Electronic Transferable Records

Once law reform on the topic of electronic communications had dealt with first-level issues like how to satisfy writing requirements or signature requirements electronically, people started paying attention to harder questions. One of these was how to meet a requirement that a document must be transmitted or stored as an original. 

The approach to such questions at the  United Nations Commission on International Trade Law (UNCITRAL), which has tended to lead world thinking on the subject, is to seek a ‘functional equivalent’ of what satisfies the requirement on paper. What is the function or policy purpose served by the requirement, and how can the same function be performed electronically? 

UNCITRAL decided that the function of an originality requirement was to show the integrity of the document that was subject to the requirement. Has the document been altered, either intentionally or not, since it was created in a form meant to have legal effect? The theory was that it is harder to alter an original document undetectably than it is to do so to a copy. Thus the UNCITRAL  Model Law on Electronic Commerce of 1996 specified in Article 8 that to serve as an original, an electronic document (in those days UNCITRAL called it a ‘data message’) must provide reasonable assurances of integrity, as well as meeting the rules as a functional equivalent of writing (that the information in the document must be accessible so as to be usable for subsequent reference.)

The standard of reliability of those assurances was to be assessed in light of the purpose for which the information was generated and in the light of all the circumstances. In other words, it was a flexible test. This was consistent with the UNCITRAL mandate, which was to remove barriers in existing legal rules that stood in the way of legally effective e-communications. Could it be legally effective to have an electronic original? The Model Law made the answer clearly Yes. 

In common-law Canada the Model Law was implemented through the  Uniform Electronic Commerce Act (UECA) adopted by the  Uniform Law Conference of Canada in 1999. All provinces but Quebec have enacted the UECA, as have two territories. Quebec enacted its Act to provide a legal framework for information technology, which usually had the same legal effect. The UECA’s section 11 closely followed the language of the Model Law.

In removing the legal barriers to the use of e-communications, the Model Law and the UECA did not tell transacting parties how to satisfy the legal tests they laid out. They were deliberately ‘technology neutral’; they did not prescribe or depend on a particular technology. This was an overall advantage to the adoption and use of e-communications in general, but it posed difficulties in some areas where existing law was particularly demanding as to form, beyond merely requiring writing or signature.

A large class of documents or records that pose such demands is those that themselves carry the value of their content. In other words, the owner of the document owns the property that the document refers to, and transfer of the document transfers the property. Examples are negotiable instruments (bills of exchange including cheques, promissory notes, bills of lading, warehouse receipts and other documents of title.) Certain security agreements in personal property can also have this characteristic. In the United States in particular many areas of the economy depend on ‘securitization’ of the secured debt, i.e. its packaging into collections of debt that are transferred to financing companies. This ‘chattel paper’ is a large component of a class known as ‘transferable records’. 

(I use the terms ‘document’ and ‘record’ interchangeably, though I recognize that an archivist would not. American law tends to use ‘record’ and Canadian law tends to use ‘document’, in part because the latter is easier to translate into French) 

A serious challenge to making transferable records electronic is that they must be unique, because the record itself has value beyond its information. Their ‘originality’ is a key feature. It is difficult to make an electronic record that cannot be copied. For this reason the UECA simply does not apply to negotiable instruments. In the absence of technology, it was thought imprudent to provide rules that future technology would have to follow.

 However, American law did not make the same choice. The  Uniform Electronic Transactions Act (UETA) (1999) has general provisions about originals in section 12, related to the Model Law’s principles. It adds a novel set of rules in section 16 for transferable records. (The federal counterpart to the UETA, the Electronic Signatures in Global and National Commerce Act (E-Sign), has similar rules.) Essentially the UETA provides that the holder of a note or document of title is the person with control of the electronic record. The general rule is section 16(b):

A person has control of a transferable record if a system employed for evidencing the transfer of interests in the transferable record reliably establishes that person as the person to which the transferable record was issued or transferred.

 The relation to the Model Law is clear in the emphasis on reliability. The section goes on to give a ‘safe harbour’, six conditions which if satisfied established control of the record. The first and most important of these is in paragraph 16(c )(1): “a single authoritative copy of the transferable record exists which is unique, identifiable, and, except as otherwise provided in paragraphs (4), (5), and (6), unalterable.” The record has to show who owns it and track any changes to the ownership.

 UETA intended in creating these terms to provide, in the words of the Official Commentary, “the requisite incentive for industry to develop the systems and processes, which involve significant expenditures of time and resources, to enable the use of such electronic documents.” The law consciously led the practice, an unusual sequence in commercial law.

Not everybody was as bold as the creators of UETA. About the same time, Article 9 of the Uniform Commercial Code (UCC) was amended to permit electronic chattel paper, but only if the six conditions of UETA were met. There was no generic permission to the person who could reliably establish control. As the technology evolved over the past decade and more, this inflexibility was perceived as a problem. Very recently Article 9-105 has been amended to insert a general test inspired by the UETA’s.

 The financial sector in the US has worked hard to take advantage of UETA’s incentives. Several systems exist and do a high volume of business:  eOriginal,  Route One and  Dealer Track.  The latter two are dedicated to auto financing and are sponsored by different manufacturers. All are closed systems, in that all participants are bound by similar contracts that spell out procedures and assign liability. An open system of transferable record based on the UETA or UCC does not yet exist. There are technical standards by standards bodies to assist develop commonality of practices.

It is interesting to note that Quebec’s Act on information technology contemplated more functions to originality than ensuring the integrity of the document. Section 12 refers as well to two other functions, to establish: 

(2) that the document is unique, its components or its medium must be structured by a process that makes it possible to verify that the document is unique, in particular through the inclusion of an exclusive or distinctive component or the exclusion of any form of reproduction ;

 (3) that the document is the first form of a document linked to a person, its components or its medium must be structured by a process that makes it possible to verify that the document is unique, to identify the person with whom the document is linked and to maintain the link throughout the life cycle of the document.

These are clearly relevant to transferable records. However, the Act does not go on to provide rules for achieving these goals. Rather it requires that any system that aims to do so must conform with technical standards approved by a standards body described elsewhere in the Act (but not yet set up). So Quebec got beyond the UECA but not so far as the UETA.

It may also be noted that Ontario’s implementation of the UETA, the Electronic Commerce Act, 2000, shows an awareness of the ‘control’ for ‘possession’ test in the US, though it follows the UECA in not applying to negotiable instruments. The section on originals contains this provision (s. 8(4):

Despite subsection (1), control of an electronic document does not constitute possession of the original document for the purposes of the Personal Property Security Act. 

 (Nova Scotia’s Electronic Commerce Act has the same provision in s. 12(3). No one else has adopted it.) The provision aims to resolve a potential conflict between the  PPSA, which gives priority to a purchaser of chattel paper who takes possession of it, and the Electronic Commerce Act, which might be read to allow an integrity test to rely on control, which might then be considered possession of the original record. If such a conflict arose, then this provision resolves it in favour of the PPSA.

Despite these serious and continuing efforts to expand electronic transferability of financial documents, there is a major alternative method to deal with transfers of interests traditionally done by such documents. That method is to provide a register of those interests, and to transfer the interests on the register. Canadians will not need much introduction to the concept of an electronic register of interests, since we have had the PPSA register for decades and electronic land registers in several provinces for several years, including under the civil law in Quebec. Indeed Canadian expertise is much sought after when international bodies set up registers for property interests.

 The US mortgage industry relies on the Mortgage Electronic Registry System (MERS), and even actual transferable records often find their way into the MERS register. Shipping interests have made repeated attempts at a register that would replace negotiable bills of lading, notably the two emanations of the Bolero system,  Bolero International System and  the Bolero Association. Registry systems can offer an advantage of being open and public, rather than requiring a system of interlocking contracts – if they have statutory support.

 UNCITRAL is currently considering whether to take on the subject of transferable electronic records at the international level. The most recent collection of papers and presentations on this topic at UNCITRAL was put together for a  colloquium in February 2011. They deal with the history of efforts to create e-negotiability, the principles required internationally to make it work, whether through registers or e-records, and case studies by those who have made it work, in the US and elsewhere. These build on earlier reviews discussed in the Secretariat’s 2010 overview of proposals for future work on electronic commerce(see Document A/CN.9/692. See also Document A/CN.9/681/Add.1 for the 2009 US proposal.)

It is very unlikely that any Canadian legal initiatives will be taken in this field pending a decision on whether an international framework is in prospect.

If the Secretariat recommends taking up, and the Commission itself agrees, then work could begin as early as October 2011. Watch this space for details.