Session 4: Electronic Contracts Business Contracts for B2B Andrew Goodchild, Charles Herring and Zoran Milosevic Distributed System Technology Center (DSTC) Level 7, GP South, The University of Queensland, QLD, 4072, AUSTRALIA Email: [andrewg, herring, zoran]@dstc.edu.au Web: http://www.dstc.edu.au Abstract A fundamental issue faced by many developers of B2B systems is how to ensure that you can trust a This paper presents an approach for the party that you are dealing with at arms length. The specification and implementation of business primary mechanism for doing this is by setting up a contracts needed for Business-to-Business (B2B) services. We first examine typical elements of business contract and depending on the law to enforce business contracts and their usage. This analysis the terms of the contract. The aim of this paper is to sets a foundation for 1) modeling contracts and 2) provide mechanisms to facilitate electronic business developing a role-based architecture that supports contracting. This involves support for electronic typical operations in the contract’s lifetime. We contract representation and also support for various explore how contracts can be encoded in XML and contract operations. Typically, these include contract present an approach for monitoring and enforcing negotiation, validation, signing, tracking, monitoring of contracts. This approach provides a flexible way and enforcing contract terms and conditions of modifying rules of enforcement, as trading arrangements change. A real-world contract example is used to illustrate the concepts described. Section 2 starts this paper off by stating the requirements for business contracts in the context of B2B. Section 3 outlines a role-based architecture to 1. Introduction support typical contract operations. Section 4 explains Many enterprises are eager to take advantage of the how XML can be used for the specification of emerging "Internet Economy". Internet based business contracts. Section 5 presents an approach of commerce offers more potential than just online using BizTalk technology to support the monitoring storefronts (a.k.a. Business-to-Customer (B2C)) and of business contracts. Section 6 concludes the paper. auction sites (a.k.a. Customer-to-Customer (C2C)), it also offers opportunities in Business-to-Business 2. Business Contracts for B2B (B2B) e-commerce. B2B covers the area of online exchange of information between trading partners. A contract is a legally enforceable agreement in Some examples of B2B include: which two or more parties commit to certain obligations in return for certain rights [R89]. In a B2B • Trading partner integration between enterprises, context this can range from a simple one-page forming supply and value chains and allowing purchase order for the sale of goods, to an extremely automated coordination of business operations complex thousand-page document for a trade level (e.g. order management, invoicing, shipping and agreement between multinational businesses. government procurement). In general, most B2B scenarios can be generalized to • Business process integration. Integration of a 5-phase trading process, of which contract commerce sites, Enterprise Resource Planning formation is one phase [C93]: systems and legacy systems. • Pre-contractual phase: customers identify • Business-to-business portals enabling formation products or services and possible sources of of trading communities, electronic catalog supply; management, content syndication, and post-sale • Contractual phase: creation of a formal customer management. Example sites include relationship between buyer and seller, covering www.mySAP.com, www.I2I.com and contract negotiation and validation operations; www.ariba.com. • Ordering and Logistics phase: placing of purchase order, delivery of goods and services; 63 Session 4: Electronic Contracts • Settlement phase: invoicing, payment authorization and payment; and A sample contract illustrating these elements is • Post-processing phase: gathering information for provided in appendix A. management reports, e.g. trade statistics. In the context of B2B, many of the terms and The focus of this paper is on the contractual phase conditions in the contract will form part of the and in particular supporting electronic contract software requirements that specify behavior of a B2B representation and contract monitoring and enforcing system. For example, terms and conditions associated operations. with invoicing and payment will dictate what forms of electronic invoices are acceptable, when they are to 2.1 Elements of a Business Contract be received, and how the payment is to follow. There will also be many terms and conditions that cannot be There are up to four elements needed to create a valid implemented (or are only partially automatable) and business contract [R89]. First, an agreement has to be would require human actions and interventions. reached on all essential conditions of the contract. The second element is the notion of consideration. Each party establishes the obligation to give 2.2 Standardizing Contracts something to each other. Consideration can take the In some business environments, such as insurance, form of money, services rendered, property or cargo, real estate and banking, it would become individual rights. The third element is that of capacity highly complicated and costly if the terms of every (or competence): ensuring that parties entering into contract had to be newly settled for each transaction. the contract are lawfully capable of agreeing to Significant savings can be achieved by reusing contracts (e.g. whether an individual has the authority standard form contracts for newly established contract to represent their organization). Finally, the legal agreements [T95]. The terms of such standard purpose of the contract must be established. A contracts can be dictated by one party (e.g. the seller) contract cannot be enforced unless the actions agreed or by a third party (e.g. in Queensland the Rental upon are legal in the jurisdiction where the contract is Tenancy Authority sets out a standard lease made. agreement for all leases in Queensland). Standard form contracts are also available for a fee from In general, each of these elements will appear in a commercial organizations2, which will provide business contract as clauses covering [FL96]: general-purpose contracts for many business • The description of parties involved, including: situations. names, addresses, roles etc; • The definition and interpretation of terms used in In some instances, new contracts can include standard the contract; contract clauses [FL96]. For example, some large • The jurisdiction under which the validity, institutions, like universities and government correctness, and enforcement of the contract will departments, may outline policies on standard operate; contract clauses to be included in all contracts of a • The duration and territory1 of the contract, which certain nature. In some cases standard contract defines the times and places at which the contract clauses are defined by a standards body and are in use is in force; between many businesses. For example, the International Chamber of Commerce (ICC) 3 has • The nature of consideration e.g. fees, services outlined a set of "Incoterms" for use in specifying rendered, goods exchanged, rights granted, etc; departure, shipment and arrival terms in international • The obligations associated with each role, which sales contracts. is expressed in terms of the criteria over the considerations. This includes terms and In terms of B2B, standard form contracts are conditions for invoicing and payment such as essential, as they allow business to confidently warranties, delivery, liability, rejection, operate at arms length. A business can deal with termination and accounting provisions. another business without the need to negotiate a new 1 contract for each transaction. Furthermore, the Note that the territory of a contract refers to what standardized nature and the regular use of standard geographical areas the contract covers. Whereas the form contracts means that many elements are stable jurisdiction of a contract refers to which location’s enough to be implemented as components in a B2B laws the contract is subject to. For example, the territory of a contract may cover all trade between 2 two parties in Brisbane, and the jurisdiction may be for example: http://www.legaldocs.com/ 3 covered by the laws of the State of Queensland. http://www.iccwbo.org/ 64 Session 4: Electronic Contracts system. Finally, as many standard form contracts conditions, and liability due to failures or share similar elements and contract clauses, there malfunctions. Discussion of these rules and their exists the possibility to reusing components in implications is out of the scope of this paper. different B2B systems. 3. Key Contract Related Roles 2.3 Support for electronic contracting for B2B Applications operations Based on the above requirements for business contracts in B2B systems, we have identified the The discussion in the above subsection suggests that basic roles needed to support typical operations the availability of electronic representation of associated with contract establishment, monitoring standard contract forms and clauses can bring and enforcement [MB95, MAL96]. These roles are: significant savings to the process of creating and negotiation contract terms. Electronic contract forms The Contract Repository (CR) is needed to store can be stored in an electronic repository that can be standard form contracts and standard contract clauses. subsequently accessed and used by businesses to facilitate the definition of their mutual obligations. The Notary is used to store signed instances of standard form contracts which, can later be used as It is important to note however that by electronic evidence of agreement in contract monitoring and contracting we do not only mean an electronic version enforcement activities. of contract forms but also a wide range of possibilities related to the automation of the typical The Contract Monitor (CM) enables monitoring of contracting procedures or processes such as: the activities of parties by measuring their conformance to contractual terms and conditions and • location of suitable contract templates and/or signals the contract enforcer if it detects a violation. contract clauses, • electronic negotiation of contracts, The Contract Enforcer (CE), upon being signaled by • electronic signing of a contract, and having this the CM, performs enforcing actions such as sending a as an evidence of the agreement; this can bring message to various parties informing them of the significant savings, in particular in cases where violation and possibly preventing further access to the contracts involve multiple, geographically system by non-conforming parties. distributed trading partners, such as those related to international contracts, The Contract Validator (CV) ensures the creation of • electronic tracking - This allows timely reaction legally valid contract instances by checking the four to some important deadlines such as contract aspects of contract validity (discussed in 2.1): termination, thus making it possible to re- • Competence. To accomplish this, the CV verifies negotiate a subsequent contract and put it in the capacity of parties willing to enter a place, before or immediately after the existing contractual relationship. contract terminates. • Clarity. In most cases the contract semantics will • monitoring of the behaviour of the trading be unambiguous if it is derived from a template partners who have entered in contractual in the CR. The CV can be used to provide relationship and, possibly, additional checking if needed. • enforcing behaviour of trading partners so that • Legal purpose. The legal purpose of a clause or their contractual operations are met. contract can be validated based on information in a repository of legal rules. • Consideration. The CV can ensure the contract 2.3 Legal Enforceability of B2B contains contract elements describing what is Contracts exchanged between the parties. An essential element of trust in a B2B system is the legal enforceability a contract. In order to create Some elements of contract validation are very certainty for electronic contracts, legal groups, such difficult for a computer to perform. For example, the as American Bar Association (ABA), have clarity and legal purpose elements are very difficult to established several rules for enforcement of a model and verify. Attempts have been made in the area of deontic logic, however, this work is still contracts in the B2B area [W94]. These rules cover issues such as fraud, transmission and receipt of preliminary [TT98]. One approach to address this messages, evidentiary concerns, prior terms and problem is to establish some systems of credentials 65 Session 4: Electronic Contracts that would guarantee legal validity of contract • A preamble which outlines the parties involved templates. in the contract and the nature of the consideration; Some elements of contract validity are possible to • A list of contract clauses, clustered in logical Figure 1: Elements of a business contract template automate, such as checking the consideration aspects groups. In some cases, a contract clause itself (by inspecting signed contract instances) and may be a pointer to a standard contract clause competence aspects (by enforcing rules for signing provided by an external institution; contracts by people with the legal authority to do so, • An approval section which enumerates whom as discussed in [MAL96]). from each party approved the contract; and • A digital signature section with digital signatures The Contract Negotiator (CN) is an optional role that from the appropriate parties listed in the approval can be used to mediate the negotiation of contracts in section; and the pre-contractual phase. Automated contract • Finally, a separate section contains a list of policy negotiation is another area with significant challenges specifications stating contract enforcement rules as much of this work requires reasoning about the according to the agreed contract clauses. This effect of obligations outlined in a contract and then aspect will be explained in detail in section 4.2. negotiating based on this. Some attempts to solve related problems have been made in the area of 4.1 Describing Contracts intelligent agents [S96]. In this paper, we will be encoding this model using XML. Given the textual nature of business contracts, 4. Use of XML technology to XML is the logical choice for capturing the structure support contracts of a contract while preserving the text of the contract. Based on the analysis of contracts presented in Furthermore, essential pieces of emergent XML section 2.1, we have defined a model for contracts. infrastructure can be used to advantage, namely: The model (shown in figure 1) for a contract is CBL, XML-DSig, XSLT, and XML repositories as broken down into the following elements: will be discussed in the following sections. 66 Session 4: Electronic Contracts 4.1.1 Use of CBL implemented using the same repository implementation choices as above. Common Business Language (CBL), devised by Commerce One4 defines a set of XML documents and The signing of contract instances can be facilitated XML building blocks that enable businesses to using XML-DSig compliant signatures. XML-DSig8 assemble e-commerce applications quickly. CBL has is a digital signature standard currently being jointly made important contributions to CommerceNet’s worked upon by the W3C and IETF. The use of such ECO5 semantic recommendations and is available in signatures will prevent fraud by providing the emerging XML.org and Biztalk.org repositories mechanisms to guarantee integrity, authenticity and and the "electronic business XML initiative"6. CBL privacy of XML documents. Further protection can provides a “document service architecture” enabling also be achieved by using a third party, such as the exchange of: Verisign9, as a certificate authority to prevent the tampering with of signatures by one of the parties. • Documents to send, reply to and check the status of purchase orders; Finally, to facilitate human user viewing of contracts, • Documents related to invoices; an XML contract can be rendered in HTML by using • Documents used to check the price and a transformation technology like XSLT10. This availability of goods; and implementation detail is beyond the scope of this • Documents used to maintain product catalogs. paper. Each of these documents is built out of smaller elements, such as elements for customer details, 4.2 Describing contract policies delivery information, product descriptions, names, In this paper, the contractual terms and conditions are addresses, list of part numbers, prices, currencies, modeled as a policy which specifies that a role is countries, dates, etc. This is an important feature as it either forbidden or obligated to perform actions under already provides elements that can be reused in a certain conditions. Each of the contract clauses can be business contract specification. regarded as a high-level policy statement. However, these statements need to be further refined so that CBL also provides the concept of a contract, which is they express constraints on the actions that parties very brief and only includes a contract identifier and involved in contract need to fulfill – as a result of start and end dates. In this paper we have taken the their contractual obligations. These actions can then CBL contract and extended it to include the additional be monitored, if required, and if they do not comply elements illustrated in figure 1. with those agreed in the contract, then the Contract Monitor can signal this non-performance to the Appendix B provides an example of a CBL-based Contract Enforcer to perform an action on a specified description of the contract introduced in Appendix role. A 7. The formulation of this policy system has been 4.1.2 Other Related XML Technologies influenced jointly by the Event-Condition-Action (ECA) paradigm from active databases [UW97] and The standard form contracts are stored in the Contract the ODP enterprise language [SD99]. The core part of Repository. This can be implemented using any the grammar for this policy system is formulated as: number of existing XML-enabled repositories, such as relational databases provided by Oracle, Informix, ::= * Sybase and Microsoft. Specialized XML repositories when can also be used. must [not] occur where The agreed upon and signed contract instances are otherwise ; stored in a Notary repository, which can be ::= action(, , ,