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Jurisdiction: Building Confidence in a Borderless Medium

July 26-27, 1999
Montreal, Canada

Development of International Law Inside Closed GroupsProjects in the Coming 2000's

Åke Nilson
Managing Director
Marinade Limited
1 Gainsford Street
London SE1 2NE , UK


Abstract

This presentation concerns the development of international law inside closed groups. Using an example from the Bolero project for dematerialised international trade, it proposes a way forward for the use of contractual rules to supplement statute and case law, where conventional law cannot be guaranteed to apply in a consistent and predictable fashion to traders using electronic commerce methods.

Private International Law

The normal scope of Private International Law is to define a set of rules determining which national laws to apply in case of a "conflict of laws", in other words, where the rules of several different legislations could be applied to resolve a (private-law) legal problem. For instance, which law applies to the division of the estate of a national of country A who dies in country B, having as heirs citizens or denizens of countries C and D?

However, this is not the area of law reviewed in this presentation. Instead, the presentation reviews the development of a set of rules, applicable internationally, by members of a closed group on a private basis. This should be seen in contrast to the development of law on a public basis, as carried out by the legislature of every sovereign state.

Thus, in this presentation, the reference to private law means law developed by private individuals. In this particular case, we are considering international law, because the rules we are talking about will apply in the same way to citizens of and actions in a number of different states. And finally, we are considering as law any set of rules which determine the rights and obligations of individuals in a way which they are prepared to respect (and ultimately, to enforce).

The development of law

Since this presentation is aimed at describing the development and implementation of private law (as defined above), it is worth briefly touching on some relevant ideas of how law develops. Leaving aside (with a deep bow of respect and acknowledgement of indebtedness) the developments of antique and mediaeval societies, the first major explanation of the development of law is the concept of natural law, i.e. a set of principles which are innate to the universe and which are "obviously right". From this view we can pick up such useful concepts as "suum cuique tribuere"¯give to each what is his (Ulpianus, a Roman writer on law came up with that one, but it fits in nicely) and "pacta sunt servanda"¯agreements must be fulfilled (Grotius).

With the principle of "pacta sunt servanda" follows the concept that all law stems from a basic agreement between citizens to limit some of their individual liberties in the natural free-for-all state (the "bellum omnium contra omnes" of Hobbes), in order to achieve a better result for society as a whole (and therefore also for each member of society)¯the compact of society. This compact is based on natural law and therefore naturally binds every member of society, even today, though the original compact was agreed so long ago that nobody can any longer remember it.

Even if the original compact was perhaps implicit rather than explicit, it seemed like a good idea to the Pilgrim Fathers, who set out to create a completely new society, separated from the old one by a whole ocean. So they decided to create an explicit one, the Mayflower Compact, and felt justified in thinking that this immediate development of a private law would work to everybody’s benefit.

A related principle is that of the sovereignty of the people: laws can only be just if they are agreed to by those whose behaviour will be ruled by them. This idea we find in the Magna Charta, as well as in the American Declaration of Independence and in particular in the French Revolutionary Bill of Rights "Le principe de toute souveraineté réside essentiellement dans la Nation. Nul corps, nul individu ne peut exercer d’autorité qui n’en émane éxpressement."

(David Hume of course came up with a spin on this, and suggested that law is not based on anything natural but instead, it is a creation by people to promote what they agree is good and useful for them¯which still supports the concept of a compact based in the will of the people.)

Summarised very briefly, then, these ideas tend to underpin the development of private law in closed societies. Of course, basing law on principles finalised in the 18th century does rather skip a great deal of further thinking, but then the closed societies discussed in this presentation have perhaps not (yet) evolved to such a degree that more complex doctrines need to be brought in. Apologies therefore to Savigny, Marx, Hägerström and others¯we may come back to you in the future!

Law in closed societies

Of course, clubs and other closed societies have always been keen on developing their own laws, whether referred to as statutes, rules or something else. Indeed, every incorporated company will have its own Articles of Association, and frequently also shareholders’ agreements and many other sets of rules which govern the relations between its members.

One interesting example is the development of private law within the students’ societies of old European universities. These societies started at the same time as the development of universities themselves¯indeed to some extent they were the universities, in the case of Bologna and the other very first medieval universities. The societies came about because of the natural tendency for people of a common origin to stick together for mutual support in a foreign land¯thus students from the same diocese tended to form a single society at Bologna and Paris. These societies then developed in two main streams: one became the colleges of Oxford and Cambridge, and one became the Nations of German and indeed Scandinavian universities. The fraternities and sororities of American universities are undoubtedly related to the latter strand.

Because these societies have been around for such a long time, and because their statutes were generally written down and preserved, they constitute an interesting example of the development of law for the purpose of social support over many centuries and are worth studying for the dynamics of the development of law.

Another relevant example, bringing us somewhat closer to the main theme of this presentation, is the Rule Books of Protection and Indemnity Associations (on account of their tongue-twisting name generally known as P&I Clubs). These clubs are mutual insurance companies for shipowners, covering the exposure of their members to cargo and third-party liabilities. These clubs have complex sets of rules governing when a claim may or may not be paid, the financial relations between the members and the club and so forth.

It is also clear from (comparatively¯the case referred to below is from the 1880’s) recent law that the statutes of clubs and societies have full status as contracts and are upheld by the courts in cases of dispute. For example, the rules of an English sailing club stated that, if any damage was caused by one yacht to another during a club race, the damage was to be paid for in full by the owner of the yacht having caused the accident. In one such case (the Satanita), the owner of the errant yacht sought to limit his liability, irrespective of the club rules, to the universal limit of liability afforded under the then applicable shipping act and based on the tonnage of the yacht (which would have been a very small amount). The House of Lords eventually held that the rules of the club constituted not only a contract between each member of the club and the club itself, but also directly between each member and each other member, and that this contract (because of the principle of freedom of contract) had the power to override the limit of liability set by the "background" law (the word background here used in the same sense as in "background radiation").

The Internet as a pre-society

The main thesis of this presentation is that the Internet somewhat resembles a pre-historic assembly of people, before any major compact of society has been agreed. The old laws applying to the real, physical society are not always appropriate in cyberspace, and even when they are, their application by the judiciary cannot be guaranteed to be consistent and predictable. This leads to uncertainty and, to some extent, to a "bellum omnium contra omnes". Until either there is a new compact of all cyber-society, or the laws of the physical world can be adapted and applied consistently to cyberspace, one way forward for merchants looking for order and security in their transactions is the development of private law for closed societies.

Hierarchy of rules

Another concept worth dwelling on briefly is the way in which laws and rules can be seen to form a hierarchy where certain laws are more important than others, yet those higher-level laws are often dependent on the deliverables of lower layers. In this way, laws can be described in some fashion similar to that of the famous OSI 7-layer model for connectivity.

The level of law discussed in this presentation tends to be found somewhere between the technical standardisation of message content (for instance in EDI message standards¯which form a sort of law) and legislative work in national and international governmental bodies (for instance UNCITRAL).

It may be helpful to refer to the OSI 7-layer model of standardisation for communications. In this model, each layer provides several alternative standards for connection. Each layer can be described as providing specified services to the layer immediately above. The sender and receiver must agree on using one standard for each layer, in order to achieve communication. For a simple example, consider the following: The lowest layer is called the Physical layer. It is responsible for transmitting a bit stream over the communications medium. Standards in this area include the V.2x standards for modem modulation. A modem transmitting bits modulated according to the V.29 standard can create effective communications if the receiving end accepts a bitstream modulated to this standard. At the top, we find the Applications layer. This contains file transfer standards such as FTAM, terminal standards as well as other top-level standards for the use of a network. Between these layers we find layers concerned with the routing and flow control of data, the establishment and close-down of a connection and so forth.

The important point is that there are several different standards to choose from in each layer, but they are each generally compatible with all or at least with many standards in the other layers. Thus, for example, an X.25 packet-switched data connection can use bitstreams provided by V.24 or V.26 modem modulation, and can carry out file transfers or interactive data exchanges.

If we consider the OSI layers as being the base for exchanging data, we can imagine above these layers various layers concerned with the exchange of information. For instance, we could define one layer as being the message format layer, where messages can be formatted either as an EDIFACT message or perhaps as a Microsoft Excel file. We then pass through layers concerned with the meaning of these messages (the upper layers in this group would be an area of competence for private international law in this sense) and into layers concerned with the legal implications of the messages (the lower layers of this group also fall within scope). At the top, we find "the law" in its full majesty¯at the very top perhaps principles such as freedom of speech, human rights and so forth.

Principle layer

UN declaration of human rights

Constitutional layer

Freedom of speech

Commercial law layer

UNCITRAL model law on E-commerce

"Private law"

The ICC

...

Bolero

...

etc...

Meaning of messages

Message Implementation Guidelines (CEFACT)

Message standards

EDIFACT, X.12, Microsoft Word...

OSI applications layer

X.400, SMTP...

...deeper OSI layers...

 

The messaging medium

Copperwire!

It is now also possible to see where the vertical limits to the scope of our layers are. The law discussed in this presentation is not best placed to define the meaning of electronic messages, but it can use the service provided by that layer. In other words, the rules may say: "At such and such a time, a receipt message by the carrier needs to move from the carrier to the buyer." In doing so, the rules make use of the service provided by the layer below, which defines what a receipt message may be. That layer in turn makes use of (perhaps) a definition of the IFTMCS message in the layer below, and so forth.

Moving upwards, we stop before rules concerned with the implications of transfer of ownership, say. So for example, our top layer may provide the service of determining when a transfer of ownership has occurred to a higher layer supplied by commercial law, which deals with the rights of creditors in relation to things owned by their debtors.

Bolero¯an example of a closed society

The Bolero project aims to dematerialise all international trade documentation. It has a long history, which is of little concern to this presentation. Suffice to say that the project is now in the hands of Bolero International Limited, a commercial company set up to deliver the service to the users. It is jointly owned by S.W.I.F.T. and the Through Transport Club.

S.W.I.F.T. is a co-operative venture between some 5,300 banks and other financial institutions around the world, which provides an extremely secure network for payments and other financial transactions. Every day, some US$2.5 trillion are handled through the S.W.I.F.T. network. The Through Transport Club, or the Through Transport Mutual Insurance Association, to give it its proper name, is a mutual insurer of transport operators' liabilities. It has some 1,200 members, including practically all the world's container shipping lines, a large number of freight forwarders, port authorities, terminal operators and so on.

The service, now in beta test and expected to go live in September this year, delivers a secure electronic messaging facility, especially designed for the transmission of electronic messages equivalent to standard trade documents. Naturally, the service is designed to be secure in the technological sense, with digital signatures securing all exchanges and detailed audit facilities available. But it is also designed to be secure in the legal sense, which is of course the aspect of most interest for this presentation.

The concept and aims of the Rule Book

The legal security in the Bolero project is being delivered through the medium of a Rule Book, which is essentially a multi-lateral contract between all users. This contract provides all the rules necessary to make the exchange of electronic messages equally effective as the exchange of paper documents. Since international trade law tends to be an area where the parties are free to contract as they see fit, this contract can effectively override the "background law", as long as no issues of public policy are raised, at least insofar as the parties to the contract are concerned.

In order to make sure that all parties using the service are effectively bound by the Rule Book, it is administrated by an organisation called the Bolero Association (which in fact predates the formation of Bolero International). All users of the service must be members of the Association (which also delivers the usual user-group services) and when they become members, they will "sign on" to the Rule Book, which then contractually binds them to its provisions, both in relation to the Association, but also, importantly, through an agency arrangement, to all other present and future members of the Association. (Of course, it would have been possible under English law to rely on the precedent of the Satanita and not have an explicit agency arrangement, but it was felt that, for the sake of clarity and consistency where English law might not be applicable¯even though the Rule Book itself has English law as its own¯there should be a fully spelled-out agency contract as part of the Rule Book.)

In this way, even though the potential Bolero user community is very large¯there may be one million exporters and importers in the world today¯the users can all be subject to the same contractual rules, which (as will be explained below) may be necessary in order to provide the full functionality of paper documentation through a fully dematerialised system.

The aims of the Rule Book are very precise. It should not interfere with the underlying contracts (e.g. of sale, of carriage or of insurance) negotiated, agreed and implemented by the exchange of electronic messages. Instead, it should leave all parties in exactly the same position as that in which they would have been, had they been using conventional exchanges instead. It should simply provide a "safety-net" so that, in case traditional trade law would give an uncertain result, when applied to a Bolero transaction, the contract will step in and clarify the situation.

Some aspects of this safety-net are very straightforward and easy to deliver, for instance a rule that says that the parties waive their right to contest the validity of a Bolero message as evidence on the sole ground that it is an electronic message, rather than a paper document. In some cases, Bolero attempts to introduce a greater level of certainty than is normally available, for instance in providing that the time-stamp of the central Bolero service shall be accepted by the parties as the time at which any action carried out by means of a Bolero exchange actually becomes effective. This could apply for example where a bank credit facility expires at a certain deadline unless certain information is presented; in such a case, the Bolero timestamp will indicate whether the information was presented in time or not.

In other cases, however, implementing a contractual solution that replicates by electronic means the effect of exchanging paper needs to be more subtle. The best example of this is Bolero’s solution for replicating the functionality of the maritime Bill of Lading, a negotiable document giving (among other functions) to the rightful holder the right to take delivery of the goods it represents from the carrier. Since the B/L is defined as a negotiable document, it carries not just information, but also a value, and it is at this point the difficulties of an electronic implementation become apparent.

A negotiable Bolero Bill of Lading

Documents of title, i.e. documents that carry a value, whether banknotes, bearer bonds, cheques or bills of lading, have a function as physical tokens in addition to their normal documentary functions. The mere presence of the document can identify the holder as entitled to a particular value. This makes them hard to replicate by electronic messaging alone, since electronic messages are non-physical, and also very easy to copy. Worse, any copy made of an electronic message (considered as a bitstream) is exactly equal to the original, so it cannot even be proven which is which.

Therefore, any electronic system trying to provide the equivalent functionality must use some technique in addition to mere messaging in order to provide a workable system. In the case of Bolero, this is a title registry, working in much the same way as most dematerialised share trading systems, where the holder of rights to each B/L is defined as whoever is registered in a central database as that holder. The database can then be updated in various secure manners, to replicate the actions of issuing, trading and redeeming the document of title.

There are, however, further complications stemming from the law on negotiable documents. The first problem is that, in some jurisdictions, the law defines very clearly what a B/L is: it has to be a piece of paper with somebody’s ink signature, and if it isn’t that, it’s not a B/L. Clearly, a database with electronic records, updated by digitally signed messages is never going to count as a B/L in such jurisdictions. So the approach taken by Bolero is simple: it provides not a B/L, but an electronic sub-system that delivers the same functionality (in terms of its effects on the rights and obligations of the parties concerned) as the paper B/L does. For the sake of simplicity, this sub-system is called a Bolero B/L, or BBL for short, but a BBL is not a B/L.

The other complication is that new negotiable instruments can (as a general rule) only be created through statute law. One alternative would be to go to the legislatures of all major trading nations and ask them to recognise the BBL as a new negotiable instrument, but this would probably take slightly too long to be a commercially viable route (even with the assistance of the UNCITRAL Model Law, which devotes a chapter specifically to this issue).

A major reason why negotiable instruments tend to be protected by statute law is because their use can affect the rights of third parties, and this is of course also a problem for Bolero. Bolero can only create a legal safety-net based in contract; a contract binding only on the users of the service. Nonetheless, a contractual solution has been found, which is generally agreed to work at least under English law. This involves a contractual arrangement between the carrier and the shipper, whereby the carrier holds the goods on behalf of the shipper (this is also the case with a normal B/L), but when the shipper wants to transfer his rights to possession of the goods to another person, such as the importer, this is done by novation, so that a new contract (on the same terms) is created between the carrier and the importer. The Bolero registry plays an important role in this novation, by being appointed the agent of the carrier for the purpose of agreeing to such novations.

To the outside on-looker, then, the transaction using a BBL looks exactly like those with a paper B/L, even though the internal machinery is based on a series of contracts instead of statute law and the transfer of a document of title. To use a term from object-oriented programming, the methods and properties of the BBL object are exactly the same as those of a B/L object, but the procedures private to the two objects and used to achieve its functionality are completely different. It is a case of black-box programming (or encapsulation, to use the current terminology).

As a final note, one might wonder why Bolero has gone to this trouble to replicate functionality which in reality is not much used these days, rather than to re-engineer the entire process and do away with the need for negotiability. The reason is simply one of market perception: it is much easier to sell the concept of dematerialised trade documentation if one can simply state that all the current functions of paper documents are catered for and can be replicated, rather than having to sell to a very conservative market both the dematerialisation and a set of re-engineered processes.

Future developments

If Bolero becomes a success and its methods for dematerialised trade become normal practice for a significant proportion of world trade, then eventually, its rules and privately developed law will start to migrate upwards in the hierarchy of law. It may become recognised as normal trade practice and it may eventually become part of the great generalised body of merchant law. At that point, the Rule Book and the closed user group is no longer necessary.

In the meantime, and in order to help things along, it may be possible for organisations such as the International Chamber of Commerce to adopt the provisions of the Rule Book as recommended practice, which would certainly speed up the process. If the migration of the rules towards Lex Mercantoria is too slow, then another approach might be to pick up their principles in an international convention on the use of dematerialised trade documentation. In either case, it is clear that the development of law on a private basis can fulfil a function also in helping the development of general law.

Conclusions

If users of e-commerce services band together in a "club" of some form, it is possible to provide a great degree of legal functionality and security, even in areas which might otherwise be thought to be unsuited to dematerialisation. The concept of a club developing its own law has deep-rooted precedents and is workable even on a relatively large scale. In the longer term, "real law" may develop from club rules, if they prove to be effective in protecting the members’ interest in a stable and predictable legal environment.

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