The Electronic Signatures in Global and National Commerce Act: A Sea Change in Electronic Records Law.

Introduction

For a long time, electronic commerce in the United States and worldwide operated in a partial vacuum. While the Internet created an ongoing boom in electronic business transactions large and small, that expanding sphere of commerce operated in an incomplete legal framework. Although case law had long since disposed of questions about challenges to admissibility in court of electronic records, and increasing numbers of regulatory agencies authorized the use of electronic records in required information collections, gaps remained. The efficacy of electronic signatures was still doubtful, and acceptance of electronic records was incomplete and inconsistent.

Compounding the problem were the many state and federal regulatory agencies with independent rulemaking power and the more than 50 independent American legal jurisdictions, each with the right to make law on the subject. These created a formidable legal matrix within which to attempt electronic commerce or electronic records maintenance. Electronic records were completely acceptable for some purposes and in some regulatory schemes but not in others -- as was the case with electronic signatures. Some signature technologies were acceptable to some regulatory authorities, but not to others. A completely valid and binding electronic signature in one jurisdiction might not be one in another. Further complicating matters was the low-level, technology-specific nature of some regulation, which effectively acted as a disincentive for development and use of new technologies.

Effective conduct of business requires a regulatory and legal framework that is consistent, predictable, and uniform. Only when this is so are businesses comfortable taking the costly risks associated with any new environment. In this context, the state of affairs in electronic records law was highly problematic for business. Interstate and transnational business transactions conducted electronically were often in a state of limbo.

The Electronic Signatures in Global and National Commerce Act

The U.S. federal Electronic Signatures in Global and National Commerce Act (hereafter, "the Act") enacted in June 2000 has significantly altered the playing field. Although styled as a piece of signature legislation, the Act is, in reality, a broad electronic records and trans-actions act that in effect sweeps away the previously existing legal impediments to electronic information management and electronic commerce. Its provisions are well worth examining.

Electronic Signatures and Electronic Records

The Act does not authorize the use of electronic signatures; instead, it is structured as though electronic signatures already had legal status -- which they did, at least under some circumstances. The Act nullifies the assertion that a document signed electronically is unenforceable or invalid.

   [A] contract relating to such transaction may not be denied legal effect,
   validity, or enforceability solely because an electronic signature or
   electronic record was used in its formation.(1)

Conceptually, this is important. First, it eliminates uncertainty as to whether an electronic signature is valid. Since certainty is so highly valued in commercial law, this constitutes a major step forward -- an electronic signature is valid, period. Secondly, since the Act's terms are broad and the enumerated exceptions few and well-defined, the uniformity so highly prized in the commercial realm is enhanced -- use of a signature technology need not be scattershot.

In a manner similar to its treatment of electronic signatures, the Act places its imprimatur upon electronic records generally. Again, the authorization is accomplished, not by overt approval, but by removal of the means to challenge them:

   [A] signature, contract, or other record relating to such transaction may
   not be denied legal effect, validity, or enforceability solely because it
   is in electronic form.(2)

Records Retention

The Act also broadly authorizes the retention of electronic documents, including images, in place of paper originals.

   (1) ACCURACY AND ACCESSIBILITY. -- If a statute, regulation, or other rule
   of law requires that a contract or other record relating to a transaction
   in or affecting interstate or foreign commerce be retained, that
   requirement is met by retaining an electronic record of the information in
   the contract or other record that --

   (A) accurately reflects the information set forth in the contract or other
   record; and

   (B) remains accessible to all persons who are entitled to access by
   statute, regulation, or rule of law, for the period required by such
   statute, regulation, or rule of law, in a form that is capable of being
   accurately reproduced for later reference, whether by transmission,
   printing, or otherwise.

and,

   (3) ORIGINALS. -- If a statute, regulation, or other rule of law requires a
   contract or other record relating to a transaction in or affecting
   interstate or foreign commerce to be provided, available, or retained in
   its original form, or provides consequences if the contract or other record
   is not provided, available, or retained in its original form, that statute,
   regulation, or rule of law is satisfied by an electronic record that
   complies with paragraph (1).(3)

Again, this provision has the effect of providing, certainty while giving the green light to implementation of advanced information technology.

Electronic Notarization

The Act permits electronic creation and maintenance of documents requiring notarization. It does so by analyzing what notarization actually is: a declaration by the notary that the persons signing a document are who they purport to be. Having acknowledged this, the Act simply provides that this declaration can be made and signed in electronic format.(4) This provision brings a large and previously thorny class of documents within the purview of electronic records technologies.

Negotiable Instruments.

The Act also addresses the negotiability of a limited class of electronic documents such as promissory notes. Again, it accomplishes this by analytically considering the concept of negotiability. Just as notarization is a warranty of authenticity, so is negotiability. If an electronic document has suitable guarantees of authenticity and chain of title, the Act permits its negotiation. The key is that the Act establishes high-level guidelines as to what constitutes an adequate set of such guarantees in an electronic setting.(5)

Automated Transactions and Electronic Agents

The Act also addresses automated agents, such as those used in ordering systems and point-and-click authorizations. Again, as with other provisions, the language is not an explicit authorization but the removal of an obstacle:

   ELECTRONIC AGENTS. -- A contract or other record relating to a transaction
   in or affecting interstate or foreign commerce may not be denied legal
   effect, validity, or enforceability solely because its formation, creation,
   or delivery involved the action of one or more electronic agents so long as
   the action of any such electronic agent is legally attributable to the
   person to be bound.(6)

This provision is significant -- it covers a wide range of transactions used extensively on the Internet and provides a legal basis for the most widely used devices.

Preemption

Although the Act's provisions substantially change the landscape, they would be of limited value if individual states or regulatory agencies could negate them by enacting conflicting laws or laws limiting their application. The Act provides against this possibility by preempting state law to the contrary(7) and by limiting federal agencies' ability to enact regulations serving to limit the Act's applicability.(8) Thus, in one fell swoop, the prior thicket of statutes, regulations, court rules, and case decisions is eliminated, and the entire country is covered by a single regulatory scheme concerning electronic records and electronic transactions.

Other Provisions of Interest

The Act's other provisions facilitate electronic commerce and use of electronic information systems as well:

Requirements for Federal Agencies

As observed above, the Act constrains federal agencies from promulgating regulations inconsistent with it. In addition, agencies are charged with various affirmative duties: they must accept electronic records in situations where they require records to be kept or submitted; they must enact implementing regulations so as to give force and effect to the Act;(9) and, in some cases, they are directed by the Act to commence developing suitable regulations and procedures for specific documents such as prospectuses issued under the Securities Laws.(10) Requiring federal agencies to use and accept electronic records subtly forces the commercial public to begin using them as well. The net effect is a strong push toward using electronic technologies.

Study of the Act's Effects

The Act is self-policing. Various parties are charged with monitoring and periodically reporting the Act's effects.(11) Thus, as experience reveals shortcomings or difficulties with the Act in its current incarnation -- virtually a certainty -- those difficulties can be dealt with expeditiously and systematically.

Foreign Law and Commerce

The Act explicitly seeks compatibility with foreign law. The Secretary of Commerce is directed to promote the international use of electronic signatures and transactions and to do so within the principles set forth in the Model Law on Electronic Commerce, as adopted by the United Nations Commission on International Trade Law.(12) Since a substantial number of foreign jurisdictions have either adopted or are developing laws in this area, international standards are a natural and inevitable outcome. These, in turn, ought to significantly enhance international electronic commerce.

Technological Flexibility

What is not in the Act is perhaps as important as what is in it. A common failing of prior electronic information technologies law was a strong tendency to regulate or authorize it in a low-level, process-specific manner. Authorizing a particular technology or imposing a series of technical requirements caused an ongoing revision cycle as the law attempted to accommodate continual changes in the technology in use. Given the rapid pace of technological change and the relatively glacial pace of statutory change, the law was forced into a game of catch-up that it could not possibly win. The Act sidesteps this trap by avoiding any attempt to impose technical standards. Instead, the Act relies on broad, high-level standards with respect to security, authenticity, and the like.

With respect to technology selection, the Act is enormously broad. Not only does it fail to specify preferred technologies, it positively proscribes them. Thus, federal agencies issuing regulations to implement the Act may only do so if:

   [T]he methods selected to carry out that purpose do not require, or accord
   greater legal status or effect to, the implementation or application of a
   specific technology or technical specification for performing the functions
   of creating, storing, generating, receiving, communicating, or
   authenticating electronic records or electronic signatures.(13)

The Overall Effect

The net effect of these provisions is the sweeping away of virtually all impediments to using electronic media for almost any type of document or transaction. It places electronic documents on a par with paper documents, eliminating nearly every meaningful distinction. The exceptions to the Act's provisions are few and well-defined -- certain court documents, divorce and child custody documents, certain specified consumer transactions, and wills. For other specific documents, the Act's applicability is delayed. Everything else is fair game.

Stumbling Blocks Along the Way

Like any legislation that effectively clears away prior doctrine and starts fresh, the Act will undoubtedly encounter problems. The Act anticipates this normal process by calling for studies of its own effectiveness, with a view to correcting problems if they arise. Usually, such problems consist of correcting unclear wording, adding language to cover a situation not originally anticipated, and the like.

A more long-term process is the development of case law for the Act's provisions. Because the United States is a common-law jurisdiction, any statute is accompanied by an attendant, construing body of case law applying it to real world situations over time. One of case law's most important aspects is deciding factual questions necessary to apply the statute. The Act leaves room for many such factual questions. For example, on the question of proving a negotiable instrument's ownership, the Act stipulates that "reasonable" proof be provided. What constitutes "reasonable" in some situations is a factual question to be answered by judge or jury based upon the facts and circumstances in the particular case.

The effect of this is not trivial. For example, in matters of commercial paper -- checks, drafts, notes, and the like -- the concept of reasonableness is used with regularity. However, the issues arising out of commercial paper in its hard copy form are so old and so well-litigated that a vast body of case law effectively and completely describes the boundaries of "reasonableness" in this area. With electronic records, much of that prior case law is inapplicable. One must start from scratch.

These obstacles, however, are surmountable. As the body of case law builds, it tweaks the provisions of the Act itself, and the uncertainties and ambiguities will disappear as they eventually do in other areas of commercial law.

Conclusion

The Electronic Signatures in Global and National Commerce Act opens up broad horizons for anyone contemplating use of an electronic information system or entering into electronic commerce. For virtually any endeavor, the legal hurdles have been removed; anyone bold enough to move forward may be confident that a legal basis for doing so now exists. As with any new vista, however, the precise lay of the land has yet to be discovered. The fertile fields will contain a few potholes and rocks, and it will take a few years to find them all and remove them. It will, however, be an exciting few years.

ENDNOTES

(1) Title I, sec. 101 (a)(2)

(2) Title I, sec. 101 (a)(1)

(3) Title I, sec. 101 (d)

(4) Title I, sec. 101 (g)

(5) Title II ,sec. 201 (f)

(6) Title I ,sec. 101 (h)

(7) Title I ,sec. 102

(8) Title I ,sec. 104 (b)(2)

(9) Title I ,sec. 104 (c)

(10) Title I ,sec. 104 (d)(2)

(11) Title I ,sec. 105

(12) Title III ,sec. 301(a)

(13) Title I ,sec. 104 (b)(2)(c)(iii)

John C. Montana, J.D., is an attorney and records management consultant based in Landenburg, Pennsylvania. He may be reached at johnmontana @qwestinternet.net