Electronic Bill (EB) as ‘Paperless Bill’

9.54 Broadly speaking, in the absence of a statutory (or other precise) definition, an electronic­ally issued payment order that otherwise has all the characteristics of a cheque and is treated as a ‘paperless cheque' is known as an ‘Electronic Payment Order' (‘EPO')^[936] or ‘Electronic Cheque'.^[937] Like a paper cheque,^[938] an EPO is issued by the drawer/payer and is addressed to the drawee/payor bank, ordering it to pay on demand a sum certain in money to the payee (or bearer), to whom the order is issued.

9.55 Certainly, the same can be said about the ‘electronic bill' (‘EB'). A software bill program can create a visual image of both the front and the back of the ‘bill' and take a screenshot of the image. The program could then transmit to the remitting bank an encrypted version of the imaged ‘bill' to which the ‘handwritten' drawer's and indorser's signatures, both the seller of the goods (‘seller'), are attached. The program could further facilitate the successive in­dorsements and the acceptance on the bill. However, in the absence of an existing compre­hensive statutory, as well as regulatory, framework, private agreements are required to fill the gap and determine legal issues involving the EB. A natural inclination is to resort to the UCC (or BEA), as well as the Check 21 Act. The passage of a comprehensive statute in that direction is thus highly recommended.

9.56 Purporting to address the collection of EPOs,^[940] the Board noted that not being derived from an original paper cheque, an electronically-created cheque image cannot be used to create a substitute cheque that meets the requirements of the Check 21 Act and Regulation CC.

ELECTRONIC BILL (eb) AS ‘PAPERLESS BILL’ 193 in the collection system would make all warranties that the bank would make if the image were derived from a paper cheque.

Since the source of the electronic image is unknown, the Board proposed that a bank receiving a warranty claim relating to an electronic collection item, electronic return, or a nonconforming substitute cheque, would be able to pass back its liability for the item to the bank from which it had received the electronically-created image and information. Although the first bank to make the warranty may also be unaware of whether an image or information came from a paper instrument, the Board neverthe­less expressed its view that that bank is in the best position to know and protect itself contractually against the risk. Indeed, the warranty given is that the appearance of an electronic image conforms with that of the physical cheque from which it is derived. Thus, according to the version of § 229.34(a)(1) effective from 1 July 2018, and repro­duced above in section V, the warranty given by ‘[e]ach bank that transfers or presents an electronic check or electronic returned check and receives a settlement or other consideration for it’ applies to the accuracy of the electronic image and against double payment.

9.58

In particular, these warranties purport to cover all losses that would have been caused by warranty breaches had the electronically created item been derived from a paper cheque.

Each bank that transfers or presents an electronically-created item^[943] and receives a settle­ment or other consideration for it shall indemnify,... each transferee bank, any subsequent collecting bank, the paying bank, and any subsequent returning bank against losses that result from the fact that—

(1)                        [t]he electronic image or electronic information is not derived from a paper check;

(2)    [t]he person on whose account the electronically-created item is drawn did not au­thorize the issuance of the item in the amount stated on the item or to the payee stated on the item...; or

(3)    [a] person receives a transfer, presentment, or return of, or otherwise is charged for an electronically-created item such that the person is asked to make payment based on an item or check it has already paid.

9.59

The indemnity under § 229.34(g) would not flow to the drawer, payee, or the depositary bank. The Board rationalised that ‘the payee and the depositary bank are in the best pos­ition to know whether an item is electronically created and to prevent the item from en­tering the check collection system’. As well, the Board went on to explain, the depositary bank can contractually pass the risk to the payee.

electronically created by the [drawer]' into the check collection system.^[944] Under § 229.34(i)(1), the indemnity amount shall not exceed the sum of:

(i)     [t]he amount of the loss of the indemnified bank, up to the amount of the settlement or other consideration received by the indemnifying bank; and

(ii)    [i]nterest and expenses of the indemnified bank (including costs and reasonable attorney's fees and other expenses of representation).

9.60 However, under § 229.34(i)(2)(i), and without reducing ‘the rights of a person under the UCC or other applicable provision of state or federal law’,^[945] if such loss ‘results in whole or in part from the indemnified bank's negligence or failure to act in good faith, then the indemnity amount... shall be reduced in proportion to the amount of negligence or bad faith attributable to the indemnified bank'. The Board rationalised the ultimate adoption of ‘these protections as indemnities... rather than warranties, as there would not likely be a difference in the damage calculation as between an indemnity and a warranty, and the rule permits a comparative negligence claim for indemnities, which may be appropriate in some cases for these items'.^[946]

9.61 Such indemnities should also be provided in connection with the EB. As in connection with the EPO, those indemnities ought not to flow to the seller and remitting bank. As in the case of the electronic image, practically speaking, legal equivalency of the EB can best work hand in hand with technological feasibility: it is only where technology facilitates the change of control of the EB from one person to the other that legal equivalency of the EB can work. In the alternative situation, in which parallel control remains in a sender's hands, warranties and indemnities against double payments are as good to the recipient as the creditworthi­ness of the sender who gives them.

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