Volume 7, Number 5, Page 1

Electronic Commerce in the Western Hemisphere: An Ongoing Series

In this edition of the series, experts from the Americas discuss the advancement of e-commerce in their countries and identify the obstacles to the further development of e-transactions. Given the length of the responses, this question will appear in two parts.
The second part shall be published in the next issue of the Trade Report. For further
information on this topic or e-commerce, contact Mariana Silveira (msilveira@natlaw.com)
or Francisco A. Laguna (flaguna@natlaw.com).

E-Commerce and Obstacles - Please describe the nature of e-commerce activities in your country/region. Other than existing formalities and/or legislation, what are the legal or non-legal factors in your country (such as telecommunications infrastructure, taxation systems, intellectual property, banking rules and/or practices, cultural, or political issues) that could be regarded as obstacles to the development of e-commerce transactions? What do you believe to be the best mechanisms (for instance, the enactment of local or international rules) that could
be utilized to overcome the most serious obstacles?

M. Devoto - Argentina

Investigations carried out by the Centro de Estudios En Information Technology (CENIT) indicate that the absence of a general plan or initiative constitutes one of the most significant obstacles to overall development, including the advancement of electronic commerce. With particular regard to the Internet, in general, this plan should cover, among other things: de-regulation of the telecommunications system; universal access, privacy; development of electronic commerce; education and employment, etc.

In this sense, CENIT has designed a master plan to be proposed to governments. In the case of Argentina, the project is named "ARGENTINA DIGITAL."

R. Nogueira / L.H. Ventura - Brazil

The most popular e-commerce activities in Brazil are home-banking and home-shopping.

The principal factor that could be regarded as an obstacle to the development of e-
commerce transactions in Brazil is the lack of security. The general public does not have the necessary comfort level to rely on electronic means for its commercial activities. Any potential legislation in Brazil must guarantee transactional safety and privacy. Without said principles there will not be good, valid and reliable e-commerce in Brazil.

An important mechanism to curb the above referenced fears would be to enact effective
international legislation, including the imposition of criminal sanctions, to regulate certain unwanted activities, as occurs with the international traffic of drugs.

R. Lemos - Brazil

These issues require an analysis of general institutional obstacles as well as specific issues deemed obstacles to e-commerce development in Brazil.

Difficult enforcement of electronic contracts or the probability of non-enforcement, combined with increasing transaction costs, can be regarded as significant obstacles to electronic contracting. Therefore, on the institutional front, a comprehensive legislative body regulating e-commerce will not suffice if the enforcement of such laws is defective.

As pointed out in the study of Burki and Perry1, legal rules are only one element for the
protection and development of e-commerce. The existence of effective enforcement mechanisms and an efficient judiciary can be equally or more important. As such, a fruitful environment for e-commerce growth necessitates efficient, reliable legal and judicial institutions. The risk of a difficult or defective enforcement of an electronic contract or the probability of non-enforcement, besides increasing transaction costs, can be regarded as significant obstacles to electronic contracting.

In their study, Burki and Perry considered variables for 49 countries in connection with
institutional matters. An index was assigned to each variable to gauge the efficiency of the institution in question. For purposes of this question, the variables designated Efficiency of Judicial System and Rule of Law are pertinent.

The study defines Efficiency of Judicial System as an "assessment of efficiency and integrity of the legal environment as it affects business, particularly foreign firms, produced by the country-risk." It uses the averages provided by Business International Corporation, for 1980-1983. The scale runs from 0 to 10, with lower scores representing lower efficiency levels2.

Rule of Law is defined as an assessment of a country's tradition of law and order, as determined by International Country Risk (ICR), country-risk rating agency. The study incorporates the average risk assessment for April and October for years 1982 through 1995. As above, the scale runs from 0 to 10, with lower scores representing lesser law and order traditions3.

Brazil received a score of 5.75 for Efficiency of the Judicial System. Latin America, especially those countries of French tradition, did not fare well in this category, and the Brazilian score was comparatively lower4. For instance, Argentina earned 6.00, Chile 7.25, Colombia 7.25, Ecuador 6.25, Mexico 6.00, Peru 6.75, and Uruguay 6.25.

Countries like the Netherlands scored 10.0, as did the United States, and France 8.005.

For Rule of Law, Brazil scored 6.32. Again, Latin America did poorly in comparison with other countries. Argentina scored 5.35, Chile 7.02, Colombia 2.08, Ecuador 6.67, Mexico 5.35, Peru 2.50, and Uruguay 5.00. Both the Netherlands and the United States scored 10.0, and France 8.98 6.

This paper is not meant to address why Brazil scored so poorly in the Efficiency quotient.
However, some examples bear mentioning to identify the root causes at work7: excessive
formalism; selection and education of the judiciary; limited availability of alternative dispute resolution mechanisms; and excessive litigation based on procedural rules.

The low score for Rules of Law can be attributed to similar causes. Unreasonable formalism renders effective law enforcement difficult. The public's access to the courts is another factor that affected Brazil's overall score. Barriers and obstacles to meaningful access to the courts dissuade certain segments of the Brazilian population from seeking judicial redress and adversely impact Brazil's rating in this category 8.

In addition to discussing the growing demand for institutional reforms in Latin America, Burki and Perry also stress the difficulty in organizing groups interested in reform and in overcoming the pressures imposed by groups that benefit from existing institutional structures. In this regard, the study notes that "potential benefits of reform are usually more uncertain and potential beneficiary more difficult to identify, while potential losers tend to be more concentrated, rich, informed, organized, and vocal."9

Transaction costs related to e-commerce and the uncertainty of obtaining effective, efficient enforcement of electronic contracts will continue to be formidable deterrents unless the institutional reforms contemplated are implemented.

Turning to the subject of specific obstacles to e-commerce, the 1999 Draft Bill submitted to Congress by the Brazilian Bar Association tries to reconcile the notion of Certification Authorities with the archaic Brazilian system of notaries public. According to the Draft Bill, the Notaries Public shall certify the authenticity of the public keys, which certifications shall be presumptively valid. In contrast, similar certifications issued by private Certification Authorities shall not enjoy such presumptive effects. In this regard, Article 24 of the Draft Bill provides that: Services rendered by Private Certification Authorities are eminently commercial and private, and shall not enjoy the same effects of the Public Certification Authorities10.

The provision contemplates an excessively formal model for certification authorities in Brazil, limiting substantially the role to be played by private authorities. Moreover, the fact that only Notaries Public will be able to certify the authenticity of public keys may result in a non-competitive market for certification services, fraught with all the inefficiencies that currently plague notary services.

A second obstacle is that the 1999 Draft Bill is not technologically neutral. The Draft Bill provides for one mechanism to certify the authenticity of signatures and electronic documents: asymmetric cryptosystems using public and private keys. It does not contemplate any other provisions for electronic documents not generated/transmitted by such technology. Therefore, electronic documents generated with other technologies shall not enjoy the presumptions of authenticity that the Draft Bill provides for documents using public and private keys. Documents using unregulated technologies shall have the probative value determined by the Brazilian rules of evidence, which rules assign a significant degree of uncertainty to electronic documents. Therefore, some "technologically neutral" provisions should be included in future laws governing e-commerce.11

J. Remsu - Canada

In Canada, electronic commerce encompasses three distinct types of transactions: business-to-business transactions, business-to-consumer transactions, and transactions related to government services. Before the benefits of electronic commerce are realized, businesses, consumers and government users want to know that transactions are private and secure, that legal and financial frameworks exist to support transactions and that the information infrastructure works.

A body of rules that governs how business and government transactions are conducted has developed over time. How the law is applied to paperless transactions is viewed as uncertain. To remove barriers to the use of electronic commerce, these rules need to be examined to assess how they apply to the digital world, and adapted where necessary, to create a level playing field that is predictable and consistent for all kinds of commerce.

Governments are acting to address this uncertainty by reviewing these rules and clarifying how the law may be applied. Legislative reform initiatives may involve provincial and territorial governments as well as the federal government and require ongoing consultations to ensure the development of consistent, predictable frameworks for businesses and consumers. At the international level, Canada is actively participating with international organizations, such as UNCITRAL, OECD, APEC, WIPO and WTO, in developing electronic commerce frameworks.

In respect of taxation, attention has been focused on ensuring that tax administration can keep up with changes in the market. The Minister of National Revenue's Advisory Committee on Electronic Commerce issued a report in April, 1998 that examines how existing taxation systems apply to electronic commerce. Given the global reach of electronic commerce, Canada is participating with other OECD member countries to consider the implications of electronic commerce on tax treaties, the application of consumption taxes and customs duties and tariffs.

In respect of intellectual property issues, new international agreements and other forms of
cooperation are being considered to address these concerns through the WIPO, FTA, APEC, and the OECD. Canada is an active player in these discussions. Canada's national IP legislation is being reviewed to determine whether it needs to be adapted.

(For further information, please refer to the paper on the Canadian Electronic Commerce Strategy at http://e-com.ic.gc.ca)

J. Otero - Chile

Factors that prevent the development of the Internet and e-Commerce in Chile:

• Local Content: There is a significant void of Spanish language content in the web, and the majority of sites in Spanish do not consider the particular interests of Spanish speaking countries.

• Consumer Culture: Consumers do not trust e-commerce. They are skeptical about the security of online payment systems, the possibility/logistics of returning merchandise purchased over the Internet and the lack of consumer protection against fraud or non-delivery of purchased products. Moreover, Chileans enjoy the social aspects of traditional shopping: going to the malls where they can meet with friends, enjoy their families, eat and window shop.

• Business Culture: Electronic commerce requires a transformation of the traditional way business is conducted in Chile and worldwide. Chile has a traditional business culture that does not place an important value on two relevant issues related to e-commerce: market responsiveness and customer services. Chilean companies, however, have not adequately considered how technological change would benefit their business. They still feel that the costs associated with a building and maintaining a network are too high vis-à-vis the perceived benefits. Consequently, to date, most domestic companies employ the web in a limited capacity to introduce themselves, inexpensively and effectively, to potential clients and to attract new business opportunities; few of them, however, have transaction capabilities.

• Expensive Services and Telecommunications Infrastructure: Internet use in Chile is extremely expensive. The user has to pay a monthly rate to an ISP, as well as a per minute connection cost to the local telephone company. Costly service is exacerbated by delays in obtaining permits and in the installation of data lines. Finally, most Latin America ISP are connected to the Internet via satellite uplinks, resulting in poor performance during peak hours.

• Few Local Investors: There are very few sources of local capital that will consider financing Internet projects. Basically, investors do not yet understand the investment model for Internet companies or the technology involved therewith.

• Foreign Financing: Recently, Internet opportunities in Chile have begun to attract foreign financial or strategic investors. However, these new ventures and sources of foreign funding have difficulty finding each other, and many Internet startups in Latin America do not understand how to package themselves to attract foreign capital. Indeed, most of these firms do not know where to seek advice regarding this issue.

• Lack of Credit Card Clearing System: One of the main obstacles to e-commerce is that the members of Transbank, the credit card clearing house, do not have a set policy on credit card fraud. In an effort to limit online transaction fraud, many Latin American banks are evaluating two types of payment methods, each using a different encryption protocol: the SSL and the SET protocols. Transbank expects to make a decision on technology by the end of the year. Currently, domestic retailers offering online transactions use SSL to send credit card numbers over the Web. Alternately, members of the trade/merchants allow their customers to fax or to e-mail credit card information. In either case, the merchant must manually process the transaction by entering the credit card information into the machine connected to Transbank. The customer usually signs the receipt upon delivery of the goods or sends a fax with the authorization.

• No Aggressive Leader in the E-Commerce arena: Government policy makers, academicians, influential trade organizations and large, domestic corporations are reluctant to assume responsibility for promoting e-commerce in Chile. However, the Universidad de Chile has initiated a project to foster technological development in Chile. The University has earmarked a separate fund to invest in technology ventures identified and supported by its computer science department. In addition, the government is beginning to encourage use of the Internet. For example, as of 1998, all companies were encouraged to file electronic tax returns. Furthermore, the recently enacted electronic privacy law protects an individual's personal privacy rights. The government has also decreed that all electronic government documents are functionally equivalent to hard copies in terms of lawfulness, and policy makers are now drafting legislation to extend the principle of electronic signatures to the private sector.

• In Chile, the number of households with PCs and Internet connections remains very low.

• Economic and Demographic Factors: The Chilean Internet market is quite small. The primary reasons for this phenomenon are Chile's population (15.000.000), disproportionate income distribution and principally young Internet users who are not the principal buyers in their households.

F. Reyes - Colombia

In Colombia, "electronic commerce" is most prevalent in contract negotiations. Such dealings, which take place prior to the actual execution of an agreement, are frequently carried out by electronic media. Therefore, faxes and electronic messages have become unavoidable elements for the trade of goods and services. At the same time, corporations and other business associations have become accustomed to performing several acts through electronic mechanisms. The granting of powers of attorney, the issuance of votes for the participation on voting sessions of boards, committees or stockholders meetings are frequent examples of corporate action by means of electronic commerce.

On the public sector front, the National Government has authorized electronic invoices. Similarly, Decree 1094 of 1996 permits the electronic filing of income tax using EDIFACT standards. Finally, the Colombian Institute for Industrial Codification and Systematization has approved at least ten master documents for transactions performed through EDI.

As for electronic commerce at the retail level, there are a few national web sites. Bogota.com, for instance, uses master agreements to a certain extent. Such site sells theatre tickets, books and other products. Encryption systems are available to ensure the security of the information provided by the buyer in question. Similar sites can also be found in the country's three largest cities. Local banks and airlines have established web sites for on-line business transactions. Although business-to-consumer e-commerce is still emerging, the volume of transactions is increasing steadily.

Notwithstanding the existence of a comparatively significant number of computer systems in the country, there is still a general tendency to execute contracts of any meaningful value in written form. Therefore, once the transaction has reached the formalization stage, individuals resort to physical signatures and printed documents.

The development of electronic commerce transactions in Colombia, despite the obstacles, has already won an important victory. A law regulating the subject has already been executed by the national government on August 18, 1999. Naturally, the practical application of this law must overcome several other legal and cultural obstacles, the most important of which is the deep-seeded distrust of any commitment or transaction not reduced to a paper.

Historically, the probative value afforded stamped, sealed and signed documents is singular. Such evidentiary value is generally attributed to legislatively mandated steps and solemnities for contract formulation. E-documents must overcome these presumptions and formalities. To a certain extent they have already surpassed the intervention of notaries - and their control over public deeds: in certain areas of e-commerce, notary participation is not required.

The judiciary's lack of technologically advanced systems may also pose a considerable obstacle to understanding and applying the new electronic evidence rules. Having Internet access is still a luxury privilege for certain segments of Colombian judges, particularly in the smaller municipalities. Hence, at this rather early stage in the development of e-commerce, it may be complicated to introduce electronic evidence (in contrast to faxes, for example) in the context of civil proceedings. Furthermore, the Colombian legal system adheres to the principle of judicial assessment of evidence. It may be difficult for a judge to decide a case solely on the grounds of electronic evidences, if he is not acquainted with, and has an understanding of, the relevant technologies involved.

In addition to the foregoing, the present state of telecommunications infrastructure in Colombia may constitute another obstacle to the development of electronic commerce.

Although such infrastructure has improved over the last years, many areas of the country still have limited access to computers, the Internet and relevant systems of communications.

Furthermore, the main developments in this field have taken place in major cities.

Notwithstanding the improvement in electronic infrastructure in the main municipal areas, the government must make a commitment to improve telecommunications throughout the country. Private sector partners may play a critical role in such development projects.

BURKI, Shahid Jave and PERRY, Guillermo E., Beyond the Washington Consensus, Institutions Matter, World Bank Latin American and Caribbean Studies, 1999, Washington D.C. The World Bank. We refer specifically to Chapter 4, "Capital Markets and Legal Institutions". The paper presents a comprehensive study of the Enforcement of Laws and Latin America Institutions. Albeit we are discussing e-commerce, the research is still applicable. BURKI, Shahid Jave and PERRY, Guillermo E., op. cit. p. 76.

Ibid.
Id. at pp. 81-84.
Id. at p. 84.
Ibid.

Many studies have been conducted in this regard. Cf. FARIA , José Eduardo. Ordem Legal x
Mudança Social: a crise do Judiciário e a formação do magistrado, in Direito e Justiça - Função Social do Judiciário, 1996, São Paulo, Ática.

Cf. DINAMARCO, Candido Rangel, A Instrumentalidade do Processo, 1994, São Paulo,
Malheiros, for a comprehensive description of the main concerns related to procedural peculiarities access to the courts.

Ibid.

Informal translation.

Despite the fact that the 1999 Draft Bill refers to the principle of "accompanying technological
advances," it does not seek to govern specifically such alternative, developing technologies.
This information has been taken from "The State of Electronic Commerce in Chile," a research
carried out by Larraín Vial S.A.