Legal Briefs

Electronic Signature Advances Will Facilitate Online Business

The world of electronic transactions has galloped far beyond the efforts of the legal community to develop laws that facilitate traffic on the Internet. Recently, Congress gave an unequivocal green light to those exploring the realm of electronic commerce.

While some states have enacted versions of the Uniform Electronic Transactions Act, an overarching federal law has not been in place to validate online transactions — until now. President Clinton signed the Electronic Signatures in Global and National Commerce Act on June 30, and most of the law's provisions took effect Oct. 1.

The act allows electronic signatures to satisfy most existing legal requirements for written signatures, disclosures, or records. However, the act neither entirely eliminates risks related to electronic signatures and documents nor guarantees their enforceability. Instead, it provides the opportunity for businesses and government to adopt technologies and procedures that ensure:

  • attribution, or proof that the parties involved actually signed the contract;
  • data integrity, or proof that the parties involved signed the same contract;
  • nonrepudiation, or proof that the other side executed the contract; and
  • reliability, or proof that neither party altered the contract after its execution.

Fortunately, technology has been developed (and continues to develop) that allows both parties (and the courts) to reasonably rely on each other's electronic signature. A common form of digital signatures involves using different keys to encrypt and decode a message made through a “hash” function, which translates a long document into a short alphanumeric code, or an identifier. The signer and receiver use the same encryption functions to ensure that the document is “signed.”

Because the legislation legalizes electronic signatures but does not specify the use of particular safeguards or technology, the E-Signatures Act will allow for the continued development and improvement of e-commerce mechanisms.

On the other hand, failure to adopt specific requirements or presumption of reliability implies that efforts to rely exclusively on electronic signatures or documents will not be without risk, at least until a greater body of case law addresses their enforceability.

Establishing Legitimacy At the heart of the E-Signatures Act is its pronouncement that a signature or contract may not be denied legal usage or enforcement solely because it is electronic. However, the act does not require anyone to agree to use electronic signatures.

The act establishes certain conditions that address the enforcement of electronic transactions. Specifically, when an existing law requires that a contract be in writing, the enforceability of an electronic record of that contract depends on it being in a form that can be retained and “accurately reproduced” for later reference as necessary.

As noted, various technologies exist to assure proper attribution and data integrity. Over time, it is likely that meaningful standards will emerge to guide parties in developing enforceable electronic agreements.

Real Estate Implications Title 2 of the E-Signatures Act defines transferable records as electronic records that would be notes under the Uniform Commercial Code if such records were in writing; the issuer expressly agrees that the document is a transferable record; and the transaction involves a loan secured by real property. In such cases, a transferable record may be executed using an electronic signature. If someone establishes “control” of a transferable record bearing an electronic signature, that person is entitled to the benefits of being a “holder” under the UCC and has the same rights as a holder of an equivalent written record.

The act states that a person has “control” of a transferable record if the system used to monitor the transfer of interest in the record “reliably establishes that person as the person to which the transferable record was issued or transferred.”

Current law requires forms recorded in real estate transactions and other formal documents to be notarized according to state law. The act provides a mechanism for electronic notarization if a document bears the electronic signature of a notary together with the other required information and is “attached to or logically associated with a signature or record.”

This provision should enable real estate transactions to be conducted electronically. Security devices that verify a notary's identity should be coupled with the electronic signature technology.

Record Retention Many federal and state laws require that certain records be maintained for a defined period of time. However, the E-Signatures Act states that such requirements are met by retaining electronic records of the information.

But the record must accurately reflect the information set forth in the contract or other record and remain accessible in a form that can be “accurately reproduced for later reference, whether by transmission, printing, or otherwise.”

Again, the act provides the opportunity for businesses to replace paper records with electronic ones but does not create a precise road map for doing so.

When substituting electronic records for paper records, companies may need to adopt technological, procedural, and administrative safeguards that assure that electronic records are accurate reproductions of original materials and that no tampering has occurred.

Although the benefits of electronic records are clear, they also pose significant risks that should be considered whenever a company is contemplating a transition to paperless record keeping practices.

Another overlay of existing law involves original documents. If an existing law requires that a contract or other record be retained in its original form, the E-Signatures Act states that retaining an electronic record satisfies such a requirement.

The record retention provisions of the act become effective March 1, 2001, although that period can be delayed until June 1, 2001, if a rulemaking proceeding is underway.

The E-Signatures Act should give a big boost to advocates of electronic transactions. However, technology to develop reliable electronic signatures and security procedures still must be learned and understood in order to be implemented.

Carol C. Honigberg, JD, and Steven M. Nolan, JD

Carol C. Honigberg, JD, is a partner in the real estate group at Reed, Smith, Hazel, & Thomas LLP in Falls Church, Va. Contact her at (703) 641-4220 or chonigberg@rssm.com. Leonard A. Bernstein, JD, is the administrative partner in the New Jersey office and a member of the firm\'s E-Commerce & Technology Law Group. Contact him at (609) 520-6005 or lbernstein@reedsmith.com. Gary L. Kaplan, JD, is a partner in the Pittsburgh office and heads the firm\'s Information Technology Group. Contact him at (412) 288-4268 or gkaplan@reedsmith.com. The discussion of legal issues in this column is for informational purposes only. Results may vary depending on state laws and individual circumstances.

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