1 Introduction

1 ELECTRONIC COMMERCE IS A GENERIC NAME given to business transactions which are entered into through electronic rather than paper-based means. No single definition of the term “electronic commerce” has attained universal approval. For the purposes of this paper, the term “electronic commerce” means the use of electronic communications technology (instead of paper, telephone or face-to-face meetings) for business purposes in the widest sense. Electronic commerce is not limited to the purchase and sale of goods or services on the internet: rather, it extends to cover a number of primary and support activities which include electronic publishing, intra-organisational communications (eg, through intranets), computer-supported meetings and communications with other businesses.¹ In this paper the word “internet” is used as shorthand for interconnected computer networks; it is not intended to denote any particular form of computer network. In the same way that commerce (in the sense of the mix of marketing, management, finance and business law) largely consists of information gathering, processing, and distribution networks, electronic commerce is the use of computers and telecommunication networks to carry out those same functions (Viehland 1997 1; see also Tapsell 1998 63).

2 All computer-based data communications are based on the bit: a bit being a binary digit (0 or 1). This has changed the fundamental nature of what is used to deliver information from one person to another. It has been said that:

We live in the age of information in which the fundamental particle is not the atom but the bit. Information may still be delivered in magazines or newspapers (atoms), but the real value is in the contents (bits). We pay for our goods and services with cash (atoms) but the ebb and flow of capital around the world is carried out – to the tune of several trillion dollars a day – in electronic funds transfers (bits). (Negroponte cited in Viehland 10)

As Viehland notes, bits do not follow rules that govern other business resources (10). They are weightless. They are easily and flawlessly reproduced. They exist in an infinite supply. They can be shipped anywhere at nearly the speed of light. The implications of this are that barriers of time and space disappear and information distribution costs shrink significantly. If electronic commerce is to result in true savings to business it must be both sufficiently secure and sufficiently adaptable to meet the needs of businesses which currently trade in the paper-based environment. This entails merchants trading with each other having the ability to carry out other functions (such as documentation for shipping of physical goods by air, sea or road, insuring of risk and completion of financial settlements) through the same electronic system. A fully integrated electronic commerce system will require government regulatory bodies to provide and accept certificates and other “documentation” in electronic form to facilitate trade. There is already a facility to transact business electronically through the New Zealand Customs Service. The Inland Revenue Department is also moving to an electronically-based system. A coherent regime is required to ensure that all of these various aspects of trade can blend together in electronic form to produce a wholesome product.

3 Commerce can be carried out at different levels. First, there is the business-to-business level; second, there is the consumer-to-business level. The potential implications for consumers in the increasing use of electronic commerce has already been recognised by the Ministry of Consumer Affairs in a 1997 discussion paper, Electronic Commerce and the New Zealand Consumer: Issues, and Strategies for the Future. In the first instance, the Commission proposes to examine electronic commerce from the perspective of those involved in international trade on a business-to-business basis. This is being done to focus issues of law reform on the potential benefits that can be gained from international trade given that, of course, New Zealand earns its living from export earnings. Electronic commerce issues which affect consumers have already been the subject of the Ministry of Consumer Affairs’ discussion paper. The Organisation for Economic Co-operation and Development (OECD) is now addressing the question of law reform to protect the interests of consumers on the internet in its Draft Recommendation concerning Guidelines for Consumer Protection in the Context of Electronic Commerce, due to be concluded in October 1998.

4 The ability for businesses and consumers to access trading opportunities through the internet and the world wide web renders it necessary to reconsider the fundamental principles of business law by asking what changes, if any, ought to be made to the law to facilitate trade on an electronic basis.²

5 Business-to-business commerce over the internet (consisting of parts and supplies ordering, financial services and the like) reached an estimated $US8 billion in 1997: 10 times the 1996 total. Erwin estimated in a 1997 paper, “Sizing Intercompany Commerce”, that business-to-business commerce over the internet will grow to $US327 billion by the year 2002 (1). While it is not possible to vouchsafe the accuracy of the estimated value of future electronic commerce, it is plain that there are many advantages to business by trading through electronic means rather than through a paper-based regime. The business benefits are summarised by Viehland as being:

lower information transfer costs;
lower procurement costs;
reduced inventory costs;
product customisation;
the ability to conduct business with distant partners in the same way as with neighbouring partners; and
increasing operational efficiency (14–16).

It has been reported that about 10 percent of major New Zealand organisations expect to spend more than $500,000 each in setting up electronic commerce systems over the next 2 years.³

Role of the Law Commission

6 The Law Commission has a respectable pedigree in relation to its support of uniform statutes to facilitate international trade: in particular, reference is made to the reports which preceded the enactment of the Sale of Goods (United Nations Convention) Act 1994 and the Arbitration Act 1996. The proposed work of the Commission on electronic commerce builds on that foundation. In addition, the work done by the Commission in identifying the sources of international law has relevance to the international trade aspects of this inquiry.⁴

7 In a paper delivered by Law Commission consultant Paul Heath QC to the Asia Pacific Economic Law Forum in Christchurch in 1997, the Commission identified the approach which it took in deciding whether to embark upon this particular project (published as “A Legal Infrastructure for Electronic Commerce?” (1998) 7 Canta LR 11). That approach was neatly summarised by the Common Law Team of the Law Reform Commission of England and Wales in the 1996 consultation paper, Feasibility Investigation of Joint and Several Liability. First, the Commission must be satisfied that there is something wrong with the law, in particular that it is unfair or inefficient; second, the Commission must be satisfied that there are acceptable legislative solutions that would remedy any deficiencies (para 1.2). This Commission has approached issues raised by electronic commerce by asking itself those same questions. We are satisfied that the law can be made clearer (and, therefore, more efficient) in its application to electronic commerce.

The international trade project

8 This is the first of a series of reports dealing with international trade issues. We summarise below the purpose of each of the reports which we propose to make:

This report questions whether existing commercial laws are sufficient to accommodate the needs of electronic commerce. The recommendations contained in this report address changes to the law which are required immediately in order to provide sufficient clarity to enable business benefits of the type summarised in para 5 to be achieved. We ask whether the current law meets the need of those engaged in business-to-business commerce through electronic means internationally. While domestic business transactions are not considered discretely in this report, the question whether the law meets the needs of domestic business transactions will, largely (but not completely), be determined by the answer to the question whether the law meets the needs of those doing business internationally. There are two particular points of distinction between international business transactions and domestic business transactions. First, domestic business transactions will almost invariably be governed by New Zealand law; in an international setting the question of what law governs the transaction will be determined either by the parties (by a choice of law clause contained in their contract) or by the courts (applying domestic law principles of conflicts of laws; see chapter 6). Second, under New Zealand domestic law, transactions may be governed by different rules depending upon whether they are conducted domestically or internationally. A practical example of this are the differing presumptive regimes applied to domestic and international sales of goods.⁵
Our second report will address the questions raised in this report (in light of submissions made to us) and will consider whether changes to the law are needed to accommodate the needs of those doing business domestically.
Our third report is intended to be more general in its application. We propose to address international trade issues arising out of other reports and Model Laws prepared by organs of the United Nations to which New Zealand has not yet subscribed. These will include, but not be limited to, consideration of the question whether New Zealand should adopt various conventions on the recognition of foreign judgments.⁶ It is at this stage that a wider question can also be addressed. That question can be stated as follows:

Can the developing trend of adoption by countries reliant upon international trade, of uniform statutes recommended by organisations such as UNCITRAL, together with the increasing use of standard form contracts or other international standards, truly be regarded as a modern transnational lex mercatoria?
This is an issue which must be addressed because of the global nature of the internet. The law applicable to internet transactions (which itself is likely to build on the Conventions and Model Laws to which we have referred) may well turn on international trade custom rather than national legislation. The Commission proposes to contribute to the development of principles of law which meet the needs of international commerce in the twenty-first century in the same way that the lex mercatoria met the requirements of traders living under the Roman Empire.⁷

Finally, a report will be issued later this year which will consider whether New Zealand should adopt the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross Border Insolvency.

Aims

9 The Commission sees its work on electronic commerce and other international trade issues as being no more than an initial study of the general, and difficult, issues that arise. Reference has already been made to the possibility of some form of modern transnational lex mercatoria being recognised by individual jurisdictions. Wider issues also arise, such as the need to balance rights of privacy and desires for business confidentiality against the state’s interests in law enforcement and national security. It is not difficult to appreciate the complex and troublesome issues that arise in this regard: while private methods of encryption of messages may well be considered desirable by business people (to achieve confidentiality), there is also a legitimate interest for the state to ensure, for example, that illicit trade in arms or child pornography does not take place. These issues are identified in chapter 8 and submissions are sought on how they should be addressed.

10 The Commission has endeavoured to develop principles which are first, consistent with those which underlie the UNCITRAL Model Law on Electronic Commerce which was approved by the General Assembly of the United Nations on 16 December 1996, and secondly, consistent with policy statements released in other jurisdictions since that time. The Commission has also had the advantage of considering the 1998 report of the Electronic Commerce Expert Group to the Australian (Federal) Attorney-General, Electronic Commerce: Building the Legal Framework, from which we have derived considerable assistance (available at http://www.law.gov.au/aghome/advisory/eceg).⁸

The Model Law on Electronic Commerce

11 The UNCITRAL Model Law on Electronic Commerce is divided into two parts: the first deals with electronic commerce generally while the second deals with electronic commerce in specific areas (carriage of goods and transport documentation). In discussing the issues the Model Law’s Guide to Enactment states:

It was observed that the Model Law should permit States to adapt their domestic legislation to developments in communications technology applicable to trade law without necessitating the wholesale removal of the paper based requirements themselves or disturbing the legal concepts and approaches underlying those requirements. At the same time it was said that the electronic fulfilment of writing requirements might, in some cases, necessitate the development of new rules. This was due to one of the many distinctions between EDI [electronic data interchange] messages and paper based documents, namely, that the latter were readable by the human eye, while the former were not so readable unless reduced to paper or displayed on a screen. (20)

12 The UNCITRAL Model Law relies upon the “functional equivalent approach”. This approach is

based on an analysis of the purposes and functions of the traditional paper based requirement with a view to determining how those purposes or functions could be fulfilled through electronic commerce techniques. For example, among the functions served by a paper document are the following: to provide that a document will be legible by all; to provide that a document would remain unaltered over time; to allow for the reproduction of a document so that each party would hold a copy of the same data; to allow for authentication of data by means of a signature; and to provide that a document would be in a form acceptable to public authorities and courts. . . . However, the adoption of the functional equivalent approach should not result in imposing on users of electronic commerce more stringent standards of security (and the related costs) than in a paper based environment. (Guide to Enactment 20–21)

Guiding principles

13 We have developed four guiding principles to assist our research into electronic commerce which are set out in full and discussed in chapter 2. These principles have been developed so that submissions can be made on the recommendations of the Commission having regard to the policy which underlies the recommendations.

14 We also follow the “functional equivalent approach” promulgated by the Model Law on Electronic Commerce. Accordingly, this report is prepared on the basis of the four guiding principles in conjunction with the functional equivalent approach adopted by UNCITRAL.

Summary of this report

15 Commercial law reform is aimed at improving business efficiency while, at the same time, retaining safeguards for those who use it. We believe that fundamental principles of commercial law should, so far as is practicable, be retained when adapting the law to fit the electronic commerce environment.

16 In chapter 2 we deal with the guiding principles identified by the Commission and explain the reasoning behind adoption of those principles.

17 Chapters 3 and 4 of the paper deal with questions involving the law of contract and tort. We examine in this chapter whether any specific changes to the law are required to enable business to be transacted easily through electronic form.

18 Chapter 5 deals with matters relating to evidence. Later this year, the Law Commission will release its final report on its evidence reference. The Commission will make recommendations for the enactment of an Evidence Code which, in its present draft form, will enable evidence stored in an electronic form to be produced readily. We proceed on the basis of the recommendations to be adopted in the Evidence Report. We have set out in appendix C the relevant provisions of the current draft Evidence Code even though those provisions remain subject to possible refinement before the final report is published.

19 Chapter 6 deals with issues of conflict of laws and identifies the conflict of laws issues which need to be taken into account in this context.

20 Chapter 7 addresses the issue of electronic signatures and discusses the options available for reform.

21 Chapter 8 summarises a variety of other issues which have arisen from our consideration of electronic commerce. Submissions are sought both as to what further work needs to be done and as to which body is most appropriate to carry out that work.

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