DIGITAL SIGNATURES AND THE INTERNET (UPDATE)

Congress passed the “Electronic Signatures in Global and National Commerce Act” in June 2000.  The text of the law is found at 15 United States Code (USC), Section 7001 et seq.  This “Electronic Signatures Act” became effective October 1, 2000, but with several important provisions delayed until March 1, 2001 and June 1, 2001.  See Section 7007(b) of the Act.

The purpose of the Electronic Signature Act is to clarify how and when electronic records can become binding legal documents equivalent to traditional written agreements.  The opening sentence states:

“Notwithstanding any statute, regulation or other rule of law  …  with respect to any transaction in or affecting interstate or foreign commerce – (1) a signature, contract or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and (2) a contract relating to such transactions may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.”

Simply stated, the Act allows electronic documents to have binding effect upon parties to a contractual business transaction when the parties agree that such mode of communication may be used.  Separate documentation of such agreement to be bound by e-commerce is not required.  The courts will look to the intent of the parties in the course of the transaction and, obviously, the text of the established electronic communications (presumably downloaded and printed).  The parties may establish the authentication procedures, including encryption procedures that will be required for records to establish a binding agreement. 

Section 7006 provides definitions of terms used throughout the Act.  These definitions include

“Electronic Signature” –“means 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.”

“Electronic Agent” – “means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part without review or action by an individual at the time of the action or response.”

“Electronic Record” – “means a contract or other record created, generated sent communicated, received or stored by electronic means.” 

“Record” – “means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

Note that information existing in an electronic form will not be deemed to be a complying electronic record for purpose of the Act if the “sole purpose is to enable the contract or other record to be sent, communicated or received.”  Therefore, it would seem that a procedure for archiving communications would be mandatory, in contrast to allowing email messages to remain solely on the hard drive as “mail.”

Although definition of “electronic” contained in the Act would appear to include telephone communication, i.e., “relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities”, the Act elsewhere states that “an oral communication or a recoding or an oral communication shall not qualify as an electronic record for purposes of this subsection except as otherwise provided under applicable law.”  See Section 7001(c)(6).  However, the definition of electronic signatures, quoted above, includes “sounds.”

The Act applies to business, commercial and governmental transactions.  It applies also to many consumer transactions provided that the consumer has expressly consented to the use of electronic communication in the transaction with the understanding that electronic communication is not required, the technical software mechanisms are disclosed and understood and that this consent can be withdrawn.   See Section 7001(c), Consumer Disclosures.  It does NOT apply probate and family law documents, e.g., will, trusts, adoptions, divorces, etc.  See Section 7003(a).  The Act also precludes the validity of electronic delivery of evictions or foreclosures notices.  Although the Act expressly states that it is to apply to insurance, it also states that notice of life insurance cancellation may not be delivered electronically.  Section 7003(b). 

Although contract law is usually a matter of state law (broadly standardized via the adoption of the Uniform Commercial Code by all states), the Act preempts any provisions of state law that are in conflict.  Congress enacted the “Electronic Signatures Act” to provide a expedited method of establishing how and when “e-commerce,” in all its evolving forms, could be enforced by courts equivalent to the traditional “hard copy signed contracts and purchase order.”  Prior to the enactment of the Electronic Signature Act, numerous states had enacted individual laws attempting to govern the issue.  However, the lack of uniformity was viewed as a potential barrier to the development of commerce on the Internet.

In a curious recognition of the traditional role of states in matters of contract law, the Act provides that the preemption of state law is removed when the state enacts the provisions of the Act into its own statutory code.  See Section 7002.  (Texas enacted the provisions of the Federal Act, as a matter of Texas law, effective January 1, 2002.)

The Act does not, however, establish any standards as to what authentication may be required.  (In this manner, the Act establishes to an equivalent principle traditionally used in contract law, i.e., the contracting parties traditionally stipulate to the necessary formalities of signature requirements, mode of communication and delivery address.  Failing to adhere to the stipulated formalities will (or should) cause the non-complying party to lose the benefit of the agreement.)  Once it is determined that electronic communication has been agreed by the parties as an acceptable means of binding communication, an electronic record of the communication, e.g., email, will satisfy legal requirements for written documentation, including signed written documentation.  Note however, if the agreement requires certain communication to be conveyed by certified mail or courier delivery, an email message will not be sufficient. 

The party seeking to prove the communication will still have the burden to establish the authenticity of the communication, just as it would have the burden to authenticate any other written record.  Note that this issue of authentication has traditionally been handled by documents being signed, witnessed and notarized.  Further, corporate agreements may often be accompanied by a certificate of the corporate secretary stating that the person signing on behalf of the corporation is a properly elected officer and authorized to sign on behalf of the corporation.  Further certainty can be achieved by having the corporate secretary furnish a certificate of good standing from the Secretary of State for the state in which the corporation is organized.  

Exactly how a comparable level of authentication will be achieved electronically is not clear.  Section 7001(e) states that notwithstanding the broad text of subsection (a), quoted above, if a statute or other rule requires that a contract or other record relating to a transaction be in writing the legal effect, validity or enforceability of an electronic record may be denied if the electronic record is not in a form that is capable of being retained or accurately reproduced for later reference by all parties.  Subsection 7001(g) provides that statutory requirements for notarization of signatures, acknowledgement, verification or oaths made at the time of signature may be satisfied if the electronic signature authorized to perform the notarization, verification or administration of the oath “is attached to or logically associated with the signature or record.”  (Emphasis added.)  It is clear that the rules of evidence are to apply equally to electronic records and therefore the issues will be the same, but the manner of evidence required to resolve the issues may be different.

Section 7001(d) provides that electronic retention of records is satisfactory “if the electronic record of the information in the contract or other record accurately reflects the information set forth in the contract or other record and remains accessible to all persons who are entitled to access by statue, regulation or rule of law for the period required” by statute, etc, “in a form that is capable of being accurately reproduced for later reference, whether by transmission, printing or otherwise.”  Again, archiving documents in a standard computer form, i.e., Microsoft Word, Excel, etc., would seem to be part of the requirement.  However, does one party to the transaction have to have the records in a electronic file accessible to the other party to the contract?  

A electronic communication is deemed sent upon showing that it was properly addressed to the recipient (preferably an address furnished for that purpose by the recipient), transmitted in a form that can be processed, and when transmitted for delivery to a medium outside the control of the sender.  The communication is deemed received when (i) the document is received by the recipient’s electronic messaging system, (ii) from which the recipient can access the record, and (iii) the message can be processed by the system.  

Implementing the statute to the technology (a technology to which most of us possess only a superficial understanding), will likely require in the short term the cooperation of IT System professionals to understand how transmission and receipt of electronic records, correct use of computer media (language or platform) and the compatibility of the media interface between sender and recipient can be documented (electronically or otherwise) to meet the requirements of the Act.  In the longer term, I envision that commercial software will be provided that can record this information automatically, perhaps through means similar to ET’s or cookies.

© David McEwing, 2002