The ability to sign something electronically has been around a while. Today, it’s become somewhat ubiquitous in the consumer world (clicking “I Agree” when opening a new app, accessing a webpage, or buying something from Google Play or iTunes all constitute an electronic signature, or “e-signature”). However, e-signatures still give some companies headaches.
Many commercial transactions involve large dollar amounts and substantial risk, and the last thing anyone wants to worry about is whether an e-signature will hold up in court. Here’s a summary of the laws authorizing and affecting e-signatures, highlighting the key provisions companies will want to follow to ensure their e-signed contracts are just as enforceable as wet-ink originals.
The eSign Act of 2000
In 2000, the Electronic Signatures in Global and National Commerce Act (“eSign Act”) was signed into law. The eSign Act sets the federal floor of rights and requirements for electronic signatures and contracts. One of its fundamental provisions states that signatures and contracts may not be denied legal effect, validity, or enforceability simply because they exist only in electronic form. As a result, under eSign, electronic signatures are given the same treatment as traditional wet-ink signatures.
An “electronic signature” is defined as “any electronic sound, symbol, or process attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record”. Companies want to make sure that the documents they intend to be used electronically (“e-docs”) clearly indicate how a signer is supposed to execute the e-doc (by clicking a box, digitally signing, entering their initials, etc.), and establish that the signer intended to sign the e-doc.
In addition, the eSign Act also provides several key requirements that companies must follow to ensure an electronic contract is properly e-signed and enforceable:
1. First, companies must provide specific disclosures to would-be signers, informing them of their right to: (i) use paper documents instead of electronic docs if they prefer, (ii) withdraw their consent to e-contracting, and (iii) request paper copies of all electronic documents.
2. Second, after providing the disclosures, companies must also obtain the signer’s consent to e-contracting.
3. If a signer provides consent electronically, it must be in a manner that reasonably demonstrates that they can access the information being disclosed to them. This means that the signer must have access to a device (tablet, smartphone, computer, etc.) capable of allowing the signer to review the electronic documents.
Companies intending to implement e-signatures and e-docs into their business need to remember that eSign represents the minimum requirements of federal law, and other jurisdictions and laws may impose additional requirements.
State Law: UETA
The Uniform Electronic Transaction Act (“UETA”) is a uniform law proposed by the National Conference of Commissioners on Uniform State Laws, and is similar to eSign. It sets the legal framework for e-signatures and e-contracting for most states. To date, 47 states and the District of Columbia have adopted UETA, with Illinois, New York and Washington having not adopted it, but have adopted their own statute for electronic records.
Like eSign, it establishes the fundamental rule that a contract or signature may not be denied legal effect or enforceability solely because the contract or signature is in electronic form. Also like eSign, UETA provides that consent must be obtained from signers before the e-contracts are e-signed.
Also of note, UETA specifically excluded certain types of agreements from it’s scope, including: (i) wills, codicils and testamentary trusts, (ii) contracts governed by the uniform commercial code (“UCC”), except for Sec. 1-107, 1-206, Article 2 and Article 2A), and (iii) Uniform Computer Information Transactions.
Real Estate: URPERA
Wet-ink originals have traditionally always been required when dealing in real estate. The involvement of real property, mortgages, notaries and recording requirements all tend to be more acceptable when signed in-person with ink signatures. However, in 2004 the Uniform Real Property Electronic Recording Act (“URPERA”) was drafted, which was designed to build upon eSign and UETA, specifically allowing land record officials to accept records in electronic form, store electronic records, and set up systems for searching for and retrieving electronic land records.
Under URPERA, unless local jurisdictional law prohibits it, signatures on real estate documents may be obtained via electronic means. As of April 2019, URPERA has been adopted in 33 states and the District of Columbia.
Article 3 of the UCC and Promissory Notes
If your company deals with loans, mortgages or other types of finance agreements, you’ll want to understand how Article 3 of the UCC (“Art. 3”) and eSign interact. When a company seeks a loan, mortgage or other financial accommodations, banks will ask the company to sign a promissory note, which is a document containing a written promise to pay a stated sum to a specified party at a certain date or on demand.
Under Art. 3, a promissory note is considered a negotiable instrument. A negotiable instrument is simply a signed document that promises a payment to a specific person or assignee. The most common example is a check, and the second most common example is a promissory note.
Negotiable instruments may be transferred, that is the actual document with the promise to pay can be sold and assigned to third-parties. Art. 3 contains the rules for how checks, promissory notes and other negotiable instruments may be executed, held and transferred. One of the key rules concerns perfection of a security interest. In very general terms, for a promissory note holder to prove they have superior rights to the payment due under the note, they have to “perfect” their security interest in the note. In most cases, this “perfection” is accomplished by simply possessing and controlling the wet-ink signed original note.
However, when dealing with promissory notes signed electronically (“eNotes”), two key questions arise: (i) How can someone tell if a signed eNote is an original, and (ii) How can someone possess and control an eNote?
These questions are especially important for banks, mortgage companies and other finance companies who often sell and assign promissory notes to third parties (the passing of the promissory note paper is known as “negotiation”). This process of selling notes on the secondary market helps maintain the capital markets, and makes credit easier to obtain (for example, Fannie Mae and Freddie Mac buy mortgages on the secondary market, allowing banks and mortgage companies to lend more money to people with a wider range of credit scores).
Understanding how UETA and eSign work with Art. 3 begins with knowing that under UETA and eSign, eNote’s are valid and enforceable contracts. Second, neither UETA or eSign attempt to insert new rules regarding negotiable instruments, control or possession into Art. 3. Instead, they both extrapolate relevant concepts from Art. 3, which creates an equivalent framework for eNotes across Art. 3, UETA and eSign.
To create an enforceable eNote that may be sold and assigned as a negotiable instrument (such eNotes are defined in the UCC and are referred to therein as a “transferable record”), the following requirements must be met:
(i) the eNote contains only the same terms and conditions that are permitted in a paper negotiable note;
(ii) the eNote is signed;
(iii) the issuer of the eNote agreed it should be treated as a transferable record; and
(iv) the method used to record, register, or evidence a transfer of interests in the eNote reliably establishes the identity of the person entitled to “control” the eNote.
To satisfy the “control” requirement, an eNote must be created, stored and assigned in such a manner that:
(i) a single “authoritative copy” of the eNote exists that is unique, identifiable, and unalterable;
(ii) the authoritative copy identifies the person asserting control as either the person to whom the eNote was issued or most recently transferred;
(iii) the authoritative copy is communicated to and maintained by the person asserting control or its designated custodian;
(iv) copies or revisions that add or change an identified assignee of the authoritative copy can be made only with the consent of the person asserting control;
(v) each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and
(vi) any revision of the authoritative copy is readily identifiable as an authorized or unauthorized revision
At first glance, these requirements may seem onerous. However, most companies only need to add a couple steps to their contracting process and a few simple terms to their documents to comply with eSign and Art. 3. Moreover, most of the top e-contract and e-signature vendors provide solutions that meet and often exceed these requirements.
Benefits of Electronic Signatures and Contracts
Electronic signatures and contracts provide many benefits over hand-signed paper documents. E-contracts help eliminate signing errors, like forgetting to sign a document when multiple signatures are needed or missing places where initials or dates are required. When done right, e-contracts allows agreements to be executed faster and provide customers an easier and more convenient method of signing. In addition, most e-signature vendors can provide audit trails, showing when a document was opened, where it was opened, and if and when it was signed which helps to guard against fraud.