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HOW TO AVOID LEGAL DISPUTES ARISING OUT OF ELECTRONIC DATA INTERCHANGE -
THE EDI TRADING PARTNER AGREEMENT

By: Thomas E. Roche

Every state in the country has laws that require certain commercial contracts to be in writing and signed by at least one of the contracting parties. Business people across the country are striving to eliminate paper in their commercial transactions by using electronic data interchange (EDI). How can a business meet the legal requirements for signed written contracts and still eliminate the paper that contains writing and signatures?

It is easy to see how traditional commercial terms such as "in writing", "original document", or "signature" do not fit an EDI transaction. But those words and scores of other common commercial terms have important legal significance. Trading partners who use EDI should not sit back and wait for lawmakers and judges to redefine traditional terms or develop a new legal vocabulary in order to accommodate EDI.

A well-drafted EDI Trading Partner Agreement is a valuable tool for business people who can't wait for the law to catch up with technology. An EDI Trading Partner Agreement is the best way to insure that the advantages of modern technology will not be lost to a legal system that evolves at a much slower pace.

There is nothing revolutionary about an EDI Trading Partner Agreement. Such agreements are as old as EDI technology. Trading Partner Agreements run the gamut between a simple sentence typed on a purchase order form to an "EDI Implementation Manual" contained within a three-ring binder. Despite the wide variety of agreements being used, the fact remains that most trading partners are content to use EDI without any formal agreement whatsoever.

Who Needs Another Written Contract?

There are several possible explanations for why so many trading partners do not bother to use an EDI agreement. The use of EDI technology has been generally successful and problem free from a legal point of view. Trading partners may perceive a formal EDI agreement as an attempt to fix something that isn't broken. In most cases, EDI is simply a new format for the same old business transactions. Since the trading partners do not intend to change the terms and conditions of their basic trading agreement, then why do they need a new contract?

Keeping The "Paper Trail" Without The Paper

The answer to that question lies in another question. Why, if EDI is only a different format, do trading partners tend to retain the use of paper documentation to back up their EDI transactions? Even though the technology is in place to eliminate the inefficiency of paper trail transactions, the total elimination of tangible paper documentation makes business people very nervous. They love the way that EDI works but they still worry about what will happen if and when there is a dispute that centers around "proof" via "documentation".

A well-drafted EDI Trading Partner Agreement directly addresses issues having to do with how the parties will establish the validity of a transaction without a "paper trail". The agreement must define words such as "document" and "signature" so that a "signed document" can be created without ever having to place a signature on a piece of paper. That is, after all, exactly what the parties want to do when they use EDI to facilitate their transactions. The Trading Partner Agreement spells out the parties' intention to create an electronic "paper trail" without the paper.

An EDI Trading Partner Agreement should address several other issues that are unique to electronic commercial practices. Issues having to do with garbled transmission, for example, never presented much of a problem before trading partners started using EDI. An effective agreement spells out how and when a transmission (even a garbled one) gives rise to an enforceable obligation. The model agreement also deals with the fact that third party service providers are commonly employed to channel communications between the trading partners. The agreement provides a clear rule for allocating the risk of loss arising from the service provider's errors or omissions.

Changing With Technology While Continuing Business as Usual

Third party service providers are usually identified in an appendix to the basic agreement along with the applicable standards and guidelines that will govern the use of EDI technology. The appendix provides necessary flexibility to deal with changes in technology and equipment without having to rewrite the basic Trading Partner Agreement.

Issues that are unique to EDI must be addressed in the Trading Partner Agreement without changing any terms or conditions that the parties have negotiated for their basic business relationship. There is absolutely no need for either party to abandon the standard language that typically appears on the back side of their business forms. Nor is there any need for either party to continue using printed forms so that the standard language remains applicable to each transaction. The model EDI Trading Partner Agreement references the appendix for the terms and conditions of any underlying agreements between the parties. The trading partners need only attach their printed forms to the appendix to continue doing business under their usual terms and conditions.

The virtual elimination of paper-based commercial transactions is not a matter of mere speculation. The transition to electronic based buying and selling is well underway. Although current indications point to a smooth transition, it is nevertheless inevitable that new technology will give rise to new disputes. A well-drafted EDI Trading Partner Agreement is the best way to eliminate potential disputes over fundamental issues. Trading partners who use or expect to use EDI to facilitate their commercial transactions should seriously consider using an EDI Trading Partner Agreement.