Contracts and Electronic Signatures

Given the rapid development of digital technology, it was inevitable that eventually contracts could be completed between two parties without ever meeting or physically signing a single piece of paper. Thanks to a federal law called the Electronic Signatures in Global and National Commerce Act (ESIGN), electronic signatures are just as valid and enforceable as those signed by the contracting party's own hand. It's important that business owners understand the main points of this law, since more and more legal documents are moving into the digital space.

ESIGN at a Glance

ESIGN changed the status of all electronic signatures and made them as binding as their counterparts on paper. This was great news for companies that were beginning to realize the potential of online business. Companies dealing with financial, insurance and other services were greatly benefited by this law. The electronic signature law also helped those who needed a faster means of forming business to business contracts, such as supplies and services contracts. Technically, the law states that electronic signatures are valid as long as the two parties involved agree to that method of signing.

Electronic Signatures and Electronic Contracts: What Are They?

An electronic contract is a document that is created, transmitted and signed, all in electronic form. This means there is no waste of paper or postage fees. In addition, "clickthrough" contracts -- typically found in online user agreements -- are another form of an electronic contract. The user must click "I Agree" at the end of the user agreement before the online service or software becomes usable.

There are a number of ways to sign an electronic signature, such as one's initials or full name. Other methods include clicking an "I Agree" button, or even scanning and pasting in an image of a person's real signature.

Cryptography and Electronic Signatures

Cryptography provides a means of scrambling information from the sender, allowing the receiver to unscramble it on the other end. One of the more popular standards for online cryptography is the Public Key Infrastructure (PKI). PKI uses an algorithm to scramble and encrypt electronic contracts and other documents so that they are only viewable and accessible to authorized users.

In addition, the Worldwide Web Consortium, the organization that sets standards used throughout the Internet, has developed guidelines for XML based digital signatures.

Paper Contracts Are Still Available

While ESIGN gives businesses and the consumers the power to create, sign, and complete contacts all through electronic documents, the same laws give consumers the right to opt for paper contracts as well. ESIGN provides that, prior to getting a consumer's consent for using electronic contracts and signatures, a business must notify the consumer whether or not there are paper copies that can be used as an alternative.

The law also mandates that businesses inform consumers that, even if they give consent to use electronic documents, they can later change their mind and switch to paper documents. These notices must give the consumer information relating to any fees or penalties that will apply (since paper and postage costs money). Lastly, the notice must indicate the scope (how many documents the consent will apply to) of the consumer's consent to use electronic documents.

Although electronic contracts and signatures may be great for business, they may harm low-tech consumers. These people may be forced to pay higher fees for continuing to conduct business on paper.

Situations in Which Paper Contracts Are Still Required

There are still contracts that are required to be on paper in order to protect consumers. These documents include:

• Documents dealing with adoption, divorce, and other family law matters
• Wills, will codicils, testamentary trusts
• Notices of utility termination or cancellation
• Notices of foreclosure, eviction, repossession or default
• Court orders, notices and other court documents
• Notices of termination of health or life insurance benefits
• Notices of product recalls due to health or safety reasons, and
• Documents that are required by law to travel with hazardous materials

The UETA

The Uniform Electronic Transactions Act (UETA), adopted by most states, establishes the validity of electronic signatures in contracts much in the same way that ESIGN does. The UETA works like the ESIGN, but on an in-state level, while the ESIGN works on an interstate level.

Get Legal Assistance for Your Electronic Contract and Document Needs

Technology is constantly changing, while laws typically must play catch-up. It can all be quite complicated for non-attorneys and entrepreneurs are already wearing many different hats in order to stay lean and competitive. If you have questions regarding electronic signatures or other issues, you may benefit from meeting with a small business attorney in your area.