commercial practice has been influenced to a considerable degree during the
years by electronics and computers in numerous ways. The purpose of this essay
though, would not be to examine the impact of electronics in commerce in
general, but to scrutinize the impact of the attempts to launch electronic
alternatives to the traditional paper based financial instruments. However, in
order to do so, and since there are a number of ways to approach the issue, we
will not particularly analyze the electronic systems and methods used to achieve
this desirable outcome, since that would be more appropriate to be undertaken by
an electronic engineer or a computer programmer. We will, nevertheless, attempt
to concentrate on the legal effects of such a development, the problems posed by
the law, and the reservations of the legal and commercial world to adapt to such
a rigid alteration of what had been until now considered to be the
power-structure of finance during the years.
As with all scientific developments within the business environment the
pace of adjustment corresponds to a challenge to the traditional legal notions
regulating patterns of trade. This necessitates legal advisers to be cautious in
identifying potential problem areas. Still, the hurdle in this field lies on
that “lawyers like to deal with well known and well defined problems.”
It seems, thus, inevitable that the law will linger
behind technological developments. Legal rules relating to existing paper
instruments such as bills of exchange and letters of credits which themselves
evolved, as a pragmatic response to the commercial situation existing at the
time of their development, will have to be reformed and this reform cannot be
materialised immediately. Restrictions to an immediate materialisation of
electronic finance, are posed by traditional legal requirements, which call for
documents signed and in writing evident almost in every country, and also by the
traditional diversities existing between the legal systems of different
a springboard to our analysis, it seems to be essential to provide with some
basic definitions on what, for the purpose of this essay, would constitute the
main financing methods of international trade.
1. Bills of exchange &
bill of exchange, elsewhere called a ‘draft’, is a negotiable
instrument that is payable to the seller and drawn on the issuing bank and/or
the buyer. Although this document is prepared by the seller, it has an
equivalent effect with a check written from the buyer to the seller. Drafts can
be either “sight drafts” where the bank pays the full amount of the draft
upon the seller’s presentation, or “time drafts” where the bank’s
obligation at the time of presentation is merely to accept the draft for payment
at a later date (e.g. 60 days after the seller’s presentation). Time drafts
provide the buyer with short-term financing. Often, banks will purchase their
accepted time drafts at a discounted rate.
promissory notes have a similar effect with bills of exchange. The
difference lies on that promissory notes are prepared by the importer promising
to give a direct payment to the seller on a future specified due day. The note
is not drawn to any intermediate party. Bills and notes may be negotiated to an
unlimited number of successive holders when the current holder wishes to obtain
an immediate discounted cash payment and the new holder wishes to buy the note
or draft as a short term investment. They are transferred either by endorsement
and physical delivery or in the case of ‘bearer instruments’ merely by
delivery and must be drawn in unconditional terms.
2. Documentary Credits
credits concern the use of what is commonly
known as “Letters of Credit’ (thereinafter L/C). According to the ICC, a
documentary letter of credit is: “a written undertaking by a bank given to
the seller at the request and on the instructions of the buyer to pay at sight
or at a determinable future date up to a stated sum of money within a prescribed
time limit and against stipulated documents.” As Norbert Horn asserts in
L/Cs provide a unique, most important, and widely used mode of payment in
international trade, because they combine at least three important functions in
one relatively simple document. Namely those functions are, firstly that L/Cs
determine a procedure for the contractual performance, secondly that they
constitute a security for the exporter that he will receive the purchase price
at the agreed time and lastly, that they contain a credit which apparently is
extended to the exporter as the beneficiary. Furthermore, L/Cs have been
regarded as special contracts between the banks and the beneficiaries since the
bank’s undertaking is autonomous from the underlying commercial transaction.
The bank is concerned only with its mandate as contained in the L/C.
are so extensively employed by traders that nearly all states in international
trade transactions adopt in one way or another the Uniform Rules and Practices (UCP)
of the International Chamber of Commerce. The most recent form of UCP is the
UCP500 promulgated by the ICC in 1993 and came into force on the 1st
January 1994. “Generally, the UCP are recognised as a part of the contract
if express reference is made to them. In some countries, they are recognised as
a commercial custom to aid interpretation even in the absence of such specific
In due course of this essay we will endeavour to outline the attempts of the ICC
to modify the UCP500 so as to embrace the electronic forms of documentary
an international trade transaction a seller may not require from the buyer to
provide for a third party guarantee of payment, but still desires to ascertain
that the importer would pay by cash or that he would present a negotiable
payment undertaking before the goods are handed over. In this case a documentary
collection procedure may be preferred.
a documentary collection the exporter forwards the relevant documentation to the
commercial agreement to his bank, the remitting bank, which in turn, will sent
them to a bank in the buyer’s country, the collecting bank. The collecting
back, subsequently, will undertake to release the documents, which are vital for
the importer so as to obtain possession of the goods, only upon payment of the
agreed price (by cash or a bill of exchange) or with the undertaking on his
behalf to pay in a short fixed term (i.e. a promissory note for payment in 60
days). The seller in such an occasion will represent the draft for payment on
maturity or might even discount it with the bank for an immediate payment. In a
documentary collection no bank undertakes to pay for the credit as in a
documentary credit transaction, the banks therein operate as “post offices”
and merely collect payment from the buyer without underwriting the buyer’s
In the case of documentary collections again, there are widely adopted ICC rules
by many countries, called the Uniform Rules for Collection (URC).
collections first became a popular payment technique for export sales during the
1930s. The scheme continued to work effectively until the mid 1960s, when the
goods started to move faster than the documents. “Transport techniques were
improving just as postal services were deteriorating”.
The importer could not get hold of the goods unless the documents arrived and he
paid the price. In the mean time the goods might deteriorate or the buyer might
lose his right to reject or sue for not conforming goods. Evidently, this method
of financing nowadays is regarded to be obsolete and in order for documentary
collections to correspond with the demands of our technological reality and the
high standards expected by the merchants, there seems to be an immediate need
for reform of the regime.
term forfaiting is defined in the Oxford Dictionary of Finance as:
“ a form of debt discounting for exporters in which a forfaiter accepts at
a discount, and without recourse, a promissory note, bill of exchange, letter of
credit etc received from a foreign buyer by an exporter. Maturities are normally
from one to three years. Thus, the exporter receives payment without risk at the
cost of the discount.”
However, as has been argued in Lutschg-Emmenegger’s
book, forfaiting has changed a lot ever since and for example, maturities now
moved out to a maximum of 10 years. In the essence of forfaiting stand dealings
with bills of exchange and promissory notes, which are presented to the bank so
as to be discounted. The exporter usually presents the documentation for
forfaiting through the bank’s documentary collection system and most commonly
the documents are released only against acceptance and aval of the drafts.
By forfaiting the bank undertakes several risks for non-payment. However, still
it is a very profitable way of lending money and is also very commonly used in
international trade. Yet, as we mentioned above, in order for the bank to
minimise the risks in forfaiting, it only buys the receivables as soon as the
goods have been shipped and normally attaches documentation to a documentary
collection system. Thus, since forfaiting is much dependent upon documentary
collections there is one additional justification requiring for the
modernization of the collections through electronic networks.
these are, in general lines, the key financing instruments employed in
international trade. Of course, neither the list, nor the analysis provided
above is a conclusive one. There is a vast literature by finance experts and
legal commentators who spent a lot of time and paper in analysing, evaluating
and re-evaluating the financing methods of commercial transactions. However, the
purpose of this essay and its restricted size does not allow any further
analysis on that issue. Yet, we provided some inclusive definitions of those
instruments so as to get a more comprehensive view of what is the existing
situation regarding financing methods so as to have a starting point for
evaluation on their electronic forms.
the 21st century the efficacy of the various types of financial
mechanisms will be measured against the ease by which they could be adapted to
an electronic environment such as the Internet. As Maduegbuna S. supports in his
“computers first entered banking as efficient tools of prime necessity to
tackle the ever-growing volume of paperwork incident in banking operations. In
its early stages, the use of computers in banking was confined to the back
office operations of banks, but after the back-room operations had been fully
automated, computers were applied to the more visible aspects of banking
rapid growth of information technology (IT) has envisaged the possible movement
towards electronic variants of paper-based financial instruments in
international trade. Those electronic variants initially made their appearance
in banks and financial institutions that had developed their own international
networks, as far as their international banking practices were concerned, and
were consequently capable of putting these expensive networks to the profitable
ends of reducing their document-processing costs .
Nonetheless, a forward movement of such an extensive nature cannot and should
not take place from the one-day to the other because that could create a
complete chaos in the mercantile practices. Hence, a careful consideration of
the matter, its advantages and disadvantages is necessary.
dominated financial transactions are highly advantageous in many aspects. The
costs in paper-based systems are substantial, the delays in posting are
significant and sometimes decisive, and the complexities arising in an
international trade environment, innumerable. Banks, having realised those
disadvantages, “pooled their resources together and set electronic payment
and clearing networks that speed up the movement of money and reduce the bundle
of paperwork that hitherto attended the international transfer of funds”.
clearing networks are the “Clearing House Interbank Payment Systems” (CHIPS)
and the “Clearing House Automated Payment Systems” (CHAPS), which are
sophisticated versions of electronic mail. Additionally, one of the most
recognized electronic networks for funds transfer is the “Society for
Worldwide Interbank Financial Telecommunications” (SWIFT). SWIFT
provides its subscribers with the operational benefits of high-speed
transmission of financial messages in a structured text and in a uniform
However, we shall not get into a more detailed analysis of such networks, which
would also require a further expertise in electronics so as to be accurate. To
put it in simple words, though, SWIFT is a system of inter-bank communication
for the electronic transfer of funds.
notion of electronic commerce is being realised through what has been commonly
known as the EDI, or else Electronic Data Interchange, which were first
introduced in the 1960s. EDI is a programme utilised so as to transmit
information such as orders, invoices, shipping instructions and bills, between
computers. The main advantage of EDI was that it created a paper free system of
inter-business communication, linking companies such as manufacturers, suppliers
and transport providers.
The major advantage of EDI is the reduction of the administration costs in
EDI, now, extends its application to the payment and settlement process
performed by banks in regard to international trade, and that is precisely the
fundamental concern of this essay that we will attempt to assess in the rest of
Exchange and promissory notes
negotiable instruments in the form of bills of exchange and promissory notes to
preserve their expediency in international trade during the third millennium,
they must be recognised as valid in electronic form. Then again, are those
electronic instruments capable of satisfying the legal requirements set out in
the various statutory provisions of different jurisdictions so as to represent
valid negotiable instruments? It has been proposed that in order to ensure
certainty in the international trade context, a uniform law regulating the issue
shall be adopted. Such a uniform law might be for example the existing UNCITRAL
Model Law on Electronic Commerce 1996, as amended in 1998, which, if adopted,
could overcome deficiencies in the current statutory regimes and increase
certainty in relation to the enforceability of electronic bills of exchange.
the absence, however, of such a uniform law and in order to effectively analyse
whether or not it is feasible to substitute the negotiable instruments with
electronic variants, it seems to be necessary to examine whether those
electronic variants satisfy the requirements of the present law. To do so, we
will compare their characteristics with those outlined in the UK Bill of
Exchange Act 1882 (BEA 1882), which is the main statutory body providing for
paper-based negotiable instruments in England. Although, our analysis will
concentrate mainly on bills of exchange, however, due to the similarities in
their application, the same provisions will apply to promissory notes
definition provided in section 3(1)
of the BEA 1882 emphasizes on two central characteristics for a valid bill of
exchange: namely to be ‘in writing’ and ‘signed’. An electronic bill of
exchange therefore should overcome those hurdles if it is to replace the
traditional paper-based instrument. How that could be realised is the next point
one should consider.
1. ‘In writing’
sec.2 of the BEA 1882 it is submitted that ‘written’ includes ‘printed’
and ‘writing’ includes ‘printing’. However, to what extent does the word
‘printing’ apply to electronic applications? According to the Interpretation
Act 1978 (IA 1978), sec.(5) sch.I, whereby words and expressions are defined, it
is assumed that: “‘Writing’ includes typing, printing, lithography,
photography and other modes of representing or reproducing words in a visible
form”. This section of the IA 1978 applies to the interpretation of the
BEA 1882 and if it would be construed so as to include electronic ‘printing’
–which indeed is a visible form of reproducing words!-, then many problems
seems to have been resolved. Nonetheless an implementation of the UNCITRAL Model
Law would put an end to all the questions, since by art.6 explicitly confers to
electronic data messages the same legal effect with paper-writings.
v. Craucob Ltd
Scutton LJ, stated that “when a document containing contractual terms is
signed, then…the party signing is bound”. This statement gives us a
rough idea of the legal implications of a signature. But what is a signature?
There seems to be no statutory definition on that subject-matter. Gamertsfelder
describes it as a mark placed at any point of a document, which identifies its
maker. The requirement for a signature, he supports, is to show authenticity and
is also presumptively attributable to one source. The evident question arising
is: how can an e-bill be signed? Electronics and technology has provided with an
answer to that question with the use of electronic/digital signatures.
signatures can be used to endorse an electronic document in a way that can be
later validated for authenticity. A valid digital signature does not imply that
the person or organization named is also the author of the document, and should
therefore more appropriately be construed as an endorsement of the document.
A range of
electronic authentication methods, of varying security and reliability, is
available for a person to authenticate an electronic record.
The reluctance of many traders lie on a matter of security but, electronic
engineers and computer analysts endeavor to ensure them that by the existing
encryption methods electronic signatures are highly secure and able to assure
the integrity and authenticity of an electronic document. A digital signature
usually comprises three main elements: i/ a public/private key, ii/ a one way
hash function and iii/ a reliable mechanism for publishing public keys.
order to avoid the technicalities of the law and the complexities arising out of
its interpretation, especially in countries were the national law cannot be
taken to imply digital signing as valid, the possible adoption of the Model Law,
which by art.7 provides for the validity of electronic/digital signatures seems
to be a probable solution.
those issues concerning digital signatures and documents in writing do not
solely concern negotiable instruments but extent to cover also documentary
credits and the other forms of electronic financial instruments.
One of the most
essential characteristics of a negotiable instrument, whether a bill of exchange
or a promissory note, is that of negotiability. A bill is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder of the bill.
Can an e-bill be negotiated? It seems that there would not be any problem in
indorsing a bill of exchange by the computer, there are, on the contrary,
who support that the use of e-bills would further enhance negotiability.
As we have
already outlined above, the letters of credit (L/C) are one of the most
important, if not the most important, areas of financing in international trade.
This means that L/C cannot remain unaffected by technological advancement since
that would be a crucial limp in any attempt for automating the financing
credits emerged largely without the benefit of legislation and thus, few
countries have laws requiring them to be drawn up in any particular form.
We have already mentioned above that the UCP rules play the role, to a large
extend, of an international uniform law for the L/C. Many commentators seem to
agree that there is a growing need of reforming those rules so as for the L/C to
follow the demands of an electronic form. “The UCP were drawn up with
pieces of paper in mind…a feature of all such codifications is that they tend
to follow, rather than lead the practice.”
need for reform was not only evident to commentators and legal analysts. The ICC
started to realize the insufficiencies of the present rules as far as e-L/C are
concerned. After various surveys and analysis a working group was formed to
draft a supplement to the UCP500 for those transactions that consist of
electronic documents or part paper part electronic documents. After a
semi-annual meeting held in Istanbul, Turkey on 21-22 November 2000, the ICC
Banking Commission decided to materialize the “UCP Supplement for
Electronic Presentation” or, in other words, the “e-UCP”. It
has the aspiration to provide a number of definitions so as to allow current UCP
terminology to accommodate the presentation of the equivalent of paper documents
electronically and also with the aim to make available, where necessary, rules
to allow UCP and the eUCP to work together.
Whether the eUCP will be automatically incorporated into UCP500 where electronic
documents are involved, or whether it will have to be expressly incorporated by
the parties, is still under consideration. Nevertheless, at least for the start,
the latter option seems more preferable. The first draft of the electronic
supplement to UCP500 has been sent to ICC national committees and Banking
Commission members for comment already and the new scheme is planned to come
into force sometime in 2002. Obviously, after the eUCP comes into force, most of
the problems that have been encountered in the past, regarding the replacement
of L/C with an electronic variant will be long gone.
fully electronic documentary credit mechanisms
that cover both payment and shipment procedures have already been used in a
small number of cases under the bolero.net experiment, which was in
preparation for more than five years. Claiming to build in extensive safeguards
against fraud, Bolero says it can give importers, exporters, banks, carriers,
ports, custom authorities and insurers a worldwide, online-linked network to
securely store and transmit any trade document in electronic form.
We have already
mentioned the inadequacies of the documentary collections to work effectively
within the technologically advanced commercial reality. To put it in few words,
the goods travel faster than financial and commercial documents and the buyer
cannot get possession of the goods without those documents. The modernization of
the practice seems to be necessary for the further existence of the collections.
The essence of the electronic collection would be to speed up the process while
at the same time to ensure that the buyer would not be able to get hold of the
goods without the authorization of the bank to which they have been consigned as
required by the URC.
adjustment of the documentary collections to the new technological and
electronic environment forfaiting and other financial mechanisms would be
benefited also, since in many cases they are interrelated.
by paperless transactions
examined the degree, and the reasons why, it is desirable to substitute at some
point in the future the paper-based mechanisms of financing in international
trade with electronic variants, and having assessed the justifications that make
that replacement necessary, it seems to be essential to scrutinize whether such
a development is also feasible.
In spite of the
obvious advantages of electronic financing methods, there are some impediments
posed by the long tradition of paper-based transactions that have to be defeated
so as to be replaced. The traditional paper-based payment systems retain the
advantages of predictability and stability. The former arises from the fact that
the parties to the commercial transaction can predict the relevant risks arising
form their use, and the latter is evident in the existence of a well-established
legal regime behind those transactions .
The need for an international uniform law governing not only financial aspects
but also generally commercial transactions is even more apparent nowadays where
trade attempts to be conducted through the Internet. Nonetheless, we have
already discussed in an individual basis (while analyzing those instruments)
some of these issues; there are some further difficulties that should be
One of the most
obvious one is that of security against losses from fraud and error. In a
joint survey by the FBI and the Computer Security Institute of a sample of 500
companies demonstrated that 42% of the respondents had reported unauthorized use
of their information systems and 32% reported losing upwards of U.S. $100
million due to security breaches .
The fear of the traders is evident in their reluctance to adopt e-financing
methods. Even Hollywood moviemakers bombard us with films whereby 17-year-old
geniuses break security codes. Threats to the security of computer systems and
commercial transactions can be classified as internal and external, that means
that people intruding in the system might be either from the inside of the
trading corporation or even external “hackers”. Fraud in electronics is not
only easier and faster but it is also “likely to involve an amount far in
excess of any fraud possible under a paper-based payment mechanism.”
However by the use of electronic signatures the risks are somewhat minimized.
Other imminent risks include errors in any form that they can take, operational
failures, electricity failures, and unforeseeable factors (such as acts of God
and wars etc.)
problem is that less developed countries are not yet ready technologically to
follow the automating of the international trade. Is it appropriate therefore to
leave aside such a great part of the commercial world in the name of technology?
Following this brief analysis, one can come to the
conclusion that there is an undeniable truth lying behind e-commerce: No one can
resist progress. E-commerce and electronic finance is the next step of the way.
Maybe not yet realized as a whole, but surely not a far-reached vision. There
are still problems to be solved and questions to be answered. Still, just a look
at the universities study schemes around the world suffices: students in law,
economics, finance, electronics, computers and in so many other fields are being
trained and educated to deal with electronic trade in its different aspects. The
next generation is getting prepared to fight and defeat the insufficiencies of
the electronic trading. It won’t be long until ‘the impossible dream’
would be an everyday routine.
Anastasia Tsakatoura, 22 June 2002. All Rights Reserved.