Introduction

Traditional 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.”[1] 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 jurisdictions.

As 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.

Definitions

1. Bills of exchange & promissory notes

A 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.

Subsequently, 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]

2. Documentary Credits

Documentary 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 his article[3], 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[4].

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 1^st 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 reference.”[5] 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 credits.

3. Documentary collections

In 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.[6]

In 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 obligations.[7] In the case of documentary collections again, there are widely adopted ICC rules by many countries, called the Uniform Rules for Collection (URC).

Documentary 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”[8]. 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.

4. Forfaiting

The 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.”[9] However, as has been argued in Lutschg-Emmenegger’s [10] 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.[11] 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.

Consequently, 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.

Electronic Financing

In the 21^st 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 article[12] “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 operations.”

The 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 [13]. 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.

Electronically 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”[14].

Such 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 language.[15] 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.

EDI

The 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.[16] The major advantage of EDI is the reduction of the administration costs in paper-based transactions.

Financial 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 this paper.

E-Bills of Exchange and promissory notes

For 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.[17]

In 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 correspondingly.

The definition provided in section 3(1)[18] 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.