Electronic Data Interchange (EDI) and
the Law
By Eric S. Freibrun, Esq.
Electronic Data Interchange (EDI) is the
exchange and conduct of routine business transactions in a computer-processable electronic
format. Typical applications include purchase orders, acknowledgments, pricing schedules,
order status inquiries, shipping and receiving scheduling and confirmation, invoices, and
payments. EDI is, in essence, electronic paperless contracting between two commercial
parties.
EDI has been in use for over twenty
years, in various formats, and originated as companies sought to develop more efficient
means to conduct business. The availability and advance of computer and telecommunications
technologies presented an opportunity to enhance the efficiency of many paper-based
business processes. In the late 1970s, the American National Standards Institute began
developing the first of many sets of domestic and international standards for data
communication, and this process continues as the technologies evolve.
EDI has proven itself as a viable means
of expediting and facilitating binding contractual relationships between commercial
parties. Notwithstanding that EDI trading partners may intend to be contractually bound by
the terms of their electronic transactions, the law is very unclear on the question of
whether EDI contracts are legally enforceable. This issue becomes increasing relevant as
large companies continue to require not only their most important larger trading partners,
but even their smallest suppliers, to conduct business with them electronically. Further,
fraud in electronic funds transfer has been increasing, highlighting the potential
weaknesses of current electronic communications techniques and record keeping. As
technologies advance, we can only expect EDI volume to increase, with billions of dollars
changing hands -- pursuant to "contracts" whose legal enforceability is
questionable. As there are no reported cases on EDI or any U.S. federal or state laws
dealing directly with the subject (except for a federal regulation concerning uniform data
transmission standards for federal agencies), commercial parties trading by EDI do so in a
world of legal uncertainty.
To be enforceable, a contract must have
these three basic elements: offer, acceptance and consideration. If the parties intend
their EDI transactions to be enforceable as contracts, the transaction sets (the various
electronic data, messages and signals constituting the EDI transaction) must contain all
the information traditionally necessary to form a paper contract. EDI contracts typically
comport with these requirements by communicating a purchase order transaction set (the
offer); a purchase order acknowledgment transaction set (the acceptance); and an
electronic payment (the consideration).
Are EDI contracts enforceable? The short
answer is probably yes, if one analogizes from the law applicable to conventional paper
contracts signed by real people. Since EDI typically involves the transfer of goods
between merchants, the Uniform Commercial Code ("UCC") will likely apply and its
provisions liberally interpreted to facilitate the formation of legally enforceable
commercial contracts. At a minimum, the "statute of frauds" requirements of the
UCC must be met -- the contract must be signed and in writing if it involves the sale of
goods for over $500. But EDI transactions are not in writing nor do they involve a human
signature.
The UCC requires a written contract to be
"signed by the party against whom enforcement is sought" in order to
authenticate the document, to verify that it does indeed originate from its identified
source. Some flexibility is permitted as to the form of authentication, e.g. any symbol or
signature can be used if the intent is to authenticate. EDI transactions can be
electronically "signed" by containing within their data streams algorithms which
authenticate the identity of the sender, in effect acting as a "password" -- the
electronic equivalent of a personal signature. This password can be read by the recipient
by means of an electronic "key." If EDI trading partners agree upon the method
of authentication to be used in their EDI transactions which they intend to serve as
binding agreements, it seems logical that the law should regard these transactions as
legally binding consistent with the parties' intent. Yet, as the UCC does not define the
meaning of "authenticate," it is impossible to determine the precise legal
requirements for EDI signatures.
Whether an EDI transaction set can be
considered a "writing" under the UCC statute of fraud requirements is also an
entirely unsettled legal question. The definition of "writing" under the UCC
includes "any...intentional reduction to tangible form." Yet electronically
executed contracts are not clearly defined as included in this definition, either by the
UCC or case law. Nevertheless, because EDI transactions are the "digital
analogs" of written contracts -- their electronic equivalents -- they should be as
enforceable as conventional paper contracts, provided they can be properly authenticated.
Various organizations exist to assist
companies engaging in EDI or contemplating doing so by providing guidelines and data
transmission standards. Examples include the Data Interchange Standards Association,
located in Alexandria, Virginia, and the International Chamber of Commerce. But the best
way for EDI trading partners to increase the odds that their EDI transactions will be
legally enforceable is to enter into an EDI Trading Partner Agreement.
Trading Partner Agreements are written
contracts between two or more parties wishing to trade electronically via EDI or related
technologies. At a minimum, the agreement should express the parties' intention that their
EDI transactions be considered as valid and enforceable as conventional paper contracts.
It should further address apportionment of risk (especially where third party data
transmission service providers are used), security procedures, signature definitions, the
definition of receipt of a communication, business issues generally contained in standard
purchase order terms, the need for confidentiality of certain data, statute of frauds
issues (e.g. identifying legal theories by which applicable "signed writing"
requirements may be deemed satisfied), arbitration and miscellaneous items such as agreed
upon transaction sets and data transmission standards and protocols.
With respect to EDI, commercial law has
not kept pace with commercial practice. Until legislatures address EDI legal issues, a
comprehensive EDI Trading Partner Agreement remains the best means by which trading
partners can define the nature and scope of their EDI trading relationship, and bolster
the enforceability of their EDI transactions.
Attorney Eric Freibrun specializes in
Computer law and Intellectual Property protection, providing legal services to information
technology vendors and users. Tel.: 847-562-0099; Fax: 847-562-0033; E-mail: eric@freibrun.com.
Copyright © Eric S. Freibrun, Esq., Law Offices of Eric S. Freibrun, Ltd. All rights
reserved.
