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.