Subject: Enron Online: Counterparty Authority
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 19 May 2000 13:15:00 -0700 (PDT)

In view of the importance of this issue it is desirable to deal with it in
detail.

1.  The Issue

The essential issue we are focussing on is that set out in my email of May 12,
i.e. the need to avoid the possibility of a counterparty being able to claim
that the transaction is not binding because:

(a) it was outside the company's business purposes, or
(b) execution of the application was not authorized.

This issue is not unique to Japan

There is no question as to any specific Japanese laws impacting on the trading
of any of the products through the internet, including issues as to 
contractual
enforceability of contracts entered into via the internet, on which we advised
on 15 March.  A copy of that advice is attached to the bottom of this email.

Neither is there any question, if the above issue is resolved, of the 
Electronic
Trading Agreement and General Terms and Conditions forming part of the 
contract.
(We understand Mark Taylor to be concerned on this aspect.)

2.  Enron's Practice re EOL

Our understanding is that:

* Potential customers have been sent the password application under cover
of a letter from Joseph Hirl inviting them to complete the application.  
Neither
the letter nor the application form indicate who is expected to sign the form.

* Completed applications are reviewed by Enron primarily from a credit
standpoint but also, we understand from Mark Taylor, to quickly confirm the
authority of the signer (by e.g. in the case of a U.S. counterparty, checking 
if
the signatory shows the title "director" alongside his name).

* If satisfied, Enron then signs the acceptance part of the application
and issues a password.

* Four applications had been received regarding Japan as of 11am today and
none has yet been approved.

3.  Business Purposes

Article 43 of the Civil Code provides that a juristic person has rights and
obligations in accordance with law and the business purposes specified in its
constituent documents.  Where a corporation enters into a contract outside its
business purposes, the contract is prima facie void.

However, if the counterparty did not know that the contract was beyond the 
power
of the corporation, and was not negligent in failing to know such fact, the
contract will be enforced under Article 110 of the Civil Code.

The most prudent practice would be for Enron to obtain a copy of the
counterparty's business purposes (certified by the Legal Affairs Bureau or by 
a
representative director) and form a view on whether the proposed transaction
falls within those purposes.

However, since Japanese companies' business purposes, after listing a limited
number of specific purposes, generally include a final item along the lines of
"all incidental or ancillary business", it is common for companies to not make
this inquiry except in the most major contracts.

With respect to statutory corporations, however, care is required because 
often
their business purposes are in fact limited.

Accordingly, a rule of thumb solution would be: if the counterparty name does
not contain "Kabushiki Kaisha" or "Yugen Gaisha" at the end of the name, to 
make
further inquiries.

4.  Authority to Bind the Company - The Law

The position in Japan is similar to that in a number of other countries in the
sense that:

(a)  Deemed Authority

The law provides for a form of execution which, if followed, entitles a party 
to
presume that the company is bound.  In Japan, this involves the execution of a
contract by the company's "representative director".  This corresponds to the
presumption concerning the affixing of the company seal in some states of the 
US
and in the UK, and the execution of the contract by 2 directors in Australia.

It is possible for the powers of the representative director to be restricted 
by
law or the constituent documents of the corporation. (Article 53 of the Civil
Code) but if the counterparty did not know of such restriction, the contract 
is
still binding on the company.

(b)  Apparent Authority

In common, with other countries, Japan has a concept of apparent authority.
Article 262 of the Commercial Code provides:

 "A company shall be liable to a bona fide third party for any act done
by a director invested with any title such as president, vice president,
executive director or managing director from which it may be assumed that he 
has
authority to represent the company, even in cases where the person has no 
power
of representation."

Articles 37 and 38 of the Commercial Code extend the same concept to "general
managers" (so shihainin).  It is generally considered that Article 43 then
applies the concept to "an employee who has been entrusted with certain types 
of
matters or specific matters."

Accordingly, in addition to persons having the titles listed in Article 262
(above), the general view is that persons having titles such as general 
manager
and division manager (bucho), will be deemed to have the authority to 
represent
the company for normal transactions within the particular areas of the 
company's
business for which they are responsible.

It is also likely that section managers (kacho) or section chiefs (kakaricho)
have power to bind the company to a certain extent in areas for which they are
responsible.

(e)  Holding Out

Even if an employee of the company is acting outside his actual authority, if
the company has held the employee out as having authority, the company will be
bound by his/her action.

5.  Practical Considerations

In formulating an approach for Enron to take on the basis of the above law, 
the
following factors are relevant:

(a)  Practice regarding Representative Director Seal

It is common for a counterparty to seek to take the advantage of the 
presumption
referred to in 4(a) above by requiring the representative director's corporate
seal to be affixed (and, if contract is in English, for him to sign) or  to
insist on tracing the "chain of authority" of the signatory up to the
representative director (e.g. by power of attorney), for major or unusual
transactions.

(b)  Size of Transaction

The question is what transactions fall into the "major" or "unusual" category.

Unfortunately the cases on this do not allow a clear line to be drawn.  As in
many other countries, the answer depends on factors such as those noted in 
(c),
(d) and (e) below, which vary company by company.

Accordingly, where the contract involves (or could involve) a considerable
ongoing exposure by the company, Japanese corporations would not be surprised 
to
be asked for the signatory to be at a certain level, or for written 
confirmation
of the signatory's authority to be obtained from a person at such level.

(c)  Size of Company

While it would be prudent and normal to insist upon the representative
director's seal being affixed to a contract of the present type in the case 
of a
smaller company, it would not be normal practice to so insist in the case of a
major company such as a bank or major trading company counterparty, in which
companies lower level employees are presumed to have greater authority.

(d)  Business Department of Signatory

The counterparty is more likely to be bound under the apparent authority
doctrine if the signatory is in (and carries a title which refers to) the
relevant business department (e.g. energy), than if he is not.

(e)  Degree of Exposure

To the extent that the online products to be made available are likely to 
expose
the counterparty to considerable liability, the possibility of a counterparty 
in
the future disclaiming liability should not be discounted and would warrant a
reasonably conservative approach.

(f)  Recent History

However, even when faced with considerable losses during the recent economic
crisis, Japanese companies (at least major companies) have not generally
attempted to use lack of authority as a defense, presumably because of
reputation considerations.

(g) Identity of Addressee

The title of the person to whom the invitation letter is sent may be relevant.
For example, if it was sent to the General Manager of the relevant department,
but the application came from a section chief, there would be strong argument
that the company had held the section chief out as having the necessary
authority.

(h)  Internal Procedures

Since the law concerning execution by a representative director can be
considered to broadly correspond to the law concerning execution under seal in
some countries, and by two directors in for example Australia, the Japanese
rules are not out of line with those of other countries.

Accordingly, it should be necessary for Enron to take a more stringent 
approach
to Japan in this respect than it does in marketing the same products in other
countries.  The procedures in place for other countries may be sufficient for
Japan as well, although some adjustment will need to be made for Japan's 
unique
regime of company titles.

6.  Conservative Approach

If the online transactions are treated as a major or unusual transaction for 
the
counter-party, under common practice Enron would require:

* The application to be executed under the registered seal of (and counter
signed by) a representative director, or by a person who is able to produce
documentation showing a line of authority originating with a representative
director.

* A certified copy of the seal register.

* A certified copy of the register of the company issued by the Legal
Affairs Bureau, to confirm the business purposes and the identity of the
representative director.

7.  Less Conservative Approach

Major Companies

For major Japanese trading companies, banks, insurance companies and other
companies of equivalent size, the following approach could be adopted which
would not be out of line with market practice:

* The application to be executed by a manager (or general manager)(bucho)
of the relevant department or above, or

* By a person able to establish a line of authority from such party.

A more aggressive approach would involve accepting applications signed by a
person at the level of section manager (kacho) or section chief (kakaricho), 
but
this is right "on the line" and we would prefer Enron to do so only if there 
is
some history of dealings with the company or other evidence to back up an
apparent authority argument.

Smaller Companies

For other companies the approach would be as set out in 6. above.

Perhaps your credit control procedures could be used to set a benchmark for
dividing between small and large companies.

8.  Likely Response of Target  Companies

Your marketing experts will be in a better position than us to form a view 
but,
taking into account Japanese commercial practice, we do not believe any 
company
is likely to be offended if Enron responds along the above lines to an
application signed by a person who does not meet the above suggested approach,
particularly taking into account that the approach is not inconsistent with 
the
correspondence and application form the companies have been sent and no
applications have yet been approved.

Regards

Paul Davis/Hideo Ohta

__________________________________
Baker & McKenzie Advice of 15 March 2000

Dear Mark:

I refer to you e-mail of March 3 sent to my partner, Paul Davis.  I am in 
charge
of our Information Technology/E-Commerce Dept.  Please accept my apology for 
not
having responded earlier.

Please see our comments below.

Should you have any questions, please let us know.

Best regards,
Yasuyoshi Goto

> -----Original Message-----
> From: Mark Taylor [mailto:[email-masked]]
> Sent: Friday, March 03, 2000 9:17 AM
> To: [email-masked]
> Cc: Alan Aronowitz
> Subject: EnronOnline in Japan
>
>
>
>
> Dear Paul:
>
> I believe Alan Aronowitz and Mark Haedicke of our office met
> with you a week or
> so ago and mentioned that we would need advice from you
> regarding the use of our
> internet trading website with customers in Japan.  Below is a
> list of initial
> questions regarding which we would be grateful for the
> benefit of your advice.
> For your background information as you consider these
> questions, be advised that
> counterparties must sign a written "Password Application"
> which provides that
> the counterparty intends to be bound by agreements entered
> into by "clicking" in
> the appropriate spaces on the website.  Please feel free to
> contact me with any
> questions you may have.  I can be reached either by e-mail at
> [email-masked] or by telephone at (713)853-7459.
>
> 1.   Have relevant regulators in your jurisdiction made any
> statements regarding
> marketing of or dealing in any of the following types of
> products through the
> internet or other electronic systems:
>
>      Commodity transactions relating to oil, gas, electricity
> or other energy
> commodities, whether derivative
>           transactions (cash settled) or physically settled.
>      Financial derivatives - i.e. interest rate, foreign
> exchange or credit
> derivatives.
>      Weather derivatives.
>      If so, please could you provide us with a brief summary.

Our research has revealed no statements of regulators in Japan in connection
with the marketing or dealing in the above types of  products through the
internet or other electronic systems from publicly available source.  We will
let you know if we find any previous or future statements.

>
> 2.   Do any specific laws or regulations exist in your
> jurisdiction which would
> prevent or in any way impact upon marketing or trading of any
> of the products
> set out in question 1 above through the internet?  In
> answering this question
> please address issues relating to contractual formation and
> enforceability of
> contracts entered into via the internet.  In particular, if a
> transaction
> entered into via the internet is enforceable under U.S. or
> U.K. law and the
> transactions contain a choice of such law, will such
> transactions, including the
> choice of law, be enforceable in Japan?

We do not have any specific laws or regulations which would marketing or 
trading
of any of the products set out in question 1 above through the internet.  
Under
Japanese law, formation of any contract does not require any formality.

Japanese law generally does not require any formalities for offers or
acceptances to be valid as such. There is no Statute of Frauds, and parties 
may
make most types of contracts orally. If there is enough evidence establishing
that the offeree agreed to the terms offered, an offeror may rely on it. In 
most
simple sales contracts for consumer goods, for example, it would be easy to
prove that the customer agreed to pay x yen for product Y. The Seller's
electronic records showing that the customer clicked on the icon to buy 
product
Y should be enough in this context.

In more complicated contracts, the structure of the seller's Web pages should 
be
carefully designed. Having no court decisions, we have no definite answer to 
the
question of enforceability of shrink-wrap agreements in Japan. However, the
legal implications of the Web-wrap, the online version of shrink-wrap, may be
somewhat different from shrink-wraps (e.g. licenses for software sold over the
counter).  Under a typical shrink-wrap license in the real world, for example,
the customer cannot break the wrapper until after the customer purchases the
product. However, in an on-line environment, a customer has a choice to click 
on
an Accept-to-Buy icon before the customer purchases the product. Further, 
with a
carefully compiled sequence of screens or pages which would in effect be able 
to
let the customer read the terms and conditions before rushing to click on the
icon, it would be easier to prove that the customer read the terms and
conditions than in a typical shrink-wrap license situation. Unlike shrink-wrap
in the real world, the seller may obtain an electronic record showing that the
customer clicked on the icon. Given these differences, the result possibly may
be more favorable to sellers online than to those using shrink-wrap licenses.

If a transaction entered into via the internet is enforceable under U.S. or 
U.K.
law and the transactions contain a choice of such law, such transactions,
including the choice of law, will be enforceable in Japan.

>
> 3.   If the answer to either of question 1 or 2 is "yes",
> please indicate
> whether the impact of any relevant statements, laws or
> regulations will differ
> depending upon whether (a) the relevant internet site is
> maintained in your
> jurisdiction or elsewhere; or (b) the party effecting the
> marketing/trading
> through the internet is locally licensed.

N/A

> 4.   Please confirm that by marketing to or trading with
> counterparts in your
> jurisdiction via the internet local relevant regulatory
> bodies/local laws or
> regulations will not consider the party maintaining the
> relevant website to have
> established a physical establishment/branch in your jurisdiction.

We do not have any clear cut answer to this since we have no relevant laws,
regulations, or court cases.  So long as  the party maintains the relevant
website with a computer server located outside Japan, the likelihood of 
Japanese
regulatory bodies to consider that the party maintaining such website
established a "physical" establishment/branch in Japan is negligible.

>
> Thank you in advance for your attention.  We look forward to
> hearing from you.
>
> Sincerely,
>
> Mark Taylor
>
>

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