Reliable Electronic Transferable Records

You may recall that the United Nations Commission on International Trade Law (UNCITRAL) has recently adopted a Model Law on Electronic Transferable Records. An overview report made at the time is here. The text of the Model Law, along with a Guide to its Enactment, are here. Some previous attention to this project has been paid on Slaw here (2011), here (2012) and here (2016).

Transferable records

Transferable records are those that carry property rights with them, so one can transfer the property by transferring the document. Examples include negotiable instruments such as warehouse receipts, bills of lading and the like. It is important in dealing with such documents that there be only one that authorizes its holder to demand production of the property.

This characteristic is often referred to as a need for originality, or uniqueness, or singularity.

One characteristic of electronic documents is that they are generally infinitely reproducible in perfect copies – the digital data, the ones and zeroes, the on and off instructions that they are composed of, are identical in each. So what was needed to ensure it was safe to give them legal effect?

The UNCITRAL Working Group on Electronic Commerce debated such issues for a long time. In doing so, it refined and simplified the real demands of the project. As so often happens with the law of electronic commerce, one can leave in place a great number of the legal rules that apply to paper-based transactions. What one needs to add for electronic communications turns out to be fairly limited – though crucial.

General principles

The Working Group started with, and finished with, the key UNCITRAL principles that it has applied to the law of e-communications since the Model Law on Electronic Commerce in the mid-1990s: functional equivalence (an electronic record has the same legal effect as its paper equivalent if it can serve the same policy functions) and technology neutrality (any technology that can serve those functions may have that legal effect.) These principles justify the overarching one of non-discrimination: the law must give equal effect to paper and electronic records. It may not deny effectiveness to electronic communications on the sole ground of their electronic form, if the other principles are met.

In applying these principles to the analysis of transferable records, the Working Group concluded that it did not need to touch on substantive rules of law at all. Its task was to address the electronic form, but not, in particular, the rules about when and how a document is negotiable – that is a matter of “other law” that affects paper and electronic records alike.

The new model law deals only with electronic versions of transferable records known in paper form. Purely electronic records do not need enabling by functional equivalence as provided in this text.

Likewise it does not deal expressly with originality – in fact, the new Model Law does not define or deal with the notion of “original” at all, unlike the Model Law on Electronic Commerce and the Electronic Communications Convention of 2005. There can be multiple originals of a transferable record, so originality was not the key test for avoiding duplication of claims.

The essence of ETRs: one reliable record

After considerable discussion, the Working Group decided that the key factor for a transferable record – and thus an electronic transferable record – was there should be an authoritative version of it, one that clearly entitled its holder to the property it represented. It simply refers to the authoritative version as “the” record, the one (singular) with legal effect.

Thus article 10(1)(b):

Where the law requires a transferable document or instrument, that requirement is met by an electronic record if:

(a) The electronic record contains the information that would be required to be contained in a transferable record or instrument; and

(b) A reliable method is used:

To identify that electronic record as the electronic transferable record…

This authoritative identification is achieved for a paper document by its possession. For an electronic document, the equivalent is control. The key is Article 11:

1. Where the law requires or permits the possession of a transferable document or instrument, that requirement is met with respect to an electronic transferable record if a reliable method is used:

(a) To establish exclusive control of that electronic transferable record by a person; and

(b) To identify that person as the person in control.

2. Where the law requires or permits transfer of possession of a transferable document or instrument, that requirement is met with respect to an electronic transferable record through the transfer of control over the electronic transferable record.

This idea (possession = control) was not itself new – it was suggested when the Model Law on Electronic Commerce was being implemented, certainly in Canada and the US, twenty years ago. The novelty was how that concept is now supported.

It all boils down to reliability – as e-signatures did, years ago. If the method is sufficiently reliable, legal effect can be given. No specific measures are needed; an array of measures are suggested, and users of the records or parties to a transaction can decide if they are satisfied.

Keys to reliability

The new Model Law expands on the criteria for reliability from what has been in previous UNCITRAL instruments. Here is what Article 12 says about it:

For the purposes of articles 9 (signature), 10 (identification, capability of control throughout its life cycle, integrity), 11 (possession as control), 13 (indication of time and place), 16 (amendment), 17 (paper document becomes electronic) and 18 (electronic document goes onto paper), the method referred to shall be:

(a) As reliable as appropriate for the fulfillment of the function for which the method is being used, in the light of all relevant circumstances, which may include:

(i) Any operational rule relevant to the assessment of reliability;
(ii) The assurance of data integrity
|(iii) The ability to prevent unauthorized access to and use of the system;
(iv) The security of hardware and software;
(v) The regularity and extent of audit by an independent body;
(vi) The existence of a declaration by a supervisory body, an accreditation body or a voluntary scheme regarding the reliability of the method;
(vii) Any applicable industry standard; or

(b) Proven in fact to have fulfilled the function by itself or together with further evidence.

One may note in passing the importance of (b): reliability in principle, or as demonstrated in the abstract, is important, but the fact that the right answer actually emerged will also satisfy a test of validity. This formula was invented for e-signatures in the Electronic Communications Convention.

Because the Model Law is technology neutral, it does not limit how these reliability standards can be achieved. It may be that secure software and hardware systems will be satisfactory, but it may also be that a registry of interests in property could be set up, with the transfer of records leading to changes in entries in the register.

And these days, if one is speaking of a register, one may speak of a distributed ledger: perhaps electronic transferable records will be a function of a blockchain application. The Model Law would not prevent it.

Two questions

1. Is it going to be good enough to rest the whole structure of electronic transferable records on this abstract principle of reliability, however minutely analyzed? Is UNCITRAL just hiding behind language that will not help people design real systems that transfer real value? How much does the new Model Law really achieve?

   One might note that similar criticisms have been made of the e-signature provisions of the Model Law on Electronic Commerce, which also require a reliable method to identify the signatory and associate the signature to the record. That text has been very widely implemented around the world. It is the basis of most of the laws that support e-commerce today.

   The criticisms have led to efforts to be more precise, first in the Model Law on Electronic Signatures, a text that has not been widely adopted, and currently in the new UNCITRAL project on identity management and trust systems (see especially Working Paper WP.143).

   Meanwhile the world gets on with its business electronically. Perhaps reliability is a good enough standard. Or maybe it is even too high…

2. Will the new Model Law support the modernization of Canadian business practices? One thinks of securitization of chattel paper through electronic means. The interest of the Ontario Bar Association in that topic was mentioned in a comment to the 2016 note here on ETRs. The US has been dealing with such matters, at least in some industries, for years, based on legislation not far removed from the new Model Law.

   During the development of the new Model Law, the federal and provincial governments were unable to find much private sector interest in ETRs in Canada. Now that the Model Law is available for implementation, will that change? Is it an opportunity to be seized – either provincially or at the Uniform Law Conference of Canada, so as to benefit all jurisdictions? The Model Law has brief provisions about cross-border recognition of ETRs (article 19) – why not start across provincial and territorial borders here at home?

What priority should Canadian governments give to this topic?