There is ongoing concern and skepticism about handling negotiable transactions through the Internet. Only the issue of the signature seems to cause more anguish. The very thought of replacing negotiable documents with electronic messages produces a mindset that is difficult to overcome. After all, how can one electronically duplicate a process that requires the exchange of a piece of paper (usually a signed one at that) in order to negotiate? Perhaps the discussion would be better served if the process were looked at as a challenge to be overcome. After all, if electronic negotiability is possible, then most other commercial functions could be undertaken by the same electronic means.
Negotiable or transferable documents include: bills of lading, warehouse receipts, checks, stocks, bonds, deeds, or any paper that can be used to transfer rights and/or title. A negotiable document usually will be an order or bearer instrument. Possession of a negotiable bill of lading entitles the holder to possession of the goods described therein and covers title to the holder. Non-negotiable (but transferable) documents (such as common receipts, parking checks, etc.) would entitle the holder to possession but would not convey title. Thus if one had a negotiable bill of lading for a fur coat, one would be entitled to possession and would be able to demonstrate title, while if one had only a coat check for a fur coat, one would be entitled to possession, but would have to demonstrate title by some other means.A negotiable bill of lading, as used in international trade, functions as the receipt for the goods, the contract with the shipping company, and the title to the goods. It also functions as the basic shipment information sheet (describing the goods, shipment dates and ports, etc.), the verification sheet for insurance purposes, and the verification for the letter of credit. A non-negotiable bill of lading (which can be transferred) still retains the functions of receipt, contract of carriage, information sheet, verification sheet for insurance, and means to transfer title, but it is not proof of title.
Some contend that instruments such as negotiable bills of lading are outmoded and should be discarded as business moves to the internet. Indeed, there may come a time, when commerce is so secure, trustworthy, and universal that businesses feel comfortable in discarding negotiable transfers. For this time to come sooner rather than later, some accommodations must be made if electronic data interchange is to truly satisfy the needs of commerce.
The first thing to do is dissect the process of negotiability into its necessary and fundamental elements, while stripping away the myths, misconceptions, and superficialities. As long as the focus is on the signed, original document then the task is very difficult; however, the substance of a negotiable document is not its signature or its original nature, but the process that inspires confidence in that piece of paper. It has been said that: ‘Attempts to create electronic bills of lading are viewed under the possessory notice theory as dematerializing bills of lading, thereby rendering such bills ineffective.’
This ignores the fact that a bill of lading or any of document of title is an abstract representation of the material goods it describes — just as paper money is the abstract representation of the monetary unit it describes. In both cases, the paper has no real value of its own, and its value exists only as long as there is confidence that it can be redeemed for the material promised. Signatures, stamps, and other superficialities only provide confidence to the gullible. The wise avoid form over substance, and look to the process that fulfills the promise supplied by the negotiable instrument.
It is easy to understand how people have come to look at the negotiable instrument as material. When the Sumerians began to record agricultural transactions with clay pictographs over 5,000 years ago, such pieces came to substitute for the grain or animals. We have continued to use some medium, be it clay or paper, to abstractly represent the goods identified, or the monetary value stated. This is true to such an extent that the focus tends to be more on the instrument than the objects themselves. Accordingly, we must keep in mind that the instrument is merely the medium for transfer. On that basis any medium, including the internet can be used if the parties agree and have confidence in it. It is the information that’s important, not the paper.
There is nothing inherent in a paper check, draft, warehouse receipt, bill of lading, and so on that deserves our absolute confidence. In fact our common experience is that such instruments are susceptible to deception, fraud, and error, and we use them with the knowledge that they are less than perfect. The risk of using such instruments is reduced by the rules that develop around them, such as the UCP 500, INCOTERMS 2000, etc. Those rules define the processes for the use of the instruments that prevent misunderstandings and limit misuse. Without such written rules (and the related law developed by courts), confidence in these instruments would be much reduced. After all, it would be considered quite risky to purchase real estate with only the deed as proof of that purchase, no matter how many seals, ribbons, or signatures the deed might carry.
For a transaction as important as the conveyance of real estate, an independent registration system is essential to provide the confidence necessary to make the deed a worthy instrument. Certainly, if the registration system were suspected to be corrupt, nothing in the paper deed would overcome that suspicion. Thus it can be said that neither the paper itself nor the mere printing and embellishments on that paper are the key to negotiability. Rather, it is the agreed process that the medium (which currently is paper) is put through that achieves negotiability. If we wish to update the medium to the internet, then we need only devise a process that will instill confidence.
However, any process used must be verifiable. How does the transfer of a negotiable instrument verify its authenticity or its contents? This is best accomplished by communicating with the party that issued the instrument. In electronic data transfer without a piece of paper to look at, one would only have the transmission from the transferrer, and thus verification would be necessary in all cases. Since the most secure means of verification is with a trustworthy registry, logic dictates that verification be built into each transfer through some type of registry - either a centralized registry or a registry operated by the issuing party.
Using a registry system (either a central or a one-party register), any negotiable document could be duplicated electronically, provided the movement of that document is broken down into its most elemental steps, and replaced by appropriate electronic data interchange messages. Once it is recognized that the traditional functions of paper can be performed by the electronic transmission of information, then the ultimate business function, negotiability, can be undertaken as well.
The only limitation to electronic data interchange is a mental one. For those who can not bring themselves to abandon impressive looking pieces of paper for computer video screens or printouts, no argument can be put forward to justify negotiable transactions using the internet or other electronic means. Those who need or believe in real e-commerce will come to realize that we put our faith not in the piece of paper, but in the process, and that any process can be duplicated electronically. Thus it is not a question of if it can be done, but when it will be done. Registry Functions Types
Most of the existing registries are worthy models to emulate, having established reputations for integrity. Accordingly, an examination and understanding of their basic structure may well serve to establish future electronic registries.
Government Model
The easiest form of registry to recognize is the Governmental model, where an agency or subdivision of the state records and authenticates transfers of property in public records. This type of registry is essential for high value property and land transactions. For public policy reasons, the state usually takes no responsibility for any errors. The costs of such registries are generally covered by the user fees, although in some cases the state may bear part of the costs.
Central Model
Another form of registry is the central model, in which a private group conducts its transaction over a private network accessible only to its members. Banking networks, such as S.W.I.F.T., can operate securely and quickly in these environments, as can networks devoted to stock trading. A central registry requires a considerable number of staff to enforce system rules and maintain security. The high cost of this can be spread out over many users to lessen the impact on the bottom line. But even spread out, the expense can be significant - justified by the greater security and reliability provided by a central registry than that provided by any one bank at the same level of cost. Access to the actual records of the transactions are usually kept confidential, but summaries of the transactions may be reported publicly in areas such as stock trading. Transactional costs are usually borne by the users; rule books are a necessity.
Private Model
Finally, there is a private form of registry that is conducted over open networks, whereby the issuer of the document of title (or the party having responsibility for the safe delivery of the property) administers the transfer or negotiation process. Liability for misdelivery parallels the paper practice. Costs are borne by each user, but should not be significant since complexity is avoided and no additional staff are likely to be needed to run a central register.
GEORGE F. CHANDLER, III, is an international leader in the development of the rules for trade and transport under Electronic Commerce. He is a Partner at Hill Rivkins & Hayden, LLP, in Houston, Texas. Chandler served as Counsel, Chemical Carriers Association, Inc., 1987-1994. Member, U.S. Delegation to UNCITRAL Working Group on Electronic Commerce (1992-1996); Member, American Bar Association; Maritime Law Association of the United States - Proctor [Board of Directors, (1993-1996); Chairman, Electronic Communications and Commerce Committee, (1995-1999); Chairman, Committee on Carriage of Goods (1981-1995); Chairman, Electronic Bills of Lading Subcommittee, (1990-1991)]; Comité Maritime International - Titular Member [Member, CMI International Subcommittee on Carriage of Goods, (1995-1998); on Issues of Transport Law (2000-present); EDI Working Group (1996-present); CMI/UNICITRAL Group of Experts on Electronic Contracts of Carriage 1995]; Houston Maritime Arbitrators Assoc.- President (1998-present). Chandler is author of ‘Maritime Electronic Commerce for the 21st Century’. 22 Tulane Mar. L.J. 463 (1998); Negotiable Transactions Using EDI, EDI Forum; The Journal of EDI. 138 (1992); Transfer of Ownership in Int’l Trade: USA. Transfer Ownership in Int’l Trade. Kluwer ICC (1999), and has written in various other publications.