and transferable. Even the method of transfer is left to the parties to agree in their contractual arrangements and applying the relevant law. Under English law, eNIs are transferred by endorsement while other payment obligations can be transferred by assignment.

The transfer agreement can be in paper form or by electronic records or a mixture. Following the similar format of URF 800, a requirement of examination by the buyer of the TEPO of whatever evidence is stated as required under the transfer agreement remains key.

Thus, there has to be a transfer document specifying what is being transferred, how the buyer is to be satisfied about evidence of the transaction, what the seller is required to do and how and when the parties complete the purchase. The agreement should have a governing law to determine all this. URTEPO will be incorporated into the transfer document.

Incorporating URTEPO will then specify the conditions to be met for a sale of the TEPO to be concluded and, most importantly, the liability of the parties in relation to the transfer of the TEPO. This will reflect the knowledge and involvement of the relevant parties in the whole trade transaction. Thus, the seller of a TEPO who was involved in the creation of that payment obligation will have to accept a higher level of liability than one who has taken a transfer and agrees to sell the TEPO to another. The value of URTEPO is that it sets out those liabilities and the consequences.

The Rules provide for how payment for the transferred TEPO is to be made, with provisions referring to the examination of data and other evidence including data matching (with or without physical examination) and timing for this to trigger payment.

Once a transaction is concluded the TEPO is transferred to the buyer but the seller may well have continuing obligations depending on the provisions in the Rules if there is a subsequent default or failure in relation to the transfer of valid title.

Parties wanting a sale and purchase of a TEPO enter into a transfer agreement and incorporate URTEPO. That should make for a more straightforward way of documenting sales and purchases of a TEPO including the use of electronic records.

How the transfer is effected is outside the rules. That leaves the parties free to agree a technological solution to effect the transfer. As explained below, one way will be to follow concepts from ETDA and so have a reliable system where the TEPO resides and to effect the transfer from seller to buyer using the exclusive control mechanism of an electronic record.

That is not a prerequisite of URTEPO, as the Rules can be used for any TEPO – that is any payment obligation that is in electronic form and is transferable, for example: any payment obligation created following ITFA’s electronic Payment Undertaking (ePU) under its Digital Negotiable Instruments (DNI) initiative⁶ or indeed an IPU (irrevocable (or perhaps independent) payment undertaking) in supply chain finance provided by the buyer of goods (or even an invoice) if it meets the requirements of being a TEPO.

It could indeed be time for URTEPO. As more payment obligations become digital and parties (mainly the buyers of goods and services) agree that a payment obligation in electronic form can be created and transferred, then how to document the transfer will be key. Financial institutions (for example those involved in supporting customers and using URDTT) will be able to transfer payment obligations they create on behalf of their (buyer) customer or that buyer creates directly, to other parties.

This in turn is another way to involve the growing number of non-bank financial institutions (NBFIs) including funds that want to participate in trade finance by purchasing payment obligations or taking the risk in them. Those parties can then look to a transfer agreement incorporating URTEPO to set out the obligations of the seller of the TEPO to them or their counterparty. If the obligations of the seller (of the TEPO) can be standardised then negotiating sales and purchases will become easier.

A transfer agreement using a law (such as English law) that recognises an electronic payment obligation and incorporating URTEPO can go a long way to assisting in the expansion of digital trade and trade finance.

Sources

¹ See itfa.org
² See iccwbo.org
³ See uncitral.un.org
⁴ This 6 October 2021 GTR article provides useful background
⁵ See legislation.gov.uk
⁶ See itfa.org