The development of the infrastructure for e-commerce involves some
contradictions. One of them is between law and logistics. Legal argumentation deals with rights and obligations created e.g. by law and contracts and affecting the various parties of a transaction while a logistical approach relates to the efficiency of supply and distribution. There is a huge advantage gained by
promoting electronic documentation which transmits information. Over 200 data elements are required to complete a cross-border trade transaction. Many of these are re-copied and re-keyed as they move from one party of a transaction to the next. The cost of managing trade documentation is estimated by theUnited Nations at 7% of the total value of cross-border trade.18
15 The writer expresses his gratitude to international organisations for the availability of documentation, including preparatory documentation, on the Internet.
16 These are mainly the UNIDROIT Principles of International Commercial Contracts 2004, the ICC E-Terms 2004 and the introduction of the SWIFTNet Trade Services Utility.
17 It is expected, in May 2004, that the relevant UNCITRAL Working Party IV (Electronic Commerce) will finalise the Preliminary draft convention on international contracts concluded or evidenced by data messages by its session in October 2004.
18 Mallon 1997 and 2002. Mallon quotes a WTO/UN source from 1996 and states “an estimated 7.2% of all global trade is lost in paper inefficiencies; the USD 420 billion lost per year corresponds with the total corporate spend on advertising each year (USD 450billion)”(the figure is from McCann-Erickson from 2000). Mallon quotes Financial Times figures, partly estimates, on the size of global trade: USD 57 billion in 1947, USD 3.58 trillion in 1992, USD 5.5 trillion in 2001 and USD 6.75 trillion in 2005.
Mallon 1997 further gives a good illustration of the system under electronic
documentation: ”Suppliers network into their customers´ products scheduling systems, verifying the time for just-in-time shipments before releasing them. Transport companies link to the same systems, verifying that vehicles are available for loading goods and that receiving bays are free. Information is transferred electronically to customs and deep water carriers as required, ensuring smooth throughput of the shipment. Parties are linked to their banks so that payment is triggered by the receipt of goods or documents.”
On top of the above, computerisation makes it generally easier and less expensive to collect and combine information.
The use of electronic documentation would reduce costs dramatically.
Moreover, electronic documents add speed. Experiments show that electronic systems can accomplish in a day the same document handling which would require weeks to complete using traditional methods. Automated systems reduce risks posed by human involvement, information being incorrectly reproduced, documents being lost and, where precautions are taken, forgery.
Logistics cannot, however, provide technically reasonable solutions19 if legislation lags behind and does not recognise technical solutions, or if there is little confidence among business partners on their legal watertightness. A typical example is the bill of lading as a document of title. The bill of lading has been originally created by commercial usage or custom, sometimes legislation, and it works in the paper document environment. Today, a special type of technical and contractual framework is required to establish a facility which could be called ´an electronic bill of lading´.20
The contradiction between law and logistics can, however, be turned into an asset. A logistic approach to the functioning of legal rules can be useful. It is closely akin to the economic analysis of law. This school of jurisprudence, which I do not intend to follow categorically, has gained popularity during recent years in my home country of Finland. A central objective of the economic analysis of law is to reduce transaction costs.21 As applied here, legal instruments should be construed so that, in addition to guaranteeing the legal rights and obligations among the parties involved in a transaction adequately, they facilitate cost-effective logistic management.
Transaction costs can be lowered if the legal framework for conducting transactions is uniform and predictable and, it is submitted, if there is enough flexibility in the system. Uniformity means that legal rules remain the same even if frontiers of jurisdictions are crossed. This can be achieved through legal
harmonisation done by international public and private organisations. The question of how much regulation is needed, and how this regulation should be provided are key questions debated among international law-making agencies.
19 The word ´solution´ is sometimes in parallel use in the legal context as well, see for instance the title of Part Two of the work ´EDI and the Law´ (ed. by Ian Walden), London 1989. In this study, the word has also been used to signify legal rules which have as their purpose the abolishing of legal obstacles to electronic commerce or filling gaps (lacunae) in law.
20 Electronic bills of lading exist in commercial projects such as the Bolero System, see Chapter VIII, post.
21 Transaction costs are often divided, from the point of view of the economic analysis of law, into three main groups, which are
- the legal costs of an individual business transaction;
- the operational costs from the point of view of an individual enterprise; and
- the public costs of market exchange as a whole; the costs arising from legal protection mechanisms and the regulation of the contents of individual rights belong to this category.
A transaction cost analysis aims to reach an optimal level of regulation by comparing the costs of regulation and the risk to be regulated. Regulation is efficient if its costs are smaller than the costs of an unregulated risk, which are calculated by multiplying the costs of a materialised risk by the probality of its occurrence. Otherwise it is not useful to regulate a risk. (Rudanko, pp. 195-198 and the sources cited therein).
The rapid development of technology and the need to remain neutral to technology keep legal rules abstract. Legal instruments such as bills of lading and documentary credits have had centuries of evolution. Technically and legally replicating their functions electronically is possible. Should the legislator or the private sector invest in providing a legal framework that makes it possible to replicate the functions of these instruments based on their usefulness and costs?
We may ask if one can truly anticipate the benefits of future instruments. It is always possible that, in addition to lowering the logistic costs of an individual transaction, new instruments such as electronic transaction-oriented security methods emerge. Politicians often highlight the importance of small- and medium-sized enterprises as employers. I believe transaction-oriented finance is particularly useful for new small businesses. In any case, cost-effectiveness determines in the long run the feasibility and success of such services.22
The second contradiction relates to the scope of facilitation of electronic commerce. Is it only that e-commerce provides new means to communicate and to conclude contracts, or should one touch upon the substance of a contractual relationship? As we shall see, both approaches are reflected in the contract practice and, to some extent, in the legislative work. The use of electronic methods will undoubtedly have an effect on substantive law. Accelerated
communications add new requirements for the parties of a transaction. This will, for instance, undoubtedly add pressure to reduce time-limits afforded to
contracting parties to react to each other´s communications or to take a new attitude towards what is to be considered a reasonable time to react in the new circumstances. The availability of contractual information on the Web, in particular standard conditions of contract, may increase the acceptance in business-to-business relationships of the incorporation of standard terms by reference23.
It has been recognised that electronic commerce creates new conflict of laws problems. It is difficult to determine where the contract is concluded. In many countries still, the formal validity of a contract is determined by the rules of the lex loci contractus.24 Choice-of-law problems are not that apparent when the object of the transaction is delivered by traditional means rather than through the Internet as is the case with software. Yet, the choice-of-law method does not create uniformity since national laws differ, and choice-of-law rules themselves may not lead to simple results since they may require the establishment of the most significant relationship.
In any case, it would be tempting to see the new methods of concluding contracts giving rise to attracting the use of uniform substantive rules in lieu of rules selected on the basis of the traditional conflict of laws system. I am going to
22 Legal research can nevertheless analyse the legal institutions and needs for reform from a dogmatic point of view. Furthermore, the cost-effectiveness is much higher if, for instance, legislation guarantees the admissibility of electronic media to record information.
23 Unless the availability is not regarded as the equivalent of an attachment; for this see Chapter IV.8.2. and IV.10., post.
24 Eiselen, p. 8. According to the Rome Convention on the Law Applicable to Contractual Obligations a contract will be formally valid if it meets the requirements of the place where the contract was concluded or where either party has his usual residence or place of business.
describe the harmonisation of substantive rules as a final stage in the
electronisation process of contract law. An overview of some sources of uniform substantive law is covered later. New substantive rules have emerged, however, by applying the functional equivalence method.
A third contradiction is found if we compare the notion of functional equivalence and harmonisation objectives. The scope of electronic commerce remains limited and is very technical in nature. Uniformity could be achieved more easily than with more political issues. On the other hand, electronic methods of contracting and transferring rights and obligations are designed to be functional equivalents of their counterparts on paper. Electronic commerce law thereby supplements other parts of law, which are frequently not harmonised.
A fourth contradiction lies in the nature of the solutions sought. Is it about public legislation or private codes of conduct? This contradiction is reflected in the reactions25 of the private sector, notably the International Chamber of Commerce, to the work carried out under the auspices of the United Nations Commission on International Trade Law. The American approach has originally favoured the latter alternative, although notable legislation has been enacted recently, whereas the approach of the European Union is to create legislation to regulate the operation of e-commerce. However, EC legislation gives private rules or codes of conduct a role.26 This is the case particularly as regards marketing to consumers.
Between companies, the legal solutions used may be more innovative and even commercial. The provider of the value-added-network may create, in addition to the technical framework, a multi-party contractual network, which is a self-governing legal system to the extent permitted by the applicable law. This is said particularly in mind of the Bolero System27, which aims to create a system between its participants, whereby various parties involved in a sale of goods transaction are connected to a central registry, which plays a role in controlling the handing over of the goods and, indirectly, the transfer of title through electronic equivalents of bills of lading. The Bolero Service is a commercial venture between the TT Club and SWIFT.28 The legal regime of the Bolero Service is largely contained in a ´Rulebook´, which is a bye-law or a set of rules of procedure adhered to by the subscribers of the service. Therefore, a part of the legal infrastructure of electronic commerce is provided on a commercial basis and is based on a set of ´proprietary´ rules of procedure protected by copyright29.
25 See e.g. the comments by the International Chamber of Commerce to UNCITRAL, doc. A/
CN.9/WG.IV/WP. 105.
26 This is the case with Article 16 of the Directive 2000/31/EC of the European Parliament and of Council on certain legal aspects of electronic commerce in the Internal Market, OJ L 178, 17.7.2000, p. 1.
27 On the Bolero project, see Chapter VIII.7., post.
28 SWIFT is a cooperative owned by banks the task of which is to supply secure messaging to financial institutions all over the world (see Chapter VIII.2., post). The TTClub is a mutual insurance company providing insurance to the transport industry. It insures large liner operators and freight forwarders against their liability. Its members comprise many terminal operators and port authorities. All in all it has about 5000 operational assureds (Mallon, p.24). Today, the owners of Bolero Association Limited include three venture capital companies.
29 In the United States, at least some state level statutes are protected by copyright.
The role of private initiative calls for one more remark. International legal harmonisation proceeds slowly if only the pace of the implementation of international conventions is considered. However, the division line between public and private is gradually melting because many international conventions allow parties to subject themselves under their scope by way of incorporation.
Moreover, both international public and private organisations are creating useful contractual instruments (“tools for international trade”) for businesses to
overcome the boundaries of different jurisdictions. Party autonomy, which is almost universally recognised in international commercial relationships, makes it possible for companies to be their own legislators. It is one of the aims of this study to pinpoint some instruments that are available for such an exercise.
Finally, the development of electronic commerce law has to take a stand on traditional division lines in private law. One of them is between the law of obligations and the law of property. The second is between contract and tort.
There is a bounty of diverging doctrine on these issues and the significance of these distinctions varies from jurisdiction to jurisdiction. Each jurisdiction has its own system of rights in rem and unification is still in its cradle regarding these issues. Generally speaking, however, one can say a right in rem is available against the world at large (ultra partes), whereas a right in personam (or inter partes) applies in the context of a given relationship. A contract is created expressly between one or several parties and sometimes a contractual relationship will be inferred indirectly from the law or from circumstances.30 Many of the discussions on these issues are of a theoretical nature. What is relevant in my view is, however, that generally in cases of rights in rem and tort a universal31 solution has to be sought to promote electronic commerce, because a contractual application has its limitations. Therefore party autonomy does not suffice, although it has its merits in its flexibility and adaptability.