18 May 2000

Following is an article published May 18 in the Economic Perspectives journal of the U.S. State Department. No restrictions on republication. The complete journal can be found at http://usinfo.state.gov/journals/ites/0500/ijee/ijee0500.htm

Toward a Uniform Commercial Legal
Framework for Global Electronic Transactions

The author is General Counsel of the U.S. Department of Commerce

President Bill Clinton and Vice President Al Gore, in issuing a Framework for Global Electronic Commerce in July 1997, noted that "many businesses and consumers are still wary of conducting extensive business over the Internet because of the lack of a predictable legal environment governing transactions." As part of the Clinton administration's efforts on e-commerce issues, President Clinton directed Commerce Secretary William Daley to "work with the private sector, state and local governments, and foreign governments to support the development, both domestically and internationally, of a uniform commercial legal framework that recognizes, facilitates, and enforces electronic transactions worldwide."

The Framework identified several key principles to guide the drafting of applicable legal rules in this area:

-- Parties should be free to order the contractual relationship between themselves as they see fit.

-- Rules should be technology-neutral (i.e., they should neither require nor assume a particular technology) and forward looking (i.e., they should not hinder the use or development of technology in the future).

-- Existing rules should be modified and new rules should be adopted only as necessary or substantially desirable to support the use of electronic technologies.

-- The process should involve the high-tech commercial sector as well as businesses that have not yet moved online.

Based on these key principles, and in light of extensive study and experience on these issues, the administration has identified four basic steps that every country can take to ensure that its commercial legal framework is ready for global electronic transactions. Most governments are interested in taking these steps because they facilitate the participation of domestic industries in cross-border electronic transactions. Moreover, the widespread adoption of these four basic elements into domestic law will help establish a uniform and global commercial legal framework that promotes electronic transactions.

STEP 1: ELIMINATE PAPER-BASED LEGAL BARRIERS TO ELECTRONIC TRANSACTIONS BY IMPLEMENTING RELEVANT PROVISIONS OF THE 1996 UNCITRAL MODEL LAW

In 1996, the United Nations Commission on International Trade Law (UNCITRAL) adopted a Model Law on Electronic Commerce. The Model Law reflects a broad international consensus that communication of legally significant data in electronic form is often hindered by legal obstacles to the use of such data or by uncertainty as to their legal effect or validity. For example, many legal systems have requirements for "writings," "originals," and other similar paper documentation. To the extent that these requirements cannot, or might not, be satisfied by electronic records and documentation, they are real obstacles to the growth of electronic transactions and are referred to as "paper-based legal barriers" to electronic commerce. The enabling provisions of the Model Law, especially Articles 5 through 11, contain guidance for revising these paper-based legal barriers to commercial electronic transactions.

In the United States, the legal rules governing contracts and commercial transactions have traditionally been established by the state governments, working through an organization of legal experts called the National Conference of Commissioners on Uniform State Laws (NCCUSL). In July 1999, NCCUSL approved the Uniform Electronic Transactions Act (UETA) and sent it to the state governments for adoption. This measure, the product of several years' consideration by NCCUSL, builds on the international consensus established by the Model Law and contains specific provisions that the states can use to remove paper-based barriers to electronic transactions. UETA can serve as a strong model for any country seeking to implement the enabling provisions in the Model Law.

There are at least several noteworthy features of the UETA. First, it is a minimalist law that provides for the legal recognition of electronic records, electronic signatures, and other electronic documentation, but does not establish any benefits for certain kinds of technologies or methods. As a result of this and other factors, the UETA will likely remain a flexible, durable and appropriate framework for electronic transactions for a significant period of time.

Also, because of public policy reasons, NCCUSL decided that the UETA should not apply to wills, trusts, and other similar documents. Further, NCCUSL included a provision in the UETA that encourages states to consider whether to exclude other laws that bear on important public policy issues, such as laws relating to real estate transactions, powers of attorney (including durable and health care powers of attorney), and certain consumer protection requirements. These provisions demonstrate that governments should revise paper-based barriers in a careful and deliberate manner, so as to avoid creating any unintended public policy and consumer protection problems.

Enactment of UETA by all 50 U.S. states will take several years under the most optimistic projections. In order to eliminate uncertainty about the legal status of electronic transactions during that period, the administration has supported federal legislation that would ensure the legal enforceability of contracts and signatures in electronic form. A similar measure passed by the House of Representatives contains, in addition, provisions permitting parties to a transaction to provide legally required notices and disclosures in electronic form and to satisfy record keeping requirements with electronic records. The administration believes that it is important to revise laws requiring paper documents so that they do not prevent transactions from moving online, but that these revisions must ensure equivalent protection of the public interest in the online environment. The administration is working with Congress to craft legislation that meets that test.

STEP 2: REAFFIRM THE RIGHTS OF PARTIES TO DETERMINE APPROPRIATE TECHNOLOGICAL MEANS OF AUTHENTICATING THEIR TRANSACTIONS

The remaining three steps that a country can take to prepare its commercial legal framework for electronic transactions relate primarily to the issue of electronic authentication. Electronic authentication refers to the means by which a party to an electronic transaction can indicate his or her agreement to the terms of the contract, evidence his identity, and/or perform related functions.

There is a variety of electronic authentication techniques available and in use today. For example, a party could type his name at the end of an e-mail message containing the terms of the agreement. He could end a message with a previously agreed code-word or with an electronic facsimile of his written signature created by his personal use of an electronic stylus. He might also "sign" the message using some digital signature technology or some biometric technology. These authentication models and methods are evolving rapidly, and further methods will doubtless be created.

Actual Business Practices: When electronic commerce was first beginning, some observers imagined a world in which everyone would have a unique digital identifier in a universally recognized format that would be used to authenticate his or her electronic transactions. Each person could surf the Internet and enter into transactions with anyone he encountered, confident that the other party's digital identifier provided a legally valid means of identifying that party in the event the transaction ended up in court. Although the future may see both the market and the infrastructure necessary for this kind of comprehensive, real-time authentication system, such a system does not exist now and will not likely be in operation very soon.

Instead, most electronic authentication today occurs in "closed systems." These are arrangements in which parties are already related to each other in some way, and they conduct electronic transactions under a mutually agreed authentication system. Sophisticated versions of this model are found in sectors ranging from manufacturing to banking and financial services, where commercial parties establish the technological approach they will rely on as well as their rules for operating, assigning risk, and settling disputes. In the manufacturing sector, for example, the three major U.S. auto makers are developing a global system to tie product development to more than 15,000 suppliers operating around the world.

Two Different Legal Models: At least two different legal models regarding electronic authentication are developing internationally. The first, represented by the UETA and the UNCITRAL Model Law, eliminates barriers to electronic agreements and electronic signatures without granting special legal status to any particular type of authentication.

The second model involves a greater degree of government regulation. Under that model, a government creates a preference for one or more particular types of electronic authentication by establishing specific technical requirements for electronic signatures -- often providing a legal presumption that electronic contracts signed using the stated methodology are binding. Our experience has been that it is unnecessary to enact these detailed laws, since most authentication is conducted in closed systems. Moreover, it can even be harmful to enact these laws if they create doubt as to the legal validity and acceptability of closed systems that operate using different technologies or methods.

The Critical Step -- Recognize and Enforce Closed Systems: Given the dominance of closed systems in the global market today, a critical step governments should take at this time to unlock cross-border transactions is simply to ensure that their commercial legal frameworks will recognize and enforce closed systems. Countries that adopt minimalist laws similar to the UETA most likely will not need to adopt separate, additional provisions to accomplish this task. In contrast, countries that adopt detailed laws conferring legal benefits on certain methods should enact separate provisions that expressly recognize and enforce closed systems. Otherwise, those detailed laws might create doubt as to the validity of any closed systems which do not operate using the particular method established in the law.

STEP 3: ENSURE ANY PARTY THE OPPORTUNITY TO DEFEND AN AUTHENTICATION SYSTEM IN COURT

Many jurisdictions have rules governing the admission of evidence into court. These are often entirely separate sets of rules from those governing the formation and validity of contracts. It is important for countries to review these evidentiary rules to ensure that a party to a closed system has the opportunity to prove in court that his or her closed system actually created a legally binding agreement. Otherwise, even if the system is valid under general contract law, it might as a practical matter be ineffective since it could be "barred at the courthouse door."

STEP 4: TREAT TECHNOLOGIES AND PROVIDERS OF AUTHENTICATION SERVICES FROM OTHER COUNTRIES IN A NONDISCRIMINATORY MANNER.

Most countries would agree that legal regimes governing electronic authentication should not discriminate against or among foreign authentication service providers. For countries that adopt a minimalist framework along the lines of the UETA and the Model Law, this likely will not be an issue. On the other hand, countries that adopt detailed laws need to be careful to avoid structuring legal regimes that favor domestic or certain foreign service suppliers. Among other things, such laws could have the unintended effect of preventing domestic users of authentication from participating fully in cross-border transactions.

INTERNATIONAL SUPPORT FOR THESE PRINCIPLES

The approach articulated in this article has been adopted and approved in a variety of multilateral and bilateral contexts. In October 1998, the ministers of the Organization for Economic Cooperation and Development approved a Declaration on Authentication for Electronic Commerce affirming these principles. Further, the Global Business Dialogue on Electronic Commerce (GBDe), a global private sector initiative, recently issued a recommendation to governments that strongly embraces this approach. In addition, the administration entered joint statements affirming these principles with several important trading partners, including France, Japan, Korea, Ireland, Australia, Chile, Egypt, and the United Kingdom.

The approach outlined in this article represents the best means forward for unlocking commercial legal barriers to global electronic transactions, and we look forward to continuing to work with all countries to develop and implement a uniform commercial legal framework that recognizes, facilitates, and enforces global electronic transactions.

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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