LU 3 (2)

EDI and Interchange Agreements

• Electronic Data Interchange (EDI) usually operates within a regulated relationship defined by an interchange agreement.

• An interchange agreement is a framework regulating the rights and obligations of parties continuously.

• Individual transactions are concluded within the scope and control of this agreement.

• A model interchange agreement was developed in South Africa in 1996.

• The UN Economic Commission for Europe Working Party on Facilitation of International Trade Procedures (WP.4) also developed a standard agreement for international use.

• An interchange agreement sets out the rules for using EDI, which is the electronic transfer of commercial or administrative transactions.

• The agreement details the roles and legal responsibilities of trading partners for transmitting, receiving, and storing electronic messages.

• Addressing these topics reduces legal uncertainty and enhances confidence in electronic trading.

• Key issues addressed in an interchange agreement:

  • Selection of EDI messages, standards, and communication methods.

  • Responsibilities for equipment, software, and services operation and maintenance.

  • Procedures for system changes that may impair communication.

  • Security procedures and services.

  • The point at which EDI messages have legal effect.

  • Roles and contracts of third-party service providers.

  • Procedures for handling technical errors.

  • Confidentiality needs.

  • Liability for delays or failures in EDI communications.

  • Governing laws for exchanging EDI messages.

  • Specific arrangements between parties.

  • Methods for resolving disputes.

• A proper interchange agreement can resolve legal issues arising from EDI use without litigation.

• EDI was the first form of smart contracting. Once set up, the system concludes agreements and ensures performance without human intervention.

• Example: A supermarket chain's system automatically reorders products when stock falls below a level. The supplier receives the order and dispatches the stock without human intervention.

Smart Contracts

• Section 20 may become more relevant with increased use of autonomous electronic agents and smart contracts.

• A smart contract is computer code that automatically executes contractual duties upon a trigger event.

• This definition can apply to simple EDI transactions or more complex situations where the agent decides to contract, negotiate terms, conclude the agreement, and fulfill it.

• Three factors motivate the move towards contract automation:

  • Ambiguity: Fear of differing interpretations of natural language contracts.

  • Corruption: Fear that parties or enforcers may be threatened or bribed.

  • Defective enforcement: Fear that a party may evade enforcement.

• Smart contracts aim to address these concerns by replacing natural language with self-executing programming language.

• The code automatically executes contractual duties without human intervention when a trigger event occurs.

• There is no interpretation of the agreement, and neither party can influence fulfillment.

• Some lawyers question the enforceability of smart contracts within existing legal systems.

• Fundamental question: Is a smart contract a type of contract, or merely a tool within traditional contractual practice?

• Smart contracts will remain a blend of code and natural language for the time being.

• However, technology is advancing, and the entire contractual process may be carried out by computer code in the future.

• The future of smart contracts is closely linked to blockchain technology.

• A blockchain is an open, public, decentralized ledger that records transactions in a permanent manner, maintained by multiple participants.

• It is primarily used for cryptocurrency transactions.

• Blockchain and Bitcoin are decentralized, with no central processing controlled by one entity; it’s administered by all participants.

• Despite misgivings, there's an emerging consensus that smart contracts create legal obligations and meet requirements for contract formation under various legal systems.

• Blockchain and smart contracts present an opportunity to replace traditional bill of lading agreements, an area of international trade not yet fully digitized.

• The difficulty in digitizing bills of lading stems from the document's complex nature as a transport agreement, receipt, and document of title.

• Smart contracts meet the requirements of South African common law as fully binding contracts.

• The ECT Act recognizes automated contracts in section 22, referring to contracts concluded by electronic agents.

• Section 1 defines an electronic agent as a computer program or automated means used to initiate actions or respond to data messages.

• Section 20(1)(a) and (b) recognizes the validity of agreements concluded by electronic agents.

• Italy was among the first European jurisdictions to specifically recognize smart contracts in 2019.

• Several US states, including Arizona, Tennessee, Florida, Maryland, and Nebraska, have introduced legislation recognizing smart contracts or dealing with blockchain technology.

• Tennessee legislation defines a smart contract as an event-driven computer program that executes on a distributed ledger to automate transactions.

• The ECT Act's open-ended approach is preferred over technology-specific provisions, as it adequately deals with the challenges presented by smart contracts.

• Recognizing a smart contract as valid under the ECT Act obviates the need for more specific recognition.

• Vending machines are often used as an example of a smart contract. The customer selects a product and inserts money (trigger event), and the machine executes the contract automatically.

• Discussions on smart contracts often focus on their use with blockchain and cryptocurrencies like Bitcoin and Ethereum.

• Ethereum facilitates smart contracts of all kinds and more complex transactions with nested smart contracts.

• This approach opens up smart contracts for various purposes, such as digitizing bills of lading in international transport.

• Digitization of bills of lading has been hampered by the document's role as a document of title.

• Blockchain provides security and trust for smart bills of lading.

• In 2017, UNCITRAL published its Model Law on Electronic Transferable Records to create an enabling legal environment for digitizing transferable documents.

• The Model Law contains legal mechanisms for countries to formulate legislation accommodating the safe use of electronic transferable records.

Time and Place

• Determining the time and place of contract formation is important.

• A valid contract must comply with the law of the place where it was concluded (lex loci contractus), including formalities and consideration.

• The place of contracting may determine the legal system applicable under private international law.

• The place of performance is also a factor (lex loci solutionis).

• Overriding domestic-law provisions at the place of contracting, such as consumer protection, may apply.

• The place of contracting may be relevant in determining jurisdiction in a dispute.

• Determining when the contract is formed is important because:

  • The offeror can retract the offer until valid acceptance, unless the offer is irrevocable.

  • Expiration periods start upon acceptance.

  • The exact timing when performance is due within a period of days of a contract may be of importance.

  • Timing is critical for liability and interest payments.

  • The agreement's existence binds the offeror and offeree to comply with their obligations.

• According to common law, an agreement exists at the time and place determined by the parties.

• The offeror can determine when acceptance becomes final.

• If the offeror isn't stipulating anything else, it is final when:

  • When the offeror is informed of the acceptance by the offeree (information theory).

  • If the postal rule applies, the contract exists when and where the acceptance is posted.

• The ECT Act introduces the reception theory: section 22(2) states a contract is concluded when and where the acceptance is received by the offeror.

• The legislature recognizes the difficulty of determining time and place in the virtual world because the location of communications may not connect with the physical location of the parties.

• Section 23 of the ECT Act addresses these situations:

  • A data message used in an agreement is sent when it enters an information system outside the originator's control.

  • It is received when the complete data message enters a designated information system and can be retrieved and processed by the addressee.

  • It is sent from the originator's usual place of business or residence and received at the addressee's usual place of business or residence.

• An e-mail is sent when it leaves the originator's information system; it is “transported” through the Internet.

• If both parties use the same service provider, it is sent when it can be retrieved by the addressee.

Formalities

• Contract formalities typically include writing, signature, and third-party authentication.

• These formalities provide legal certainty, identification, attribution, assent, and authentication.

• They may be required by statute or by the parties themselves.

• Requiring formalities can hinder commerce due to being time-consuming, cumbersome, bureaucratic, and costly.

• Most legal systems require writing and sometimes a signature for certain contracts.

• Some countries recognize an electronic message as "writing,” while others have uncertainty.

• Authentication by signature is a significant problem, often requiring a physical signature on a paper document.

• South African law generally requires no formalities for a valid agreement; agreements can be concluded by any communication means.

• Two broad exceptions to the freedom of form:

  • Formalities prescribed by law: Several laws require formalities for certain agreements. For example Alienation of Land Act.

  • Formalities prescribed by the parties: Parties may require agreements to be written and signed before becoming valid. For example a Shifren clause.

• The ECT Act makes provision for compliance with formal requirements by electronic data messages and means, in line with the principle of functional equivalence.

• Most data messages displayed on a screen will be considered “writing.