Are You a Legal Professional?

Contracts and Electronic Signatures

Given the rapid development of digital technology, it was inevitable that eventually contracts could be completed between two parties without even meeting or signing a single piece of paper. Recent technological advances mean that electronic signatures can take the place of a person's John Hancock.

Before the year 2000, electronic signatures were haunted by various legal problems that challenged their authority. However, 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.

This legislation 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. This law meant that all of their business could be conducted online, with no more need for fax machines or the postal service.

Electronic Signatures and Electronic Contracts, What Are They?

To start with, 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, "clickwrap" or "clickthrough" contracts are another form of an electronic contract. These contracts are typically found in user agreements attached to software. The user of the software must click "I Agree" at the end of the user agreement before the software license becomes official and the software becomes usable.

There are a number of ways that people have found to put down their electronic signatures. One way is to initial where the electronic contract says to, or to type in a 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

Another way that people have of putting down their electronic signatures is to use the science of cryptography which provides a means of scrambling information from the sender and allowing the receiver to unscramble it. There are a number of cryptographic signature methods and one of the more popular ones is the Public Key Infrastructure (PKI).

The Public Key Infrastructure uses an algorithm to scramble and encrypt electronic contracts and other documents so that they are only viewable and accessible to authorized users. The parties that use the PKI system have keys that allow them to view and read the encrypted documents.

XML Electronic Signatures

There have been other electronic signatures methods developed as well that have developed popularity. For example, the Worldwide Web Consortium, the organization that sets standards used around the internet, has developed guidelines for XML based digital signatures. The document relating to this electronic signature method can be found here.

Paper Contracts Are Still Available

On the one hand, ESIGN gives businesses and the consumers the power to create, sign and complete contacts all through electronic documents. On the other hand, the same laws give consumers the right to opt for paper contracts at the same time.

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 of the documents 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 if the consumer opts for paper documents (paper documents can cost quite a bit more than electronic documents, after all). Lastly, the notice must indicate the scope (how many documents the consent will apply to) of the consumer's consent to use electronic documents.

Because electronic signatures and contracts are not like paper, a business must also give notice to the consumer about the software and hardware requirements necessary for formalizing the contract electronically. If these requirements change, the business must notify the consumer and give the consumer the opportunity to opt out of electronic documents without a penalty.

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. One source estimated that a loan applicant faced more than $500 less in fees by applying for a home loan electronically.

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

Concerns of Consumers

There are a few consumer watchdog groups that have long been concerned with the safety of electronic signatures and contracts. These groups are troubled by insecure means of transmitting electronic signatures, like scanned copies of handwriting. When people sign paper documents and then scan them into electronic form on a file like a pdf, there is then an electronic picture of a person's signature. If this document is intercepted during transmission, it could lead to problems for the consumer.

The UETA

The Uniform Electronic Transactions Act (UETA) has been adopted by 47 states within the United States and establishes the validity of electronic signatures in contracts much in the same way that the ESIGN does. The UETA works like the ESIGN, but on an in-state level, while the ESIGN works on an interstate level.

Governments Eliminating Paper

In 1998, the federal government passed the Government Paperwork Elimination Act which provided requirements and incentives for governmental agencies to reduce their reliance on paper documents and switch to electronic forms. Much has been done along this line of thinking with tax and other forms available for downloading and filing online. In addition, many states have been implementing plans to reduce paper as well. There are several states now where consumers can register a business and do other work without ever using a single piece of paper.

Next Steps
Contact a qualified business attorney to help you
address you business's operational needs.
(e.g., Chicago, IL or 60611)

Help Me Find a Do-It-Yourself Solution