Electronic Commerce - The Role of Government

"The first thing we do, let's kill all the lawyers."

W. Shakespeare, King Henry VI, Act 4, Scene 2

I.          SUMMARY

The Internet has created a banquet of opportunities and challenges for society in general, and for business and the related professional communities of law and accounting. At the same time as the Internet has facilitated international communication and business relationships, it has created the potential for unprecedented conflict between legal systems. This paper examines the sources of law and the role government in regulating Internet activity. Discussion needs to take place about the degree of certainty (in the form of rule making) required by business in order to thrive, and how that certainty might be achieved. Only then can we be satisfied that the level of government intervention is appropriate to the legal challenges posed by the Internet.

Photo by Katherine Welles/iStock / Getty Images


Marshall McLuhan said of television that "the medium is the message" and predicted "the global village". The Internet seems to be the platform that will take globalization and the ability to freely exchange information and ideas to the heights envisioned by Mr. McLuhan some fifty years ago.

Cultural and legal differences are unlikely to evaporate. Even a close and apparently similar neighbour such as the U.S., our largest trading partner, can have different cultural attitudes from Canada, often as a result of different historical experiences. This shows up in materially different approaches to concepts such as cultural sovereignty, methods of doing business, foreign investment, health care, community decency, and the relationship between the individual and the state. We can expect social values and legal systems to grind, and to see an increased need to cooperate in the face of this diversity.


To legislate or not to legislate. The question is not new.

"CADE:          I thank you, good people: there shall be no money; all shall eat and drink on my score; and I will apparel them all in one livery, that they may agree like brothers and worship me their lord.

DICK: The first thing we do, let's kill all the lawyers.

CADE:            Nay, that I mean to do. Is not this a lamentable thing, that of the skin of an innocent lamb should be made parchment? that parchment, being scribbled o'er, should undo a man: Some say the bee stings: but I say, 'tis the bee's wax; for I did but seal once to a thing, and I as never mine own man since. How now! who's there?"

"William Shakespeare, King Henry VI, Act 4, Scene 2"

As appealing as this sentiment might be, what Shakespeare was really saying is that without laws there will be anarchy in society. If we accept the need for the rule of law, a set of legal principles of general application backed by authority, to what extent should government play a role in establishing these rules for the Internet? And, as important, to what degree should there be regulation in the first place.



It is worth noting that intellectual property rights were created to encourage economic activity through the granting of statutory monopolies. It is conceivable that at times the scope of these monopolies goes beyond what is necessary to promote a desired level of business activity. Growth can in fact be inhibited. To quote from an article authored by David Vaver entitled Rejuvenating Copyright (1):

"The reality of copyright is that it is indeed a Very Good Thing. ... For a copyright to be obtained, no money need be spent; nobody needs to be notified that the right is claimed; protection is worldwide; distributors can carve up the world market into territories, often preventing parallel imports and maintaining varying price levels in different countries. One can start, stop and finish exploiting the products as one wishes, charge whatever prices the market will bear for the rights or products produced under it, refuse licenses whenever one wants, and band together with others to exploit rights collectively, with relative immunity from competition or antitrust action so long as one behaves with a modicum of diplomacy. In most places, copyright owners can count on sympathetic lawmakers, bureaucrats and judges to enforce and expand their rights. This is evidenced by the latest worldwide push to harness fine tuned versions of copyright to protect business investment in ever-expanding computerized information webs."

The economist Mancur Olson sounded a warning when he laid the blame for the decline in the postwar economic vitality of some nations at the feet of narrow, self-serving groups more interested in personal gain than the well-being of society as a whole. In The Rise and Decline of Nations, he outlined his insights about how parochial lobbies form and then defend their positions. Subsidies, monopolies and other forms of protectionism grow. Over time, economic activity comes to focus on redistributing these benefits rather than on more productive output.

At the same time, Mr. Olson advocated the need for good governance and secure property rights and contracts as a way of reducing the power of entrenched self-serving governing classes.

The more our law makers are called on to create laws, the greater the likelihood of an increasingly confusing and potentially self-centred array of regulation.


Under international treaties, Canada is obligated to have an intellectual property enforcement regime in place. Regular reporting of enforcement activity is made by Canada to the organizations administering the treaties.

Some argue that enforcement actions dealing with trade-mark and copyright infringement should be dealt with in civil court (1) so as not to bring the criminal enforcement arm of the judicial system into disrepute and (2) to allow the Federal government to refocus its' resources on more serious matters. The debate is compounded by an increase in the level of copyright protection being afforded today.


If we accept the idea that some degree of rule making is necessary, where does one start?

Some of the reasons for passing laws are:

1.         to recognize personal freedoms, private contracts and sanctity of ownership of property;

2.         to regulate taxation;

3.         to encourage certain activities, like the creation of intellectual property by the granting of statutory monopolies;

4.         to prohibit certain conduct and provide sanctions; and

5.         to provide a dispute resolution mechanism, including laws and a forum to apply them.

Value judgements are inherent in all of these reasons. The role of government is to identify society's objectives and then to pass the necessary laws to achieve them. It is trite but true to say that self-interest drives perspective. But some rules might benefit first individuals, and only later society in general.

The same methadology used to evaluate copyright law can, for example, be used to evaluate proposed laws relating to the Internet. The idea of copyright is that an individual deserves protection for the fruits of her intellectual labour. In other words, what labour, what protection? Or put another way, copyright represents a metaphor for the pressing policy debate between the public's ability to access information and the rights of the creator. For patents, the goal is to provide limited protection in return for the disclosure of an idea. For the Internet, the methodology would be to (1) identify desirable outcomes/interests (2) then to balance them against each other, and finally (3) design laws to accomplish the objectives.

As a rule, governments tend to legislate in reaction to events, rather than providing legislative leadership designed to promote the economy.

Like the regulation of the economy, countries are no longer free to operate in isolation when it comes to law making for the Internet - whether they act in concert or react to each other. For example, as of the end of 1998 members of the European Union will not be able to share data with countries which lack rules providing a minimum standard of protection for personal data - the EU Privacy Directive. The international community was left with the option of doing nothing, or passing laws which accord with the requirements of the EU Privacy Directive.

The National Computer Security Association suggests that five pillars form the foundation for secure electronic commerce - privacy, integrity, authenticity, non-fabrication and non-repudiation. Privacy acknowledges the need for confidentiality between sender and recipient. Integrity presupposes the unaltered state of a message. Authenticity and non-fabrication assure both parties of each others identities. Non-repudiation means that neither party can deny they sent the message.

Amelia H. Boss, in her paper Security: it ain't just a matter of Encryption - The Development of Legal Infrastructures to Support the Growth of Electronic Commerce (5) used the analogy of the security we feel in our home to explain trust. She outlined the expectations of a homeowner, including the right to use the property and the liability of anyone intruding. For business, this translates into an expectation when entering into transactions that obligations will be performed because of the legal and social consequences of not doing so.


The seamless and transparent way in which electronic transactions take place make it difficult to apply national laws. The number of contacts with different legal regimes increases the likelihood of competition between jurisdictions , both as to the application of domestic law and for the right to act as the forum for resolving the dispute. The uncertainty over whose national laws apply to Internet transactions (and what those laws actually are) is colloquially referred to as "the jurisdictional issue". The jurisdictional issue is one of the most significant problems facing business in its use of the Internet.

Internationally, and domestically between provinces, conflicts of laws decides (1) which laws apply in a given situation and (2) whether a court has the jurisdiction to administer them. Over the years the judiciary has developed a series of principles, having exotic Latin descriptions like lex conveniens, lex loci actus, lex loci solutionus and forum non conveniens, to guide it in choosing the applicable law and the forum to settle a dispute. At the heart of the rules is the extent to which a person has had a voluntary contact with a jurisdiction, and whether it is "fair" to assert jurisdiciton. If a court takes jurisdiction over a dispute, it does not automatically follow that it will apply its native laws. For example, a court in British Columbia could apply the laws of the state of Washington, and vice versa. International activity demands that participants not only pay attention to the forum where disputes will be resolved, but also to the body of laws that will used to resolve them.

The nature of the business being conducted or the harm alleged can have an effect on the willingness of the judiciary to apply local law. Some case law suggests that electronic contact with a jurisdiction, without anything more, cannot support jurisdiction unless the conduct complained of is a breach of a non-contractual duty owed to another, such as defamation (7). Other cases have suggested that the conduct being complained of can be directed at a state, permitting an assumption of jurisdiction based on electronic contact only.


The notion of cyberspace as a separate legal jurisdiction suggests a body of rules, and a mechanism for enforcing them that is independent of conventional sources of authority. The Virtual Magistrate (13) is an example of an attempt to provide a cyberspace forum for dispute resolution through agreement - but to date it has been unsuccessful.

Law acts in part as the gatekeeper of the past and a champion of existing institutions. As such, at least in common law jurisdictions, lawyers take old legal principles and apply them metaphorically to new situations (facts) in order to arrive at a decision. The uncertainty inherent in this process, coupled with the "jurisdictional issue" and suspicion of the legal community's ability to understand new technology, has given rise to the possibility of a jurisdiction known as cyberspace. Ironically, this concept has also arisen from a desire to keep the Internet unregulated and free of the courts and their conventional dispute resolution mechanisms.

Over several centuries, two main sources of law have co-existed. The first, and expected source, is national (or domestic) law. National law, at least in common law countries, arises from judicial decisions (the "common law") and from legislative action. The power to legislate is tempered by the respective constitution of the country in question, and by the speed with which legislators are willing to implement new laws. The second source is international law - a body of international treaties and subsequent enabling legislation arising out of years of interaction. International treaties, by their very nature and the number of participants, carry the burden of a lack of flexibility that is not present at the domestic level. National and international laws do not recognize the existence of third jurisdictions such as cyberspace.

In the absence of support from national and international laws, cyberspace must look to private treaties for its existence. Private treaty (or contract law in most cases) has come to be recognized as a third source of law, although subject to the over riding authority of the first two. Private agreements are subject to the disabilities that they are only binding on the parties to them, and there can be substantial transactional costs to them. For the simple reason that it is unlikely private agreements can completely oust national jurisdiction, cyberspace is unlikely to be recognized as a separate legal jurisdiction.





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