November 2000

Electronic Contracting & Record-Keeping

by Jennifer C. Debrow and H. Allen Blair

JENNIFER C. DEBROW practices in the areas of e-commerce, software licensing, trademark and copyright with the firm of Gray Plant Mooty and cochairs the firm's Internet & E-Commerce practice team. She is a 1997 cum laude graduate of the University of Wisconsin Law School.

On July 25, 2000, in Weston, Florida, Mr. Jose Ignacio Arroyo executed a promissory note and a mortgage without ever signing a piece of paper. 1 Using patented electronic technology and taking advantage of Florida's version of a model state law allowing electronic contracts, Mr. Arroyo may be the first person to have completed a fully electronic and completely paperless home purchase in the United States. With the passage of the Electronic Signatures in Global and National Commerce Act 2 (E-Sign), which took effect on October 1, 2000, a path has been cleared for widespread use of electronic contracting and electronic record-keeping. Although the burgeoning growth of the Internet and e-commerce was the impetus for passage of E-Sign, the law has broad implications beyond the dot-com world.

Essentially, E-Sign allows electronic signatures and documents to satisfy most legal requirements for written signatures, contracts, disclosures, or records. More specifically, E-Sign alters current law in four primary ways:

1) it validates electronic contracts and transactions;
2) it allows persons and businesses to retain and store records in electronic rather than paper form;
3) it validates electronic signatures; and
4) it allows limited types of electronic transferable records (promissory notes secured by real estate).

While the House and Senate have considered some version of an electronic contracting law for almost two years, the enactment of E-Sign follows closely on the heels of the approval of a similar model law -- the Uniform Electronic Transactions Act (UETA) by the National Conference of Commissioners on Uniform State Laws (NCCUSL). Over the last year, at least 18 states have adopted UETA. Some states, like California, however, have significantly altered the provisions of UETA. The process of adopting the model law in all 50 states would take several years, at a minimum, and some states would certainly follow California's lead in adopting nonconforming changes to the model law. Fearing that a lack of uniformity might chill enthusiasm relating to electronic commerce, Congress rapidly passed and the President signed E-Sign.

Section 102(a) of E-Sign clarifies Congress' intent to achieve uniformity in the law governing electronic commerce. As a general rule, E-Sign preempts state law. While there is some debate about the scope of this preemption, there are two limited exceptions to E-Sign's preemption of state law. First, state law will apply if the state has enacted UETA as approved and recommended by NCCUSL. If a state passes UETA with alterations that are inconsistent with E-Sign, however, these inconsistencies appear to be preempted. Second, a state's UETA provisions may apply if the state specifies alternative procedures or requirements for the use or acceptance of electronic records or signatures so long as these alternative procedures or requirements are consistent with E-Sign. Additionally, in order for state law to apply, it must be technology neutral. The state law may not require or accord greater legal status or effect to the use of any particular sort of electronic signature or record retention technology.

H. ALLEN BLAIR coauthored this article as a summer associate at Gray Plant Mooty and is currently finishing his third year at Hamline University School of Law.

"Perhaps the most basic, and most obvious concern . . . is determining when an electronic signature is binding."

E-Sign applies broadly to any transaction in or affecting interstate or foreign commerce. "Transaction" is defined as any actions relating to conduct of business, consumer or commercial affairs, including sale, lease, exchange, licensing or other disposition of personal property, services or any interest in real property. E-Sign does not apply to contracts relating to the creation and execution of wills and trusts, adoption, divorce and other family matters. Additionally, E-Sign does not apply to certain sections of the Uniform Commercial Code, which are being revised separately to address electronic procedures.

E-Sign provides legal certainty for electronic contracting in two primary ways. First, a signature, contract, or record relating to a transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form. Second, a contract may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation. Accordingly, to the extent that substantive law requires a writing or signature, E-Sign accords their electronic equivalents with equal legal validity. E-Sign self-consciously states that it does not substantively alter or limit the rights of persons under any rule of law. E-Sign instead focuses its attention of the procedures used to enter into and maintain contracts.

E-Sign offers three general types of consumer protection. Section 101(b)(2) of E-Sign states that no one is required to agree to use or accept electronic signatures. The act is, in other words, an "opt-in" law. E-Sign requires that consumers affirmatively consent to use of electronic contracts, electronic disclosures, and electronic signatures. Consumers must then be given the opportunity to withdraw their consent at any time.

E-Sign also affords consumers protection by limiting the scope of notices that may be delivered electronically. E-Sign does not apply to any notice of utility service termination; default, eviction, repossession, or foreclosure for an individual's primary residence; cancellation of health insurance or life insurance benefits; or recall of a product that risks endangering health or safety.

Finally, because E-Sign does not affect the substance of other laws, regular consumer protection laws still apply. Requirements regarding mandatory wording, conspicuousness, proximity, timing, and notarization all still apply. Laws that require disclosures in writing, such as the Truth in Lending Act, still apply. The only change to these laws is that the "writing" may now be delivered electronically.

There are numerous federal and state laws that require companies to maintain certain records for defined periods of time. E-Sign states that retention requirements will be met by retaining an electronic record so long as the electronic record (1) accurately reflects the information contained in the record, and (2) remains accessible to all persons entitled to access. Even if the law requires that an "original" be retained, E-Sign allows that requirement to be satisfied by retaining an electronic record that accurately reflects the information in the original record and remains accessible to all persons entitled to access to the original record.

Sign carefully avoids favoring any particular technology or method of electronically signing an electronic contract. E-Sign defines an electronic signature broadly as "an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record."

While many people believe that E-Sign requires "digital signatures," it does not. Digital signatures are only one type of electronic signature. The term "digital signature" refers to the use of particular mathematical processes that help to ensure the authenticity of both the signer of a document and the document itself. A number of companies, including VeriSign Inc., eOriginal, Cyber SIGN Inc., and RSA Technologies Inc., currently offer different means of administering digital signatures.

Because of the fear of forgery or fear that a contract may be deemed void because of a lack of proof that one party actually assented to the contract, practicality may demand that some form of standardized "digital signature" be adopted. In the end, there is a lot of speculation but not much certainty about what types of electronic signatures will become common place. As technology evolves in the areas of digital signatures, authentication, document integrity and security, the standards by which electronic documents are judged in court will evolve as well.

The last section of E-Sign addresses "transferable records," which it defines as electronic records that would be notes under Article 3 of the Uniform Commercial Code if the record were in writing, the issuer expressly agrees that the electronic document is a "transferable record," and the transaction involves a loan secured by real property. This sort of transferable record may be executed using an electronic signature, and the person who establishes "control" of the transferable record is entitled to the benefits of being a "holder" under the Uniform Commercial Code. The person with control is, in other words, entitled to the rights and defenses of a holder in due course or a purchaser. This section allows home mortgage documents, including promissory notes related to mortgages, to be executed electronically.

There are a number of concerns relating to electronic contracting. While consumer advocates have focused primarily on what they see as a lack of consumer protection in E-Sign, there are several broader concerns that should be considered. Perhaps the most basic, and most obvious concern with electronic contracting is determining when an electronic signature is binding. Although E-Sign says that such a signature may not be denied validity solely because it is electronic, the act says little about when it is valid. This concern, however, is not new to contract law. Article 1 of the Uniform Commercial Code defines a signature as any symbol executed or adopted by a party with present intention to authenticate a document.3 Likewise, the Restatement of Contracts (Second), in section 134, says that any symbol may serve as a signature if it is made or adopted with the intent of authenticating the writing at issue.4 Accordingly, questions about when a signature is binding have been raised and debated for many years. E-Sign simply expands the range of symbols that may be considered signatures.

Other problems might arise because E-Sign is silent about notice, deliver, integration, and choice of law issues. Parties who wish to use the freedom that E-Sign affords will need to craft provisions in their contracts to deal with these issues. E-Sign does not change the basic premise of party autonomy in contract drafting. Parties simply need to be aware that the electronic character of contracting under E-Sign might add a few twists to old concerns. For example, notice provisions may need to specify when a notice is deemed delivered to an e-mail address.

It remains to be seen how the technological developments will alter electronic commerce and contracting during the next few months and years. E-Sign does not attempt to predict how electronic commerce will evolve. Instead, E-Sign simply expands traditional contract definitions and allows for some degree of enhanced certainty as the law of electronic commerce and related technology develop.

1. "First Fully Electronic Home Purchase Follows Passage of Federal E-Sign Legislation; eOriginal, Mortgage.com, e-Cloz and Six Industry Innovators Complete Fully Electronic Home Mortgage," Bus. Wire, July 25, 2000, available in LEXIS, News Group File.
2. June 30, 2000, Pub. L. No. 106-229, 114 Stat. 464.
3. Uniform Commercial Code ¤ 1-201(39).
4. Restatement (Second) of Contracts ¤ 134 (1981).