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The Electronic Transactions Act: what it means for your business

15 May 2008

This electronic-specific legislation is an attempt to remove impediments to e-commerce, bringing New Zealand into line with most other developed countries, including the United States, the European Union member states, Australia, Canada and Japan.

The focus of the Act is on facilitating the use of electronic technology. In an era distinguished by rapid change, the Act aims to give businesses some certainty when transacting online. In this edition of Counsel we outline the provisions of the Act and its implications for businesses in New Zealand.

Electronic technology – why do we need legislation?

Electronic technology has changed the way we organise our lives, interact with other people and do business. The Internet, mobile phones, WAP technology and PDAs (Personal Digital Assistants) are just a few of the now commonplace technologies in a world characterised by cheap, fast and reliable global communications.

Many of our existing laws apply to these electronic transactions. Yet e-commerce has also challenged many of the traditional notions governing the way we do business. When is an email received by the recipient? Which country’s law applies in a dispute between parties dealing over the Internet? Can a contract be legally binding through the use of an electronic signature? Can a New Zealand business be taxed by foreign tax authorities for goods sold by that business over the Internet?

The New Zealand Government introduced the Act in an attempt to alleviate uncertainty and encourage e-commerce.

The provisions of the Act and their implications

Purpose of the Act

The Act claims to facilitate the use of electronic technology by:

  • reducing uncertainty about the legal effect of electronic information and communications
  • reducing uncertainty about the time and place of dispatch and receipt of electronic communications, and
  • allowing certain paper-based legal requirements to be performed using electronic technology that is functionally equivalent to the present legal requirements.

The key principles underlying the Act are those of “functional equivalence” and “technological neutrality”. Functional equivalence means that the law will not discriminate between paper-based transactions and electronic transactions.

Technology neutrality means that the law will not discriminate between the various forms of technology.

To try and achieve these principles, the definition of “electronic” has been drafted broadly to include “electrical, digital, magnetic, optical, electro-magnetic,biometric and photonic”.

Reducing uncertainty

The Act clarifies that an electronic transaction or communication cannot be denied legal effect solely because it is in electronic form.

Part Two of the Act establishes default rules specifying the time and place of dispatch and receipt of electronic communications. “Electronic communication” encompasses any communication by electronic means, for example, email and internet telephony. Because email is currently the most common and well-known form of electronic communication, it is used below to illustrate the default rules:

  • Time of dispatch: an email is dispatched (or sent) at the time it first enters an information system outside the control of the sender. In most cases an email will be dispatched the moment the sender hits the "send" button. Usually, the "information system" will be a server (or its equivalent), and an information system "outside the control" of the sender is likely to be the server of the sender’s Internet Service Provider.
  • Time of receipt: determining when an email is received is dependent on whether the recipient has designated a particular system for the purpose of receiving email. If a system has been designated, the email will be received when it enters that information system. If a system has not been designated, an email is received when it comes to the attention of the recipient.
  • Place of dispatch and place of receipt: an email is taken to be dispatched from the sender’s place of business. Or, if there is no place of business, from the sender’s ordinary place of residence. Similarly, an email is received at the recipient’s place of business or ordinary place of residence.

The default rules apply to all electronic communications, whether arising under statute, regulation or contract, but importantly, the default rules will only apply if the parties do not expressly address the issue of when and where electronic communications are dispatched and received.

Notably, the Act does not clarify the difficult issue of when a contract is actually formed online. The standard position of contract law is that a contract is formed once acceptance has been communicated to the party making the offer. In the case of instantaneous communications, e.g. telephone or telex, notification of acceptance is effective at the time and place the communication is received (the “instantaneous communications” rule). Because electronic dealings generally happen by email, the standard position may be abandoned in favour of the “postal acceptance” rule (i.e. the contract is formed when the acceptance is deposited in the post or an email is sent).

Some commentators assume that the Act overrides the postal acceptance rule. However, the Act does no more than define when and where a communication is sent and received. It does not state which event – dispatch or receipt – determines when the contract is formed. This uncertainty could be problematic if there is a system error and email acceptance is delayed, or the email is never received.

It is likely that electronic (including email) communications will be governed by the instantaneous communications rule. However, until this issue is resolved, the parties should agree in advance when acceptance will occur.

Meeting paper-based legal requirements electronically

Part Three of The Act allows certain paper-based statutory requirements to be fulfilled electronically. The underlying philosophy of this part of the Act is technological neutrality, i.e. the technology used to fulfil the statutory requirement is irrelevant, provided that it is functionally equivalent to performing the task manually.

So, the Act enables electronic fulfilment of statutory provisions which require:

  • information to be in writing
  • information to be recorded in writing
  • information to be given in writing
  • a signature (provided the electronic signature adequately identifies the signatory and indicates the signatory’s approval of the information to which the signature relates. The electronic signature must further be “as reliable as is appropriate” in the circumstances)
  • a signature or seal to be witnessed
  • information (whether in paper or electronic form) to be retained
  • information (whether in paper or electronic form) to be provided or produced to a person
  • a person to be required to provide access to information (whether in paper or electronic form)
  • a document to be compared with an original.

At first glance, it appears that these provisions only apply in situations where there is a statutory requirement as to the form of documents – for example, the provisions in the Companies Act 1993 requiring directors to sign certificates in various circumstances. On this analysis, voluntary obligations are left to the common law.

However, one commentator suggests that the scope of these provisions may be much greater than initially thought. Where contractual obligations to provide information are fulfilled electronically, the default rules in Part Two will apply.

Arguably, there are legal requirements embedded in the default rules that will trigger the compliance measures in Part Three. Accordingly, electronic communications under private contracts would also need to meet the requirements found in Part Three.

This interpretation does not accord with the intention of Parliament as it appeared at the time of enactment. However, the uncertainty surrounding the Act’s application to contractual obligations awaits resolution by the courts. Accordingly, one of the purposes of the Bill – to provide certainty in respect of electronic transactions – is only accomplished where there is a statutory requirement as to form.

The exclusion of specified legislation and transactions from the ambit of these provisions further complicates their application. Those exclusions apply in situations where the Government believes that it may not be appropriate to allow the use of electronic communications, for example, because documents or dealings require a very high level of integrity, documents do not have an electronic equivalent, or the use of technology may undermine the policy objective of the legislation.

One of the clearest examples of a document giving rise to these sort of concerns is a will. An electronic will would not be given legal effect because the Government considers wills to have special characteristics, such as the need for an extremely high degree of assurance regarding integrity and the need to be confident that the will can be viewed long after it was created. Other examples of excluded documents and transactions are:

  • bills of lading
  • negotiable instruments, such as cheques
  • affidavits, and other documents given on oath; and
  • powers of attorney.

The elimination of certain statutes and transactions from the Act’s ambit limits the Act’s utility in practice.

Differences between the New Zealand Act and the Australian Act

Although the Act has many similarities with the Australian Act, a noticeable difference is that the Australian Act requires government departments to accept electronic communications where there is a statutory requirement as to form. By contrast, New Zealand government departments must first consent to the use of electronic communications before the provisions of the Act will apply in these circumstances.

How will the Act affect my business?

Inevitably, e-commerce will affect every business. However, the Act is an enabling piece of legislation which does not require anyone to change their actions. It aims to remove impediments to the use of electronic technology, not to compel inpiduals and businesses to use electronic technology. Accordingly, if you wish to do business electronically you need the consent of any other relevant party. Likewise, third parties will need your consent in order to conduct business electronically with you.

The Act should encourage you to consider how you operate your business. The first step is deciding whether, and to what extent, you want your business to embrace technology. Some examples of how the Act can be used to benefit your business are:

  • company directors will be able to fulfil their numerous Companies Act obligations to sign certificates and documents using an electronic signature
  • shareholders have various rights under the Companies Act which must be effected “in writing”, in particular, the right to make written requests for information about the company and the ability to waive the right to receive documents from the company. Shareholders will be able to make these requests or waivers via email or other electronic communications
  • your business will be able to send out a range of documents, for example, annual returns, by email or other electronic means where these documents previously had to be printed out and posted; and
  • your business can cut down on storage space by storing on disk some documents which previously had to be physically retained. Further, you can provide persons entitled to access to that information, for example, shareholders, with that information in electronic form.

Once you have decided to adopt e-commerce, there are further practical steps to take. In particular, and as discussed above, the Act contains many exceptions and you will need to work out what the Act allows to be produced, signed, sent and stored electronically. You must then ensure that the technology you use meets the requirements of the Act in relation to the integrity and reliability of documents now and in the future.

Conclusion

The Act is not a radical piece of legislation designed to alter people’s behaviour or dramatically change existing law. Nor does it address all the issues currently impinging upon electronic transactions both in New Zealand and internationally. Rather, the Act is a very broad statement of principle which will inevitably require judicial input to resolve more detailed issues. However, the Act should provide some comfort to businesses as to the reliability and enforceability of their electronic dealings. And, as we progress further into the technology age, any measure of comfort is to be welcomed.