When electronic signatures are used, contracts created online are now as legal as those on paper.

Electronic contracts and electronic signatures are just as legal and enforceable as traditional paper contracts signed in ink. Federal legislation enacted in 2000, known as the Electronic Signatures in Global and International Commerce Act (ESGICA), removed the uncertainty that previously plagued e-contracts.

This 2000 e-signature law made electronic contracts and signatures as legally valid as paper contracts, which was great news for companies that conduct business online, particularly companies that provide financial, insurance, and household services to consumers. The law also benefits B2Bs (business-to-business websites) who need enforceable agreements for ordering supplies and services. For all of these companies, the law helps them conduct business entirely on the Internet. This results in substantial savings to businesses, which can be passed on to consumers. For example, one online company estimated that eliminating paperwork fees reduced the cost of processing a home loan by $750.

What Are Electronic Contracts and Electronic Signatures?

An electronic contract is an agreement created and "signed" in electronic form -- in other words, no paper or other hard copies are used. For example, you write a contract on your computer and email it to a business associate, and the business associate emails it back with an electronic signature indicating acceptance. An e-contract can also be in the form of a "Click to Agree" contract, commonly used with downloaded software: The user clicks an "I Agree" button on a page containing the terms of the software license before the transaction can be completed.

Since a traditional ink signature isn't possible on an electronic contract, people use several different ways to indicate their electronic signatures, including typing the signer's name into the signature area, pasting in a scanned version of the signer's signature, clicking an "I Accept" button, or using cryptographic "scrambling" technology.

Though lots of people use the term "digital signature" for any of these methods, it's becoming standard to reserve the term "digital signature" for cryptographic signature methods and to use "electronic signature" for other paperless signature methods.

Cryptographic Signatures (PKI)

Cryptography is the science of securing information. It is most commonly associated with systems that scramble information and then unscramble it. Security experts currently favor the cryptographic signature method known as Public Key Infrastructure (PKI) as the most secure and reliable method of signing contracts online.

PKI uses an algorithm to encrypt online documents so that they will be accessible only to authorized parties. The parties have "keys" to read and sign the document, thus ensuring that no one else will be able to sign fraudulently. Since the passage of the e-signature law in 2000, the use of PKI technology has become more widely accepted. Many online services offer PKI encrypted digital signature systems that function much like we use PINs for our bank cards.

XML-Based Signatures

Other e-signature systems have been developed, including a method for digitally recording a fingerprint, and hardware that electronically records your signature. In addition, the organization that sets Web standards for the Internet, the Worldwide Web Consortium (W3C), developed XML-compliant guidelines for digital signatures. The results of their working group are discussed at the W3C website at www.w3.org/Signature.

Opting Out of Electronic Contracts

While the federal e-signature law makes paper unnecessary in many situations, it also gives consumers and businesses the right to continue to use paper where desired. The law provides a means for consumers who prefer paper to opt out of using electronic contracts.

Prior to obtaining a consumer's consent for electronic contracts, a business must provide a notice indicating whether paper contracts are available and informing consumers that if they give their consent to use electronic documents, they can later change their mind and request a paper agreement instead. The notice must also explain what fees or penalties might apply if the company must use paper agreements for the transaction. And the notice must indicate whether the consumer's consent applies only to the particular transaction at hand, or to a larger category of transactions between the business and the consumer -- in other words, whether the business has to get consent to use e-contracts/signatures for each transaction.

A business must also provide a statement outlining the hardware and software requirements to read and save the business's electronic documents. If the hardware or software requirements change, the business must notify consumers of the change and give consumers the option (penalty-free) to revoke their consent to using electronic documents.