E-Transferable Records, Online Dispute System Needed But Raise Many Legal Questions, U.N. Body Says

A transferable instrument is evidence of an obligation owed by the person issuing it to someone named in it or to bearer, UNCITRAL said in a paper to WG 4. Its value isn’t in its physical characteristics but in the rights it embodies, and its delivery is done by physical transfer, it said. Those key traits “raise several issues that represent obstacles to the creation, use, transfer and enforcement” of e-transferable records, it said.

Electronic transferable rights are growing in importance as people get used to doing things electronically, said Brown & Welsh commercial law attorney Houston Putnam Lowry. Ten years ago there were no electronic airline tickets, but now it’s possible to log onto a website and obtain a boarding pass, he said in an interview. People see they can clear customs and get on airplanes electronically, and now those in control of negotiable instruments want to be able to negotiate them the same way, he said.

Transferable paper must be in writing and signed, UNCITRAL said. UNCITRAL has dealt with writing and signature requirements in other model laws, but the subject of electronic transferable records was omitted because of the need for mechanisms to address potential consequences of unauthorized duplication of transferable instruments and for ensuring their uniqueness, it said. Surmounting the problem of e-signatures and electronic writing doesn’t solve the issue of negotiability because e-records can generally be easily and non-detectably changed, making their integrity paramount, it said.

The hottest issues around electronic transferable rights are how to authenticate the holder of the negotiable paper and prevent unauthorized copies, Lowry said. Electronic records can be copied in a way that creates a duplicate record identical to, and indistinguishable from the original, UNCITRAL said. So there must be a “functionally equivalent” way to make such instruments unique, it said. Another problem is how to deal with the requirement for possession of an e-record so its holder will feel assured that there’s a unique e-transferable record in existence, it said. A critical element in acceptance and use of such documents relates to their acceptance by third parties, which depends on their trust in the underlying processes, it said.

The paper recommended that any solution follow the principle of technology neutrality. To get around the problem of identical copies of the records, WG 4 should consider requiring the use of digital object identifiers or digital rights management and designation of an authoritative copy and identification of its holder or owner, it said. The designated copy could be stored on a specific secure computer system protected by appropriate security and access controls, or designated based on verifiable content or location, it said. The person in control of the transferable record could be identified in the instrument itself or in a separate, third-party registry, or defined as the single person with access to the e-record, it said.

The possibility of online dispute resolution for cross-border e-commerce complaints has been on UNCITRAL’s plate since 2000, it said. Told last year that proposals for regional Internet dispute resolution systems were in the works, it decided to deal with the matter internationally to avoid inconsistent mechanisms, it said.

There are concerns about whether legal standards should cover only B2B or also B2C transactions, and about the difficulty of harmonizing consumer protection because laws vary from country to country, UNCITRAL said. On the other hand, however, some believe that in today’s electronic environment, consumer transactions represent a significant portion of e-commerce and mobile commercial transactions and are often cross-border, it said. Any work by WG 3 should tackle B2B and B2C e-commerce and be “carefully designed not to affect” consumer rights, it said.

The key issue is coming up with a system that’s relatively cheap to operate and self-enforcing, so people can trust it, Lowry said. Now, credit card companies and banks act as gatekeepers between consumers and merchants in disputed transactions, reversing charges in appropriate cases, he said. For merchants and consumers the system works well, but financial institutions can be left holding the bag in fraud cases, he said. There are also problems with handling credit cards versus debit cards that require quick, rough justice, he said.

But it’s lesser-developed countries, rather than financial institutions, that are pushing for a worldwide online dispute resolution mechanism, Lowry said. Their consumers don’t have access to credit cards and can’t buy things online, he said. Merchants should also be interested in selling to those markets, he said. Rules on electronic transferable records and online dispute resolution will likely take 5-10 years, he said.