Impact of Modern Technology on International Sales and Service TransactionsPaper presented at the Singapore Conference on International Business Law, September 9 - 11, 1992
"Modern" technology usually refers to the combination of computers and communications devices which in the last several decades have changed the way in which we handle information. These changes are having a substantial impact on both the practice and the law of international trade, notably in the use of electronic documents to replace paper, the so-called electronic data interchange (EDI). The same technology permits services to be offered in remote locations which previously would have required a substantial local presence.
EDI has been a "glamour" subject for the last few years, but computers also have less visible and less discussed impact on international trade. The science of robotics will continue to change the way in which large cargoes can be handled and the way in which large carriers may be operated. More refined models of stock control, only possible with substantial computing facilities, will continue to change the pattern of stock replacement and, consequently, the pattern of stock movement and the international trade in goods.
While this particular form of modern technology undoubtedly is having its impact on both the practice and the law of international trade, it is by no means the only "modern" technology exerting such an influence. We can expect the value of trade in biological products to increase as a proportion of the total value of world trade. The use of cell technologies to produce monoclonal antibodies and of genetic manipulation to produce new and more profitable crops are but two examples of an industry with almost unlimited trade potential.
The next section examines these "modern" technologies in more detail, but the salient characteristic of "modern" technology seems to be a shift of focus from manufacturing and transport to communications and information handling, from "natural" methods of biological science to methods which manipulate at the cell and gene level.
Modern technology raises a host of problems for the law of international trade in goods and services. This paper will identify some of the problems and indicate some of the proposed solutions. Part of the theme of the paper is that some of the problems may be solved by relatively simple changes in local laws but that the solution to others will require long and sophisticated political negotiations. So, for example, the problems raised by EDI may be solved by relatively minor changes in local laws. By contrast, the problems raised by modern biotechnology will require broad political consensus.
This section of the paper will discuss some of the details of "modern technology", identifying some of the broad outlines of the problems raised by the introduction of the technologies.
It is commonplace to talk about the dramatic changes which have occurred in the world communications network, and there is no doubt that the changes have been remarkable. Within a single lifetime we have moved from devices which required human operations to effect connections to computer controlled networks that allow direct connections. The changes would not have been possible without the computer.
However, it is the direct marriage of computers with communications networks that has the greatest impact on world trade. The possibility of direct computer to computer communications means that the pure electronic message has, for the first time, the potential of being more than just the message in the same way that a formal document is more than the message which is written upon it. Direct computer to computer communications can allow us to be reasonably confident that the pure electronic message has not been altered, that it was sent by the person who purports to be the sender and that its contents have been agreed to by various parties who have "signed" the message.
These characteristics mean that it is possible to use pure electronic messages where before we required documents. But the emphasis here is on the word "possible" for there are many technical and legal obstacles to be overcome, and it is in the nature of things that the technical obstacles are overcome much more quickly than the legal ones.
One of the important results of this gap between technological and legal development is that the benefits of the technology will be realised first in situations where the participants can resolve difficulties without recourse to law. This will occur first where the communications have no legal significance at all. When there are legal consequences attached, factors which facilitate implementation include the security of the message network, the nature of the messages and the identity of the participants.
So, for example, one of the earliest uses of computer to computer communications for legally significant messages was the SWIFT network. The participating banks could afford to establish their own network which guaranteed an acceptable level of security. The messages, although very valuable, are relatively simple and so may be structured so as to minimise the likelihood of error. The participants have a common purpose and strong incentives to be both honest and reasonable, so that it was relatively easy to reach agreement on allocation of responsibility when problems did arise.
In short, the banks were in a position to make their own laws and the problems were confined enough so that it was practicable to do so. This is not to suggest that the establishment of the SWIFT network could ignore existing law. Whatever the rules of the network, the rights of other parties, particularly the paying and the receiving customer, would be governed by national laws including, of course, the national law of contract which might impose the SWIFT rules upon them. This inability to isolate the network from the surrounding legal system is part of the reason for the development of the UNCITRAL code on electronic payments.
Can machines think? At the present time, the answer to the question is "no", but most researchers in the area of artificial intelligence believe that the answer will change with time. What is certain is that machines can make decisions on specific issues, and in some cases we know that the machine will make better decisions than most humans. So, for example, one of the pioneering developments in the practical application of artificial intelligence is the MYCIN program which gives advice on the administration of antibiotics. The motivation for the development of the program was a finding that general practitioners were very poor at prescribing the correct antimicrobial agent. The MYCIN program does a significantly better at this difficult task.
As machines become smarter, they will take over tasks that have formerly been the sole preserve of humans. Many of these tasks will have legal consequences, and we must find rules of law which will apply when the consequences do not necessarily meet with the expectations of those who are affected by the consequences. Two examples will help to explain the problem.
Many organisations use mathematical models of stock control to determine when replacement orders should be placed. At the present time, these models are run on computers which produce notices alerting the appropriate person that it is time for the order. A message in the appropriate form will be sent to the supplier.
If the supplier is large enough, then its inventory will also be controlled by computer. An appropriate person in the supplier organisation will enter the order information into the supplier's computer. It is clear in all of this that the role of the human intermediaries is dispensable. Why not simply have the purchaser's computer directly send the order to the supplier's computer which would then issue the necessary dispatching documentation?
The legal effect is that the computers have made a contract. What rules should govern the existence and the content of such contracts?
Credit providers have long used "scoring systems" to provide an evaluation of credit risk. Modern versions of these scoring systems are "expert systems", computer programs which contain more rules than the classical scoring systems.
There is every reason to believe that an "expert system" which evaluates credit risks would be better at the task than most of the human employees of the credit provider. It makes logical sense to use the computer to make the decisions. What are the legal consequences of a refusal to grant credit when that decision is made completely by machine? Or, for that matter, of a decision by the machine to grant credit?
The impact of modern biotechnology on world trade has not received much attention in the literature. The problems may be illustrated by considering genetic manipulation, cell technologies and the general problem of protecting plant varieties.
The recently acquired ability to manipulate the genetic makeup of both plant and animal life has produced a host of ethical and legal problems. Many of these problems concern the form of legal protection is to be extended to the products of the technology. Whereas the United States and Australia have permitted the patenting of the products of genetic manipulation, the UK and the EEC have excluded these products from the patent regime.
Although the product may not be patentable, it would seem that in most jurisdictions the particular manipulation process may be. So, for example, a European patent was granted in 1989 to an American company for a method of genetically engineering certain plants. The process in question inserts a gene which enhances the plant's ability to store protein.
World markets for the products of genetic manipulation are staggering. The most important developments are in the production of disease resistant strains of crops, but there is also a large market for decorative plants. A joint Australian/Japanese venture hopes to produce a blue rose with an estimated world market wholesale value in excess of $300 million.
Cloning and tissue culture techniques allow the mass propagation of some plant varieties so that the resulting exhibit a much narrower genetic base than is possible by conventional plant breeding methods. Some reported success of the method include the development of higher yielding oil palms and new soybean varieties. The success of the methods in developing genetically uniform products is also one of the major problems, some reports claiming that clonally propagated crops are six times more vulnerable to pests and diseases than their seed bred counterparts.
Cell fusion techniques use various methods to fuse different cell types into a single hybrid cell. Cell fusion is used to produce "monoclonal" antibodies which are purer and more effective than traditionally produced antibodies. Estimates are that the world market for monoclonal antibodies currently exceeds US$1.7 billion.
Genetic manipulation processes (as opposed to the product of the manipulation) can probably be protected by patent rights in most major markets, but "pure" agricultural developments have generally been denied such protection. The policy issues confronting intellectual property protection of conventional breeding techniques, or the products of these techniques, make the patent system generally unsuitable as a vehicle of protection.
Plant varieties are now given a form of intellectual property protection in many countries. The general form of the protection is based on the International Convention for the Protection of New Varieties of Plants 1961 (UPOV). UPOV is generally concerned with conventional biological breeding, and the original version clearly contemplated that the patent and plant variety systems to be mutually exclusive. The text was revised in the late 1970s to permit overlap of the two systems to the extent that the overlap existed in the domestic law at the time of ratification.
If we read only newspapers, we might be excused for believing that there were few technological developments before those of the twentieth century. That perception is of course incorrect, and it is both amusing and constructive to consider the impact on international sales and service transactions of technology which was once "modern".
The earliest technological innovations were directed at transport. For some centuries a major human problem was finding ways to transport more goods over longer distances in shorter times. Although the transport problem still engages large numbers of people, it seems unlikely that we will soon see changes which approach the magnitude of changes in earlier centuries.
There have also been earlier innovations in communications which have had significant impact on international trade. In the earliest days, improved transport often meant improved communications since the primary problem was how to move a physical message from one place to another. With the invention of the electric, and later electronic, forms of communication, the role of transport and communication was separated. This separation brought new legal problems as well as new opportunities.
There can be no international trade without transport technology which allows the movement of commercially feasible shipments. The technology must allow one person to control a much larger quantity of goods than can be carried by that same person. The technology must provide for carriage of goods over distances which are "large" in comparison with local trade.
The quantity and value of the cargo carried, the distances which must be travelled and the time required to cover that distance have all produced changes in international trade law. These developments have been centered on the need to provide safe credit.
The camel train may have been one of the most significant transport revolutions of all time. Capable of carrying greater cargo loads over greater distances than ever before imagined, the camel train opened the doors of the civilised world for international trade. Capable of travelling up to 40 kilometres a day in groups of up to 1000 camels each carrying up to 500 pounds, the trains revolutionised international trade.
Although we cannot be certain, it is easy to speculate that the increased values of cargoes and the distances travelled led to the creation of a safe credit instrument. That credit instrument was the predecessor to our bill of exchange, an instrument which provides both credit and a much higher degree of safety than cash or precious metals.
The sailing ship and the rise of the independent carrier also had dramatic effects on international trade law. When the ship and the trader were one and the same, there was little change from past practice, but when the carriers became independent international trade was changed forever. Large value cargoes could be transported economically over long distances, but the distances were not traversed quickly. During the heyday of the sailing ship, clippers such as the Cutty Sark could make Sydney 100 days out of London. The ship would refit and change cargo, then set sail for another 100 days to London via the Horn.
One hundred days is a very long time for a valuable cargo to be out of commercial circulation, but by the time of the Cutty Sark, the Bill of Lading was already more than 300 years old. Perhaps one of the most brilliant legal inventions of all time, the bill of lading is evidence of the contract of carriage, evidence of the receipt of cargo and, most importantly, a document of title to the goods which it represents.
One of the major problems for electronic data interchange is to find means of replacing documents such as the bill of lading. The salient feature of the document is that its transfer has the effect of transferring title to goods. It is essential that it be capable of "possession" and that only one person at a time is in "possession". We will examine the proposed solutions to the problem of the electronic bill of lading in section VI.
It is also clear that the large value cargoes of the sailing ship gave rise to an increased demand for credit. In conjunction with the bill of lading, this demand was satisfied by the creation of the documentary letter of credit. It seems unlikely that either the bill of lading or the documentary credit would have developed without the technological breakthroughs which created the sailing ship.
The last major technological development in transport was the airplane. International air shipments have created an entirely different set of legal problems. The reason here is, of course, the speed of transport. Air cargoes, typically much smaller and of less value than surface cargoes, do not make the same demands on credit and do not require documentation which allows in-shipment trading. What is required is documentation which allows rapid and clear directions to be given as to the disposal of the cargo.
As we all know, the solution to the air freight problem is the air waybill. The waybill is much more easily adapted to pure electronic form, since the essential feature of the waybill is the message that it carries. Physical possession is of relatively little importance. For these reasons, one of the "solutions" to the EDI problem is an adaptation of the waybill. This is discussed further in section VI.
There have been communications technologies other than those based on electric impulses. The announcement of the opening of the Erie Canal in 1823, joining the Great Lakes with the Atlantic ocean was signaled by the sequential firing of canon spaced at intervals, thereby allowing the opening of the canal to be communicated over 500 miles in just 81 minutes. The Reuters news service was started with a network of message carrying pigeons. However, only the invention of the electricity based communications services made a large scale impact on international trade and caused problems for international trade law.
The telegraph was the first of the very rapid means of communications, and the particular form that it took created legal problems which still echo in consideration of the EDI problem. The form of implementation of telegraphic communications meant that there was usually a written message at both the sending and the receiving end of the communication link. Since these paper messages were translated at each end of the link, there must have been the potential for dispute about the conformity of the contents of the received message with those of the message which the sender intended to be conveyed, although I know of no reported case on the subject.
The telegraph raised legal problems for the law of contract. Although the communication link itself was "instantaneous" the particular way in which the system worked meant that there was actual delay at both ends of the link. The English courts found that the method was analogous to the post rather than to face to face communications, and so extended the postal acceptance rule to telegraph. Contracts were formed at the time, and by analogy at the place, where the telegram was sent rather than where it was received.
The telegraph caused other legal problems. Particularly in advising of documentary credits, it seems to have been the practice to communicate the vital details by telegraph and then to follow this with a more detailed and more traditional document. But what if the telegraphic message and the later, supposedly more complete, document contained conflicting terms?
The telex is different from the telegraph in one very important feature: the communication link is direct from sender to receiver. It is not necessary to have an intermediary translate the message to a more familiar form and await delivery. On the other hand, the telex is not as immediate as the telephone. Messages may arrive at an unattended telex machine, a feature which has caused some problems for the common law.
Interestingly, it is the telex which brings to light some problems which had been dormant for a very long time. Because of its near "instantaneous" communications ability, there is the temptation to delay making the communication until the latest possible time. This is particularly true with instructions for payment. When things go well this is a sensible strategy, for it allows last minute decisions on account management. When things go wrong, it can lead to disputes about whether payment has been timely and, more generally, to the vexed question of determining the time of payment. The telex has also caused problems concerning payment orders when the machine has been left unattended and/or has run out of paper.
The telephone has had relatively little impact on the law of international trade. The reason, no doubt, is the ephemeral nature of a telephone conversation which makes it less suitable than the other forms of electrical communication for forming contracts. Although many contracts may be preceded by telephone negotiations, it would be unusual for the contract to be formally concluded without an exchange of paper.
One of the reasons that the telephone has not given rise to significant changes in international trade law is that many, perhaps most, telephone conversations will be communications devoid of legal effect. The communication will consist of an exchange of information which would not generally be classed even as prelude to contract formation.
As an "instantaneous" form of communication, the Common Law has held that a contractual offer which is accepted by means of telephone is formed at the place where the acceptance is received rather than at the place where the acceptor is speaking. This rule of law may be relevant for determining the applicable law in circumstances where an international contract is formed by telephone, but even in those unusual circumstances the rule will play only a peripheral role.
The ease with which telephone conversations may be recorded by the parties has led to laws which either regularise the practice or outlaw it. Again, it is a matter which has little importance for the law of international trade. The interception of telephone conversations by third parties is outlawed in virtually every country.
The introduction of any new technology in international trade will have some legal consequences. Most technologies will offer new opportunities for the erection of non-tariff trade barriers. Most technologies are expensive in the short term, thereby widening the gap between rich and poor nations, and most technologies have some impact on the social and economic structure of the receiving country.
The use of local standards as a non-tariff barrier to international trade in both goods and services is hardly a new phenomenon. Developments in "modern" technology will merely provide new opportunities for old practices.
With modern communications networks, it will make little operational difference where data is held. A terminal on a desk in Sydney may be displaying and manipulating data held on a computer in North America. However, if the data is perceived to be important or sensitive, then law makers and commercial interests might find that there are reasons why the data should be retained in local computers. The argument is often phrased in terms of data security or data integrity.
So, for example, when the Australian state of New South Wales was considering the establishment of a computerised legal information retrieval system, one of its design and tendering criteria was that the database be located in New South Wales. The stated reason was a form of the "security" argument: the NSW court system depends upon the integrity of the reported case and the state cannot put itself into a position where it might be held to ransom by a foreign power.
It is sometimes said that one effect of modern communications technology is that poorer countries export data and import information. This is a clever way of noting that raw data may be sent cheaply to developed countries for processing in large data processing centres. The technology and the data processing jobs remain in the developed country and there is a net transfer of wealth to the developed country.
An Example of this phenomenon would be the processing of payroll and other employment data by large multinational employers. Another example might be the processing of credit card data by the large credit card organisations. The matter is considered to be serious enough that several countries have legislated against the export of data. India has had several confrontations with IBM over equity in the Indian subsidiaries. Brazil has attempted to deal with the information flow problem by restrictive legislation which calls for data processing to be done locally if possible.
Every country has import regulations restricting the import of plant and animal products. The avowed and legitimate purpose of these regulations is the protection of health of human, animal and plant life. It is clear that this form of import barrier may be used to restrict the legitimate trade in food and animal products. As the advances in biological technologies increase the trade value of these products, we can expect that the health regulations will be used illegitimately as a non-tariff trade barrier when it suits the local authorities.
It is sometimes said that technology is neutral, but there are legitimate concerns about the effect on basic human freedoms of the uses of technology. And since every technological development has its own implementation path and consequences, it may be doubted if technology itself is neutral. What is certain is that the unrestrained use of many technologies have consequences that most of us would consider unacceptable, so that the legal problem becomes how to retain the benefits of the technology while reducing the unacceptable consequences to a minimum.
So, for example, modern communication and computer technology produces a tension between the benefits of unrestrained interchange and access to information and the basic concepts of privacy. The notion of privacy itself may be in conflict with the demand for "freedom of information" legislation which is perceived as a fundamental device for ensuring government accountability.
These conflicts are difficult to resolve, and reasonable solutions might differ quite substantially between similar jurisdictions. As a result, many restrictions and regulations are seen by others as nothing more than a device for erecting non-tariff trade barriers.
Countries which wish to have significant privacy protection laws face a difficult problem, for what is the point of strict privacy laws if the information is freely available just across the border. As an example, recent Australian legislation purports to regulate the activity of "credit reporting agencies". Can this legislation be effective if the information is exported to a computer in some other country? This is by no means an idle question, since many Australian credit card transactions receive "authorisation" by trans-Pacific communications.
The obvious solution is to place restrictions on the export of certain data. So, for example, export of "private" information may be prohibited altogether or restricted to destinations which have privacy regulation at least as strict as that of the sending country. Unfortunately, this "obvious" strategy can have devastating effect on the business operations of multinational companies whose operations depend upon the transmission of personal data.
This "obvious" solution to the data problem may also hide non-tariff barriers to trade in services. Like most non-tariff barriers, there is probably no simple solution.
Communications technologies provide the possibility of instant access to previously inaccessible information. The availability of this information is not considered as a blessing by governments which may wish to keep information hidden, particularly from their own citizens. This conflict between availability and accessibility can produce results which seem at first glance to be absurd but which are an inevitable outcome of the fact that information is not a commodity which can be controlled in the same way that physical commodities are controlled.
For example, citizens of country A have been prosecuted for obtaining information which was freely and lawfully available under the laws of country B. Information which may be freely and lawfully distributed in country C may attract civil or criminal penalties in country D.
The multilateral nature of modern computer communications networks allow the formation of interest groups which ignore national boundaries. Academics regularly consult with colleagues with no regard to geographical location, and items are posted on computer networks which are immediately given worldwide circulation. Again by way of example, Yeltsin's proclamations following the August coup attempt were available on the computer network long before the contents were reported by the commercial news sources.
This ability to form free transnational associations is not likely to be welcomed by national governments. If there are attempts to limit these communications, then commercial data may be caught in the cross-fire for it is difficult to prohibit the flow of data in any selective fashion.
"Modern" technology may be more environmentally friendly than many of the old technologies, at least in the short term. In the long term, there are concerns that the biological technologies may have devastating environmental consequences. These concerns centre on the so-called reduction in the gene pool of crops. High yield crops replace lower yield crops with the side effect that crops become more homogeneous. The fear is that a new strain of disease would then have devastating effects over a wide area rather than being confined by the natural resistance of various strains.
These fears may be exaggerated, and it may be that the biological technologies themselves will continue to produce a wide enough range of varieties so that the homogeneity does not reach dangerous levels. However, it cannot be assumed that this will happen. As an example, estimates are that 50 varieties of rice will form the entire Indian crop by the end of the century, replacing an estimated 30,000 varieties which existed at the beginning of the century.
The modern communications technology permits many services to be performed at a distance which previously required face to face consultations. It is useful to classify the service transactions according to whether they are professional or non-professional services. The provision of in-house management services is a further special case.
Non-professional services are characterised by the relative absence of formalised barriers to entry in the target country. These services would include the traditional data processing services as well as more specialised and sensitive data processing such as credit records.
The legal problems posed by these kind of services are likely to be related to the desire of the target country to control the flow of data across borders. This might be motivated by concern for privacy of its citizens, by a desire to control information about the government and culture of the country or solely as a means of restricting competition with local service providers.
These are political motivations and will require political solutions. Generally speaking, third world countries have assumed a position of guarding information while western countries have argued for a regime of free information flow.
The provision of professional services such as legal services, accounting services, banking and some financial services is characterised by restrictions on entry in the target country. What training and examination must the foreign professional undergo before being permitted to provide the local services? What local services must be a part of every transaction?
Again, these problems raise no significant legal problems as such. The problem is one of negotiation with an aim of ensuring that the requirements reflect real training needs rather than merely being a protectionist form of non-tariff trade barrier.
One of the less visible forms of trade in services is the multinational company which is now able to move more of its local management to the home office. In the past these management services necessarily were provided by the local population, or at least by foreigners who were living locally, modern communication systems have made it possible to remove that function. The result is that there is less local employment, but even worse is that the training which resulted from that participation is also lost. Local issues may well be given less importance when the management decisions are made by those who only hear about the issues rather than actually experience them. This problem is a part of the general problem of technology transfer, and it will require solution by political means.
In contrast with the problems of service transactions, most of the problems caused by modern technology in the sales area are more traditional legal problems. Most of the problems have more clearly defined strategies for solution.
An well-known American study of some years ago found that the costs of paper shuffling amounted to as much as 20% of the FOB price of goods in an international transaction. It is obvious that a reduction of this figure by even a few percentage points would result in very large dollar value savings. The replacement of paper by computer-to-computer communication is seen as a possible method for reducing these costs. The result is known variously as "electronic trading", "computer assisted trading" or "electronic data interchange". In keeping with the modern trend to assign an acronym to every conceivable phrase, the latter expression has become EDI.
In order to realise its full potential, there are some legal issues which must be addressed. There are two general methods for attacking these problems. The first would be to redesign the legal rules to accommodate electronic messages. An example of this is to redefine the rules which call for a bill of lading, replacing them with rules which call for an electronic message in some form. This general approach calls for relatively dramatic changes in the legal regime, but does not require agreement concerning the technical form of messages.
The second general approach is to retain the legal rules (with minor adjustments) but to find technical solutions to the "deficiencies" of electronic messages. An example of this is the use of cryptographic methods to ensure the integrity of the message and to provide for "electronic signatures". This second approach requires minimal change in the legal rules, but does require agreement on technical standards which will satisfy existing rules.
Either approach requires the identification of the problems which are caused by the replacement of written messages by electronic messages. A useful approach to the taxonomy of EDI legal problems is to identify the nature of the message. So, as mentioned above, certain messages have little or no legal content and so probably cause no legal problem at all.
When the message is intended to have legal consequences, usually contractual consequences, then there are certain problems which relate to the legal requirements of writing and evidence. When the message is intended to result in the transfer of property or other rights, then additional problems arise which relate to the uniqueness of the corresponding piece of paper.
The mere fact that there is no "document" and no "writing" in any common usages of the terms can pose problems in those circumstances where the law has imposed formality requirements. It may be that these problems can be solved in some instances by creative statutory interpretation, but in many cases nothing other than a statutory revision will resolve the issue.
Similarly, the formality of requiring a "signature" will be impossible to meet in an electronic message. Note that the legal requirement of a signature usually serves two related but distinctive purposes. The signature is used to identify the person who is agreeing to the contract, and it serves to indicate that the person has agreed to the contents of the document. Both of these functions cause problems in the EDI context.
EDI replacements for paper documents also cause problems for the laws of evidence. Most jurisdictions have some means of introducing "documentary" evidence, but the rules are ordinarily formulated in terms which clearly contemplate paper documents. Here the challenge is to introduce rules which allow the admission of electronic "documents" while providing methods of proving those documents which will allow reasonable confidence in their accuracy. Most jurisdictions now have rules which allow the introduction of "computer evidence".
Another evidenciary problem is the requirement for "original" documents to be produced in certain circumstances. The original document requirement is a sensible corollary of the "best evidence" rule that obtains in many jurisdictions, but it is a meaningless requirement when the "document" is an EDI message.
The EDI problems discussed above probably have relatively simple solutions, although clearly compromises will be made. However, when we turn to contracts which transfer ownership or control of goods or which transfer debts or other contractual obligations, new and substantially more difficult problems arise.
There are several paradigms which illustrate the nature of the problems. The bill of lading serves as a document of title and evidence of the transferable contract of carriage. The detailed contents of the document are legally important, and it is vital that illicit changes should not go undetected. But it is equally important that there is only one original since possession of the document confers rights.
Similarly, a bill of exchange serves as a document which evidences contracts of debt and which itself serves as an instrument to transfer those debts. Again, it is vitally important to the operation of the bill that changes can be easily detected. And again, it is important that there be an original since possession of the paper confers important legal rights.
Paper is not a perfect medium for carrying the messages of the bill of lading or the bill of exchange. Alterations of both forms of document are not unknown, and forgery is a possibility which every legal system must contemplate. However, it is not easy to make an undetectible alteration of paper, and most forgeries are not of the skilful variety found in the best detective novels. Consequently, we can be reasonable certain of the integrity of the paper document, that is, that the message has not been surreptitiously changed, and of the identity of the parties to the document.
Paper also has the admirable quality of being only in one place at any given time. It makes sense to speak of possession of the document whereas speaking of possession of a message sounds artificial. It is this quality of paper which allows possession to assume legal significance.
If we are to devise legal regimes which allow electronic documents to replace paper bills of lading and paper bills of exchange, then we must solve all three problems, the integrity problem, the identification problem and the uniqueness problem for electronic messages. There are two general approaches to solving these problems.
The first approach, the organisational approach, is to create a trusted depository. The basic idea is that the parties to a transaction would all communicate via the trusted depository. The depository would be responsible to guarantee the identity of the parties with which it is communicating. The integrity of the message is assured by the depository. The uniqueness problem is solved by asking the depository who "possess" the document at any particular time.
The trusted depository scheme has been implemented in several different contexts. The Intertanko scheme for bills of lading is a depository scheme, primarily proposed to solve the problem of stale bills. The Austraclear scheme in Australia is a depository scheme which allows the electronic trading of finance bills, although the paper bill has not been entirely abolished.
The second general approach to the problem is a technical solution. Is it possible that the message itself can carry with it evidence that it has not been altered? Is it possible to devise schemes whereby a message can convincingly say, in effect, "I am what I purport to be"? The somewhat surprising answer is in the affirmative by use of what is known as public key cryptography.
The essential feature of public key cryptography is that the message is encoded by the sender using a secret key, but is decoded by a publicly available key. A message is accompanied by "plain text" which advises the identity of the sender. If the use of that sender's public key can decode the message, then it must have been sent by that person. Equally, the contents cannot have been changed since the sender is the only person who knows how to encode for decoding with the public key. Various other combinations of encoding/decoding using the public and private keys allow for other orderly document modifications such as electronic indorsements.
These "solutions" to the EDI problem assume that it is necessary and/or desirable to retain all of the legal functionality of the paper equivalents. It is certainly worth considering if the paper model is an optimal solution when using electronic messages. So, for example, a number of authors have suggested that a waybill with a NODISP clause provides a better model for an electronic bill of lading. This solution is functionally similar to the "trusted depository" scheme except that instead of a single depository the individual carrier acts in that capacity. The legal rights of the "holder" of a NODISP waybill are not as strong, at least in those jurisdictions which require privity of contract.