Legalising B2B e-commerce - Industry Trend or Event

Telecommunications, March, 2001 by Alex Garcia-Tobar

In order to achieve widespread acceptance of high-value transactions, legally binding B2B e-commerce is critical and must be made readily available by large corporations within the internet arena.

High-value e-commerce is projected to shift rapidly from proprietary electronic data interchange (EDI) technology and paper-based transactions, towards the internet and open digital signature-based solutions. Unlike consumer electronic commerce (which is quickly moving into the mainstream) high-value e-commerce for very diverse applications (such as supply-chain management, trade finance, loan processing, healthcare delivery, and information access) is typically conducted by large corporations. These organisations will exchange information either over proprietary networks using EDT formats, or using paper-based mechanisms. But now a new market shift is underway where enterprises are moving away from proprietary EDT technology and paper, towards a more open internet infrastructure.

Considering that current EDT systems support procurement efficiencies, enable savings by automating tasks and increase visibility of information among vendors -- while providing stronger links to customers, partners, and suppliers -- why the dramatic change?

The reality is that the scope of EDI has always been limited intentionally to ensure controlled activity within a closed environment. However, as a result of heavy overheads associated with the EDI infrastructure, many small, medium and even large businesses have been shut out. In direct contrast, an open internet infrastructure opens doors to an expanded supply chain, while at the same time enabling lower operational costs and enhanced procurement efficiencies.

New challenges

But the extranet environment also poses new challenges. By far the most important is the need to protect the high-value transactions typical of B2B. These high-value transactions require much greater security and management than most online consumer transactions. Consider a typical consumer e-commerce transaction. Is it a book from amazon.com for US$21.99 ([epsilon]25) or higher-value purchases like an airline ticket or a personal computer? One way or another, the average transaction will likely fall below the US$1,000 ([epsilon]1,077) mark. But with mission-critical applications like electronic bill payment, insurance policy management and claims processing -- in addition to regulatory compliance and supply chain management being conducted over extranets -- a B2B transaction is routinely in the thousands, millions, or even hundreds of millions of dollars. Moreover, while a credit card maximum liability cap of a US$50 ([epsilon]54) protects consumers engaging in e-commerce, there are no such guarantees in pl ace for B2B e-commerce.

With so much money at stake, failure to provide robust protection can prove massively expensive. Financial repercussions can he astronomical, legal entanglements limitless, and the effect on business partners incalculable.

Let's look at some hypothetical companies which could run into some very real difficulties if B2B e-commerce is not legally binding. Take, for example, an insurance company which transfers confidential medical information to an associated medical facility. An unauthorised medical facility staff member receives the communication and then for malicious or monetary reasons, threatens to release subscriber information to employers and other interested parties. The authorisation breach occurs within the confines of the medical facility, but the insurance company is accused of liability. How many thousands of lives could be affected in this single incomplete transaction? How many lost customers? What price in customer confidence and reputation? And how many ensuing legal baffles?

Let's also imagine that a high-tech manufacturer based in Europe accepts a contract from a supplier in the US. It then [MH1]begins to market and manufacture its product. But when the required parts fail to appear on time, the supplier disavows the contractual agreement. This is because communication occurred online and the necessary evidence is unavailable. The company has no legal recourse. Meanwhile, the major customers are lost and the after-effects ripple throughout the company's supply chain.

And finally, what about a company who accepts a contract from a supplier internationally and supplies a letter of credit, but the supplier rejects the letter of credit because it's communicated digitally, and neither the supplier nor his bank has the means to verify its authenticity or legal validity?

Legally binding e-commerce

Such examples only serve to illustrate that legally binding electronic commerce is critical to support high-value transactions. Achieving legal-grade e-commerce, however, involves several complex issues. Some relate to security -- others to the law -- while additional issues relate to operational practices in place for the parties engaging in the high-value e-commerce. But to really understand what it means to be legal-grade, it's first important to understand the more basic issue of how legally binding contracts are formed between entities transacting business.