A Survey of Electronic Contracting Related Developments

We analyze the current state of electronic contracting systems. In the first part of the paper, we present a model based on a list of functions that an electronic contracting system should perform. We apply the model to discuss the current state of academic research and commercial software developments in the field of electronic contracting systems. We also point out directions for future research. 1. General Introduction In many cases businesses have the need to design customized contracts. Large multinationals always have a legal department that takes care of designing such customized contracts. Small and Medium sized Enterprises (SME), on the other hand, have to depend on banks and lawyers for legal assistance. However, drafting a complex contract with the help of a lawyer is often too expensive for an SME. * This research is partly funded by the ABN-AMRO bank and the CentERApplied Research Institute of the Tilburg University. Yao-Hua Tan, Walter Thoen, Somasundaram Ramanathan 496 Global supply chains outsourcing to foreign countries and engaging in international trade has become a competitive necessity for all companies. Additionally, the concept of dynamic networks changing trading partners at short intervals for competitiveness is gaining importance in electronic business. This means an increased need for drafting and negotiating contracts. In short, there is an increasing need for designing complex contracts for non-routine transactions or during the start of a new business relation in electronic commerce. Hence, an infrastructure that helps business executives to prepare their own contracts would be helpful. An Internet-based electronic contracting system could reduce the contracting related barriers in both domestic and international trade. In this paper, we analyze the current state of developments in the field of electronic contracting. The three distinguished objectives of this paper are as follows. The first objective is to present a model that consists of a set of features that an electronic contracting system needs to perform to facilitate contracting effectively. The second objective is to analyze the academic research as well as commercial developments with our model of electronic contracting system. The state of development both in terms of commercial and academic research work are described using actual products and services as benchmark examples. The third objective is to provide directions for future research work. The rest of the paper is divided into three sub-sections. The first section of the paper introduces the concept of electronic contracting, describes the need for electronic contracting, describes electronic contracting models, provides an overview of our model of electronic contracting system and finally elaborates on each of the functions that characterize the model. In the second section, commercial and research benchmark examples are provided to explain the current state of developments. Finally, recommendations are made for future research work in the third section. 1.1 Electronic Contracting System Ronald Lee was one of the first to introduce Electronic Contracting as a concept over a decade ago. The language and formal procedures of contracting, employment of technology for further standardization of certain classes of contracts in order to reduce the transaction costs and time of contracting is referred to as 'electronic contracting' [12]. The first versions of the idea were based on Electronic Data Interchange (EDI) as a communication medium. Since then, electronic contracting has been evolving along with electronic communication. 1.2 Our Model of Electronic Contracting System In the Electronic Markets Reference Model (EM-RM), Schmid and Lindemann [17] defined electronic contracting system as an integral component for electronically performing commerce activities. Lindemann and Runge in [14] elaborated on A Survey of Electronic Contracting Related Developments 497 electronic contracting system within the EM-RM framework. The following six contracting services namely were identified as within the contracting phase of the EM-RM framework. 1. Validation Services support the process of ensuring the validity of contracts. 2. Negotiation services provide an environment for the contract negotiation process. 3. Monitoring Services observes the actions of contracting parties and indicates the non-performance of contracted obligations. 4. Enforcement Services takes the necessary action in case of non-performance of contracting obligations 5. Arbitration Services assist in solving the disputes that arise during the formation and execution of a contract 6. Repository Services provides information that helps in the formation of contracts and in checking the validity of contracts. Our model is a further elaboration of certain aspects of the electronic contracting services from the EM-RM [15]. On the one hand our model has a more restricted focus, because we do not discuss the monitoring, enforcement and arbitration services in this paper. On the other hand, our model is a further development of their model, because we give an in-depth analysis of the validation, negotiation and repository services, and we add two additional layers compared with the EM-RM, namely the Legal Infrastructure and Negotiation Infrastructure layer. Electronic Contracting System Legal Infrastructure Negotiation Infrastructure Communication Infrastructure Contract Preparation Decision Support Legal Background Information Figure 1: Model of Electronic Contracting System Yao-Hua Tan, Walter Thoen, Somasundaram Ramanathan 498 The model that we propose for describing an electronic contracting system has three horizontal layers and three vertical categories (Fig.1.0). The vertical categories are i) Legal Information ii) Contract Preparation tools and iii) Decision Support. Each category has a set of functions, which is described below. Though the vertical categories are listed one after another, they do not necessarily describe a unidirectional flow of a process. Instead the back and forth process of preparing versions of contracts from electronic versions of state, national and international laws with the help of decision support tools that assist by providing scenario analysis is described. Compared to the generic EM-RM framework, we propose two infrastructural additions in our model. At the infrastructure level, a Legal Infrastructure layer for governing the electronic market transactions and a Negotiation Infrastructure layer on top of the Communication Infrastructure layer in EM-RM are added. Firstly, we added a Legal Infrastructure layer because one needs specific legal functions to deal with electronic documents, for example electronic title registry, which will be described in the Bolero case. Secondly, we added a Negotiation Infrastructure layer, because in many complex negotiations (e.g. in international trade) there are strict rules and procedures about how to conduct negotiations, or how to exchange trade documents. The negotiation infrastructure should provide a library of trade procedures that can be used to structure the communication. Also the negotiation infrastructure should provide a library with negotiation strategies that could be used for conducting the negotiation. 1.3. 1 Horizontal Layer: Legal Infrastructure The legal infrastructure that we are proposing governs the whole process of negotiation and addresses concerns over the legality of transactions performed over the Internet. A number of countries are in the process of developing legal frameworks that govern online transactions. Complementing these developments, private organizations such as Bolero.net [2] have created their own rulebook, which applies to the transactions that are communicated over their secured closed network. 1.3. 2 Vertical Category One: Legal Background Information Legal information that helps in the formation of contracts is listed under this category. There are two methods by which the information can be accessed. Legal Information web sites Electronic versions of some national or international laws can be accessed via the Internet either for a subscription fee or for free. Most of the subscription based web sites provide more than just electronic versions of laws and regulations. For instance, they provide a forum for debating various laws, recommendations made by renowned legal professionals for future amendment of laws and its associated arguments. While forming contracts, these web sites can be used as a reference tool. An example is DC-Professional ICC [4]. A Survey of Electronic Contracting Related Developments 499 Contract templates – Contracts terms and conditions that accompany frequently used trade documents such as purchase order are made in the form of a contract template. They can be used either as they are or after customization. With advancements in the usage of XML to machine process a contract, business executives might be able to prepare valid customized contracts from standard contract templates. Lawyers, often, use standard and stored customized versions of contract templates to make their jobs easier. 1.3. 3 Vertical Category Two: Contract Preparation In case of negotiations, where two or more parties are involved, different versions of a contract are prepared before a final agreement is made. The tools that facilitate in preparing the different versions of contracts are described. Contract drafting User-friendly tools that help in drafting of contracts are typically a part of Electronic Contracting Systems. The information that is required for the contract is collected from the user using a simple set of questions, which is formatted by the program into a standard contract. With this tool, contract clauses from sources such as standardized templates and other internet based information sites can be put together in a single format using simple word-processing functions. Generally, the program allo