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ELECTRONIC TRANSACTIONS REQUIRE CHANGES IN LAW
by Benjamin Wright
August 7, 1989
Copyright 1989 by Network World Publishing/Inc.,
375 Cochituate Rd., Framingham, MA 01701.
Reprinted from _Network World_.
Commerce is going paperless, but commercial law is stuck in the
days of pulp and ink.
Many companies now contract and bill for goods and services with
electronic data interchange (EDI) purchase orders, bills of
lading and invoices. Consumers often buy products through
videotex. Securities traders also buy and sell via networks such
as the Chicago Mercantile Exchange's forthcoming Globex system.
But some statutes and regulations governing the enforceability
and recording of business transactions speak of documents,
writings and signatures rather than electronic messages, data
logs and authorization codes.
ELECTRONIC CONTRACTS
The prime example is the Statute of Frauds, as rendered in
Section 2-201 of the Uniform Commercial Code (in force in all
states but Louisiana). It generally forbids the enforcement of a
contract for the sale of goods worth more than $500 unless the
contract is supported by a "signed writing." Unfortunately,
lawyers are locked in debate over whether a recorded electronic
message, authenticated with an electronic code, is a signed
writing.
A similar statute appears in the law of federal government
procurement. Public Law 97-258, codified at 31 USC 1501,
requires that contracts with the federal government be
"supported by documentary evidence . . . that is . . . in
writing, in a way and form . . . authorized by law."
This suggests that, to bind the government to an electronic
contract, an applicable law must specifically bless computer-to-
computer communication as an appropriate form of writing. The
government is making a large commitment to use EDI for
procurement, but Public Law 97-258 appears to require enactment
of special laws first.
A third example: Businesses must keep records of transactions
for Internal Revenue Service auditors. Revenue Ruling 71-20 and
Revenue Procedure 86-19 provide guidelines for taxpayers keeping
accounting records on computers. But these assume that _hard
copy_ detail documents (invoices, vouchers and the like) are kept
to support the information in the accounting systems. The
guidelines are confusing -- to both taxpayers and IRS agents --
when applied to EDI and other paperless transaction systems.
GOOD EVIDENCE
Laws such as these were not written to prohibit electronic
transactions, but rather to require the accumulation of good
evidence. Although computers can generate good evidence (often
better than paper schemes), the laws were enacted before the
widespread adoption of computer transaction technology.
Lawmakers simply did not take the technology into account.
This is not to say that transacting business electronically is
today illegal or unusually risky. Business law is always fraught
with some uncertainty and open questions. That is why companies
hire lawyers to minimize risk with contracts and advice. It is
also why there occasionally are commercial lawsuits.
Companies using EDI today often try to skirt problems with
antiquated laws by entering special agreements with trading
partners or obtaining government waivers. Such contrivances
usually serve more or less satisfactorily, but they are only
stopgaps. Changes in law are needed.
Knowing precisely how to change the laws will require wisdom and
foresight. The best changes will accommodate not only today's
applications but also tomorrow's.
Much of the work to be done will be educational in nature. We
have been using paper and handwritten signatures to create and
store legal evidence for so long that some lawyers and auditors
regard them with almost holy reverence.
The immediate objection will be that electronic information can
be altered and forged. But paper documents too can be, and
sometimes are, altered and forged.
TAKING CONTROL
The key to successful evidence creation in both the paper and
electronic environments is the imposition of controls over
information. We use controls such as notary seals to make paper-
written information more reliable, and we can use controls such
as passwords and secure data logs to do the same for computer
information.
The user and vendor communities, represented by organizations
such as the EDI Council of the USA, should identify troublesome
laws and petition for change. Specific industry groups, such as
the Aerospace Industry Association, which has a keen interest in
government procurement law, should press for change in their
fields of interest.
The American Bar Association, which can also play an important
role, has begun identifying some suspect laws.
Electronic transactions would enjoy substantially more certainty
if Congress, regulatory agencies and state legislatures would
clarify some choice laws.
Some movement in this direction is already underway. In April
the General Services Administration amended its regulations at 42
CFR 101-41 to specifically permit federal agencies to use EDI
bills of lading and freightbills.
Now agencies can electronically exchange bills with private
transporation carriers, provided that the bills are authenticated
with discrete codes, certified electronic records of transactions
are kept and appropriate controls are used to prevent abuse of
the billing and payment process.
The process of reviewing and modifying laws would win the
technology the legitimacy it now lacks in the eyes of some
skeptical lawyers and auditors. Plus, the public attention would
be a boost to the industry.
* * *
Wright, a Dallas-based attorney, is author of _EDI and American
Law: A Practical Guide_, introduced this week by its publisher,
The Electronic Data Interchange Association of Alexandria, Va.,
at the International Congress of EDI Users in Vancouver.