Electronic payment systems are an important part of the electronic
commerce infrastructure. However, like the conventional systems, they are
also prone to the risk of fraudulent payments that impose financial losses on
the participants. Therefore, it is important that the losses are fairly and
properly allocated between the parties, to enable them to receive benefit
from the systems.
In so far as the consumer and the electronic payment issuer are concerned,
the losses are commonly allocated through the terms of their contract.
Since contractual loss allocation may prejudice the consumer, loss allocation
rules were introduced to supplement the process of allocating the losses
between them. These specifically drafted loss allocation rules are influenced
by the loss allocation principles, and employ a combination of liability rules
including the capped liability rule, and/or fraud-based rule and/or
negligence-based rules. Apart from that, the loss allocation regimes also
employ the rules governing the use of an exclusion clause or unfair contract
terms to protect the consumer against unfair contractual loss allocation.
It should be noted that although the loss allocation models are identical, yet
their detailed rules vary from one jurisdiction to the next. Despite the
differences, they share a common aim, i.e., to prescribe the rights and
liabilities of the parties in relation to the losses. In particular, they provide
protection to the consumer against unfair loss allocation.
The success of the different loss allocation regimes in achieving the said
objectives, in view of the different stature of the consumer and the issuer in
terms of their knowledge and financial ability, depends, among others things
on the clarity and the practicality of the rules and also the ability of the rules
to induce the parties' precautionary action. More importantly, a perfect loss
allocation scheme must be comprehensive, in the sense that there should not
be any room left for the issuer to manoeuvre around its rules to unfairly use
its contract terms to allocate the losses to the consumer. Failure of the rules
to have these characteristics affects the protection of the consumer against
fraudulent payment losses, hence the need for review and reform.