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Paper - United Nations Convention on the Use of Electronic Communications in International Contracts (UNECIC) - Colloquium - Articles 19 and 20 (Declarations) (September 2007)
- Introduction
- Article 19 - Declarations on the scope of application
- Article 20 - Communications exchanged under other international conventions
- Conclusion
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Introduction
In 2005, the United Nations Commission on International Trade Law (UNCITRAL) finalised the Convention on the use of electronic communications in international contracts following over three years of deliberations. It is the first UN Convention addressing legal issues created by the digital environment.
The Convention seeks to enhance the legal certainty and commercial predictability of international electronic transactions by setting out a number of interpretive rules for the use of electronic communications in negotiating and forming contracts.
The new Convention is likely to establish a default standard for electronic transactions. Even if a country does not ratify the Convention (once it is brought into force) it will still influence the terms of a transaction; particularly where one contracting party is from a country that is a signatory to the Convention.[1]
The Convention also seeks to harmonise national law regarding how electronic contracts can be made. Harmonised domestic legislation will overcome the legal uncertainty in international business transactions where contracting parties are from different countries. A more certain legal environment will increase confidence in conducting electronic transactions, and in turn participation in e-commerce.
However, the complex provisions in the Convention on scope, exclusions, party autonomy and declarations may undo some of the good intentions of the Convention, and this paper raises concerns about the management of these exclusions and declarations in practice.
There are in fact several Articles in the Convention that have an impact on the scope of the Convention and its potential application to a specific transaction. Unfortunately, all of these Articles need to be read together to determine the exact scope of the Convention:
- Article 1. Scope of application;
- Article 2. Exclusions;
- Article 3. Party autonomy;
- Article 19. Declarations on the scope of application; and
- Article 20. Communications exchanged under other international conventions.
This paper concentrates on Articles 19 and 20. However, the other relevant Articles are briefly described so that the interaction of all these scope Articles can be understood.
Article 1 - Scope of Application
Broadly, the Convention applies to the use of electronic communications in connection with the formation or performance of a contract between parties whose place of business is in different States (Article 1). The application of the Convention is not autonomous but applies when the principles of private international law apply to the law of a contracting state whose law governs a contract.
By applying the Convention to electronic communications rather than to the contract, the scope of the Convention is broadened significantly and can apply in a number of situations, including:
- Where a contract is formed partially by electronic communications and partially through other, more traditional means such as orally or through written communications; and
- To communications made during the negotiation stage of a contract as well as any communications made in connection with contract formation. The scope of the Convention must necessarily be this broad as communications made during the negotiation and performance stages play a significant role in shaping parties’ understanding of the contract terms. It is not reasonable to judge a contract without looking at the circumstances surrounding its creation. This reflects long-standing principles of contract law.
However, Articles 2, 3, 19 and 20 place a number of significant qualifications on this prima facie broad scope of application. These Articles are discussed in the sections below.
During the drafting of the Convention there were several scoping questions that were the subject of debate. These included:
- Should the convention be applicable to goods and service or goods only?
The Expert Group ultimately determined that it was appropriate for the convention to address also contracts outside the sphere of the sale of goods. ‘It is particularly important that the convention also cover transactions in services’.[2] - Should the convention be applicable to international contracts only?
There would be some benefits if the same rules apply irrespective of whether a transaction is domestic or international. However, the Expert Group noted that ‘many states will likely be less willing to accept and ratify a convention that interferes with their law for domestic transactions’. [3] The Convention thus allows enacting states to decide whether to extend Convention provisions to domestic contracts. (Most of the trade law instruments that have been prepared by UNCITRAL apply only to international transactions[4]).
Article 2 - Exclusions
Certain matters are specifically exempted from the Convention. These are contained in Article 2, and are:
- Contracts concluded for personal, family or household purposes (Article 2(1)(a));
- Transactions on a regulated exchange (Article 2(1)(b)(i));
- Foreign exchange transactions (Article 2(1)(b)(ii));
- Inter-bank payment systems, inter-bank payment agreements or clearance and settlement systems relating to securities or other financial assets or instruments (Article 2(1)(b)(iii));
- The transfer of security rights in sale, loan or the holding of or agreement to repurchase securities or other financial assets or instruments held with an intermediary (Article 2(1)(b)(iv)); and
- Transferable trade documents, including bills of exchange, promissory notes, consignment notes, bills of lading, warehouse receipts, or any other transferable document or instrument that entitles the bearer or beneficiary to claim the delivery of goods or the payment of a sum of money (Article 2(2)).
The most significant exemption in the Convention is consumer contracts (Article 2(1)(a)). A similar exclusion appears in the Convention on Contracts for the International Sale of Goods (1980). Consumer contracts have been excluded from the Convention as the rules covering these contracts differ from country to country. Regulation of electronic communications in consumer contracts requires protection provisions that go beyond the provisions of the present convention.
During the development of the Convention it was also felt by UNCITRAL that the financial service sector was already subject to well-defined regulations and industry standards that addressed the legal issues relating to international e-commerce. The inherently cross-border nature of these kinds of financial transactions would not make it appropriate for these transactions to be excluded through declarations made by states under Article 19.
The inclusion of exclusions has the potential to reduce the impact of the Convention on e-commerce. It has been the experience in some key jurisdictions (notably Australia and Canada) that e-commerce law exclusions have been difficult to manage in practice, and have become a burden for the widespread adoption of e-commerce and e-government practices.[5]
Article 3 - Party Autonomy
Article 3 of the Convention gives parties the power to agree to exclude, vary or derogate from all or part of the provisions of the Convention.
During the development of the Convention, this appears to have been a non-controversial provision:
The Expert Group would like to stress that, in its view, it is important that the principles of freedom of contract and party autonomy be very strongly anchored in the convention, whatever form it may take. This should be non-controversial, since the United Nations Sales Convention already recognises these principles, and there is no suggestion ... that the situation should be different in the new convention. However, for avoidance of misunderstanding, and to ensure that business has confidence in the convention, the Expert Group favours a strong affirmation in it that its rules are default rules that parties may derogate from.[6]
Party autonomy, or the principle of contractual freedom, is important to ensure parties are at liberty to choose who they contract with and on what terms. There are also distinct practical advantages to this approach as it allows parties to resolve amongst themselves any legal difficulties arising from the use of electronic communications.
In practice however, the provision of unfettered party autonomy may make it difficult to develop a uniform or default standard in electronic contracting.
Article 19 - Declarations on the scope of application
Article 19. Declarations on the scope of application
(1) Any Contracting State may declare, in accordance with Article 21, that it will apply this Convention only:
(a) When the States referred to in Article 1, paragraph 1, are Contracting States to this Convention; or
(b) When the parties have agreed that it applies.
(2) Any Contracting State may exclude from the scope of application of this Convention the matters it specifies in a declaration made in accordance with Article 21.
Overview
Article 19 of the Convention gives contracting states, through a declaration made when signing the Convention, broad powers to limit the scope of application. The application of the Convention can be limited by placing restrictions on criteria for when the Convention will apply or by excluding specified matters from the scope of application.
Criteria that a contracting state can apply to the scope of the Convention include:
- Only applying the Convention when states from which contracting parties have their place of business are a signatory to the Convention (Article 19(1)(a));
- Only applying the Convention when the parties have agreed that it applies (Article 19(1)(b)); or
- Specifying matters to exclude from the scope of application of the Convention in a declaration made when signing the Convention or at any subsequent time (Article 19(2)).
Discussion
The flexibility given to states to limit the application of the Convention could pose a significant barrier to the international harmonisation of the legal rules surrounding e-commerce. The Convention sets out a number of provisions aimed at enhancing legal certainty when using electronic communications in contract negotiations and performance, however this certainty can be reduced if a state makes a declaration only applying the Convention to certain matters.
As it stands, Article 19 has the potential to re-introduce the very legal ambiguities that the Convention is designed to avoid. It could also be a significant barrier to the harmonisation of the rules surrounding electronic contracting.
The Convention has been created for the benefit of private parties, not public bodies wishing to engage in international electronic contracts. It appears to be an undue obstacle to international e-commerce if a party could not benefit from the provisions of the Convention because the state where the other contracting party had their place of business had exempted the matter covered by the contract.[7] It should also be remembered that parties are given complete discretion to vary or derogate from the Convention - it seems almost superfluous to give States a comparable power to vary the scope of application of the Convention.
As yet there has been no discussion in UNCITRAL or the Working Group on Electronic Commerce of a mechanism to track limitations a contracting state has placed on the application of the Convention. The most obvious potential example of such a mechanism would be a website, managed by the UNCITRAL Secretariat, listing exemptions a contracting state has made in declarations.
Without such a mechanism it will be difficult for private parties to ascertain whether or not a matter covered in a contract has been exempted either by the state where they have their place of business or the state where the other party has their place of business. The burden of discovering such information may become a barrier to efficient international electronic trade.
In addition to the broad power given to states to exempt matters, states can also declare that the Convention only applies when parties agree to apply the Convention, for example, in the contract itself or through some other ongoing arrangement. The effect of such a declaration is to make the Convention apply only on an opt-in basis in those states.
Article 20 - Communications exchanged under other international conventions
Article 20. Communications exchanged under other international conventions
(1) The provisions of this Convention apply to the use of electronic communications in connection with the formation or performance of a contract to which any of the following international conventions, to which a Contracting State to this Convention is or may become a Contracting State, apply:
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958);
Convention on the Limitation Period in the International Sale of Goods (New York, 14 June 1974) and Protocol thereto (Vienna, 11 April 1980);
United Nations Convention on Contracts for the International Sale of Goods (Vienna, 11 April 1980);
United Nations Convention on the Liability of Operators of Transport Terminals in International Trade (Vienna, 19 April 1991);
United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (New York, 11 December 1995);
United Nations Convention on the Assignment of Receivables in International Trade (New York, 12 December 2001).
(2) The provisions of this Convention apply further to electronic communications in connection with the formation or performance of a contract to which another international convention, treaty or agreement not specifically referred to in paragraph 1 of this Article, and to which a Contracting State to this Convention is or may become a Contracting State, applies, unless the State has declared, in accordance with Article 21, that it will not be bound by this paragraph.
(3) A State that makes a declaration pursuant to paragraph 2 of this Article may also declare that it will nevertheless apply the provisions of this Convention to the use of electronic communications in connection with the formation or performance of any contract to which a specified international convention, treaty or agreement applies to which the State is or may become a Contracting State.
(4) Any State may declare that it will not apply the provisions of this Convention to the use of electronic communications in connection with the formation or performance of a contract to which any international convention, treaty or agreement specified in that State’s declaration, to which the State is or may become a Contracting State, applies, including any of the conventions referred to in paragraph 1 of this Article, even if such State has not excluded the application of paragraph 2 of this Article by a declaration made in accordance with Article 21.
Overview
Article 20 contains provisions extending the scope of application of the Convention to other conventions so that the rules surrounding the use of electronic communications in contract formation apply without needing to alter these conventions. It creates a somewhat complex but flexible regime for opting in and out of international instruments:
- Article 20(1) lists a number of in force Conventions to which the electronic contracting convention applies.
- Article 20(2) provides that the Convention applies to communications made under any other international instrument unless the state elects not to apply the Convention. If states do not elect to do this the Convention applies. The opt-out approach used in Article 20(2) is both necessary and desirable. If an opt-in regime was adopted states may never elect for the Convention to apply to other international conventions;
- Article 20(3) allows a state to apply the Convention to specified international instruments if a state has made a broad excluding declaration under Article 20(2); and
- Article 20(4) allows states to opt out of specific international instruments if a declaration is not made under Article 20(2), which applies the Convention to all international instruments.
Discussion
The four-pronged approach in Article 20 creates a highly flexible system of choosing international instruments to which the Convention applies. This approach has received strong support from commentators:
The technique adopted in this Convention is a wise strategy as it is much easier to give new meaning to older conventions than to renegotiate all of them. In fact, without an attempt to broaden the scope of older conventions, international e-commerce would be left in legal vacuum.[8]
However, with this flexibility comes the reduced certainty of harmonisation. ‘Because each of these types of declarations can be made at any time, the potential ‘path’ of declarations over time could become complex.[9]
Overall, the benefits of allowing the Convention provisions to automatically apply to existing Conventions without having to re-negotiate and amend those Conventions are significant, and these benefits probably outweigh the concerns over tracking any declarations that have been made by individual states that limit the application of the Convention.
However, there may be a need for a mechanism to track any declarations states have made under Article 20, so that parties wishing to engage in e-commerce can determine whether or not the Convention will apply to specific transactions.
Conclusion
Greater familiarity and acceptance of the rules surrounding electronic contracts and the desire for greater legal certainty and international harmonisation has prompted UNCITRAL to develop the Convention on the Use of Electronic Communications in International Contracts.
The Convention has been developed with the intention of creating an internationally harmonised legal regime for electronic contracting. However, the flexibility offered to member states to alter the application through declarations made under Articles 19 and 20 may act as a barrier to harmonisation as it creates the potential for a regime of varying and multitudinous exemptions.
In addition to Articles 19 and 20, further limitations on the scope and application of the Convention are contained in Article 1 (Scope of Application), Article 2 (Exclusions) and Article 3 (Party Autonomy). When all of these provisions are read together there is a concern that the overall approach to scope and declarations could strip the Convention of the very legal certainty in international electronic contracts it is trying to create. It will therefore be important to establish a mechanism to track limitations a contracting state has placed on the application of the Convention.
[1] For a discussion of the potential impact of the Convention, see: Connolly and Ravindra, First UN Convention on E-Commerce Finalised, Computer Law and Security Report, 2005, <http://www.galexia.com/public/research/articles/research_articles-art35.html>.
[2] Academy of Legal Studies in Business, The New UNCITRAL E-Commerce Convention in the Mosaic of Developing Global Legal Infrastructure, 8-12 August 2006, <http://www.alsb.org/proceedings/copyright/UNCITRAL_William_Luddy_Peter_Schroth.pdf> At section 2.3. See also UNCITRAL, Legal aspects of electronic commerce - Electronic contracting: provisions for a draft convention - Note by the Secretariat, 11-15 March 2002, <http://daccessdds.un.org/doc/UNDOC/LTD/V01/872/66/PDF/V0187266.pdf?OpenElement>.
[3] Academy of Legal Studies in Business, The New UNCITRAL E-Commerce Convention in the Mosaic of Developing Global Legal Infrastructure, 8-12 August 2006, <http://www.alsb.org/proceedings/copyright/UNCITRAL_William_Luddy_Peter_Schroth.pdf>, at section 2.5.
[4] UNCITRAL, Legal aspects of electronic commerce - Electronic contracting: provisions for a draft convention - Note by the Secretariat, 11-15 March 2002, <http://daccessdds.un.org/doc/UNDOC/LTD/V01/872/66/PDF/V0187266.pdf?OpenElement>.
[5] Connolly and Ravindra, Fantastic Beasts and Where to Find Them - A Guide to Exemptions in the Electronic Transactions Act (ETA) in Australia, Internet Law Bulletin, September 2004,
<http://www.galexia.com/public/about/news/about_news-id33.html>.
[6] UNCITRAL, Report of the Working Group on Electronic Commerce on its thirty-ninth session (New York, 11-15 March 2002), 17-28 June 2002, <http://daccessdds.un.org/doc/UNDOC/GEN/V02/527/26/PDF/V0252726.pdf?OpenElement>.
[7] This can be done in accordance with Article 18, paragraph 2.
[8] Paul Przemyslaw Polanski, Convention of E-Contracting: The Rise of International Law of Electronic Commerce Law, 19th Bled eConference, 5-7 June 2006, <http://domino.fov.uni-mb.si/proceedings.nsf/0/48ecfcae60f83bf6c12571800036bae9/$FILE/49_Polanski.pdf>.
[9] Charles H Martin, Social Science Research Network, The UNCITRAL Electronic Contracts Convention: will it be used or avoided?, 6 February 2006, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893927>.
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