To many business managers, the sheer volume of paperwork involved in operating a business today might seem to threaten to bury the company under a landslide of accounting records, contracts and minutes of long forgotten meetings.
The management of a company's information stored in paper form can be an expensive administrative headache. Fortunately, the new Electronic Transactions Act (ETA) and recent improvements in information technology mean that electronic storage of important documents is now a viable and efficient method for companies to manage their information.
Storing information in electronic form and discarding original hard copies can result in significant cost savings and, potentially, could also allow more effective contract management and referencing of historical records.
There are two principal reasons why a company may retain information. First, it may be required by law to do so. Second, the company may wish to retain information as a record of its transactions, commitments and business generally. This article will briefly discuss the legal implications of electronic storage of information for each of these reasons, before setting out some very general guidelines for digital archiving.
Companies are required to retain information under a number of statutes. The two most common are the Income Tax Act and the Companies Act. However, when considering what records must be retained, a company should consider all of the statutes, rules and regulations governing that company's particular field of business as these statutes may impose specific requirements for storage of information. For example, the Medicines Act requires manufacturers of pharmaceuticals to retain information regarding the quality and testing of any medicines they distribute.
The ETA provides guidelines for companies wishing to retain electronically information that they are required to store. However, statutory or regulatory bodies such as the Inland Revenue Department (IRD) may also issue their own guidelines on electronic record retention. For example, the IRD has released an exposure draft setting out a number of requirements for retention of business records for tax purposes.
Under the ETA, a legal requirement to retain information that is in non-electronic (i.e. paper) form is satisfied by retaining an electronic form of the information provided that:
To satisfy the first requirement, integrity of the information will be retained only if the information has remained complete and unchanged in any material way (the implementation of an audit trail as suggested below will help prove this requirement).
The second requirement will be satisfied if the information can be readily accessed using the information holder's equipment, or with equipment that could be easily obtained from a third party.
Under the ETA, information originating in electronic form can be retained in that electronic form provided that its storage meets the standards of integrity and accessibility outlined above.
Otherwise, such electronic information can be converted into and stored as a hard copy so long as the information is not altered in the conversion.
Where information that must be retained is in the form an electronic communication (e.g. an email), the ETA's standard requirements for electronic storage of information apply. In addition, however, further information relating to the origin, destination and time the communication was sent and received must also be retained. This additional information must also be retained even if the communication is stored in paper form.
Obviously, at some point stored records will need to be reviewed or disclosed. The ETA provides guidance on when a company may perform its disclosure obligations by providing information in electronic form (e.g. by way of an email or on a disk).
A company may disclose data in electronic form if three conditions are met. These are that: the method used to supply the data reliably assures its integrity; the information supplied is readily accessible; and the person requesting the information consents to receiving the information in electronic form. If these criteria are not met then information will need to be provided in more traditional paper-based form.
The ETA sets out how information required to be retained by statue may be validly stored. However, chances are that a business will want to archive much more information than merely its statutory requirements.
The main driver will be records of agreements reached so that should a dispute arise there is evidence of what was agreed (this may take the form of a formal contract, correspondence and/or business records).
There is little to be gained from retaining business records, contracts and correspondence if that information cannot be relied on should a dispute arise. Accordingly, it is important to look at the court's rules of evidence in determining what steps should be taken to ensure that information stored electronically can be relied on in a dispute.
The Evidence Amendment Act defines a document as including Any information stored by means of any computer. Therefore, the evidence rules governing the admissibility of documents will be relevant to information in electronic form. The rules of evidence that may apply in determining the admissibility of electronic information are:
(b) The best evidence rule
Hearsay is evidence of a fact given by a person who does not have first-hand knowledge of the fact. Hearsay evidence is usually inadmissible in a court because it is considered to be second-hand evidence and therefore unreliable. This rule may present problems for the admissibility of electronic information.
For example, where data is entered into a computer system by a person who does not have first-hand knowledge of the data's derivation or accuracy, that person cannot present the data as evidence in court.
However, there is an exception to the hearsay rule in respect of business records (as defined in the Evidence Amendment Act). Briefly, a business record is a document made from information supplied by a person with first-hand knowledge of the information where this document is made pursuant to a duty or in the course of business.
Where a document falls into this category, it may be admitted as evidence in court without the need for the person recording the information to testify as to the document's accuracy or derivation.
Best Evidence - the best evidence rule requires that a party to court proceedings produces the best evidence available. Traditionally, this rule has meant that where documentary evidence is relied on only the original document was admissible. The rationale for the rule was that any copied document may not be entirely accurate and copying errors could affect the content of the document.
Although the best evidence remains an original document, digitally scanned copies of the document are now admissible in court. This position recognises that copies can now be made inexpensively and accurately, with minimal potential for error or inaccuracy in the copy.
Authentication - the authenticity of a document must be established before that document will be admissible as evidence. Documents stored electronically are inherently more vulnerable to either accidental or intentional change than paper documents. For example, information stored electronically may be at risk of system failures, software corruption and unauthorised access (both internal and external).
Therefore, before electronically stored documents are produced as evidence in place of the original, additional evidence of the reliability of the copying and storage processes may also be required. (Some suggestions on implementing a reliable conversion and storage process are set out below).
Any business using or intending to implement a system for electronic storage of documents should consider their storage system and the process for capturing the relevant documents in light of these three rules of evidence. Otherwise, a business faces the risk that it will not be able to rely on important documents it stores in electronic form.
There are a number of factors to take into account when deciding how long information should be retained.
We have already referred to the specific requirements for electronic storage of business records under the Income Tax Act. This Act also provides that all tax records must be kept for a minimum period of seven years. Obviously, business records stored electronically should be stored for at least this period or any longer period required by any other statute governing a company's business.
However, there are many situations where it would be prudent to retain information for significantly longer than seven years. For litigation purposes, there is generally a limitation period of six years from the date on which a cause of action arises (although this period can vary for different types of claims). That is, claims may be filed in court up to six years after the occurrence of the act resulting in a claim.
If this act was a breach of a ten-year contract in its tenth year, then the limitation period for litigation would not expire for a further six years, and the contract document might be required more than 16 years after it was created. Other documents related to the contract may also remain relevant for a similar period of time.
On a practical level, it would be extremely expensive to store all business information for an indefinite period of time. Therefore, in determining how long to retain its documents, a business should ensure that it complies with any statutory requirements and after this weigh the costs of storing a document for a certain period against the risk that such a document will be required outside of the period and the likely cost if that document were not available.
While most statutes focus on a requirement to retain information for a certain period, there are some statutes that prohibit the storage of information for longer than is necessary. The most common example is the Privacy Act which provides that if information is held about identifiable individuals, under the Privacy Act this information should not be retained for longer than is necessary for the purposes it was collected for. Again, a company should consider what statutes govern its business and what requirements these have on ceasing to store information.
The ETA requires that where information is stored electronically the method of storage must preserve the integrity of the information. In a similar fashion, the court rules of evidence require that an electronic document must be authenticated as true and accurate before it can be relied on. The following suggestions provide a basic overview of how electronic archiving can be managed to preserve the integrity of information and make authentication of that information more simple.
A version of this article was first published in IT Brief
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.