Where do I e-sign?

The impact of electronic signatures on small business transactions

On October 1, 2000, the ability for vendors to conduct business online made a quantum leap. On that date, the new Electronic Signatures in Global and National Commerce Act (ESIGN) took effect. ESIGN allows business owners to make legally enforceable contracts over the Internet. The act precludes a contract from being declared void merely because of its electronic format.

Before ESIGN, a vendor such as a mortgage broker could solicit customers, provide information on mortgage interest rates, and even take applications online. But, to have an enforceable contract, the vendor would have to send the customer the promissory note and the mortgage papers in the mail to obtain an original signature.

This "last mile" roadblock slowed down transactions, while adding huge costs to vendors seeking to sell their goods online. Thanks to ESIGN, this roadblock has been nearly eliminated.

The significance of ESIGN has its roots in contract law. State law generally governs contracts. In matters of interstate commerce, the federal government can enact laws that preempt otherwise applicable state law. This power of preemption, however, is used sparingly in contract law.

While states have increasingly adopted uniform commercial laws, substantial differences between the laws of various states still exist. As early as 1991, the federal government made an attempt at consistency among the states by encouraging them to adopt the Uniform Electronic Transactions Act (UETA), a model act governing e-commerce transactions. Although two of the leading commercial states, Ohio and Pennsylvania, have adopted versions of UETA, many other states are just beginning to address the issue. The result was uncertainty regarding if and when an electronic contract could be enforced.

ESIGN removes that uncertainty by establishing a basic framework that a state must operate within if it wants to enact laws governing electronic contracts. If a state does not adopt UETA or another law, the provisions of ESIGN will govern. ESIGN prohibits a state from refusing to enforce an electronic contract solely because of an electronic format or because a contract is signed using an electronic signature. ESIGN also prohibits a state from requiring vendors to use one type of technology vs. another in creating an electronic signature. ESIGN also provides important protections for consumers. For instance, the act makes it clear that existing consumer protection laws like those specifying the content and timing of legal notices and disclosures must be the same for electronic contracts as exist for paper contracts. Also, online vendors are still subject to the same antifraud and deception provisions as offline vendors. Most important, however, is that an online vendor must provide the consumer the choice of paper or electronics. In other words, a consumer cannot be forced to accept an electronic contract.

Finally, to enforce an electronic contract, the vendor must provide the consumer with at least the same level of consumer protection, such as privacy and documentation, as that consumer would be entitled to in traditional paper transactions. Thus, the vendor must have a secure system that is also capable of preserving electronic records that can be accurately reproduced for later reference by relevant parties.

There are important qualifications to ESIGN and UETA. For example, the two laws apply to the sale and leasing of goods, but not to the creation of security interests in or the sale of chattel paper (secured leasing transactions). The much-anticipated revised Article 9 of the Uniform Commercial Code, scheduled to become effective July 1, 2001, will address this issue. Even then, it may take longer for all of the states to adopt the provisions. Thus, dealers in chattel paper will have to rely upon traditional paper-based systems. Both UETA and ESIGN facilitate the transfer of other electronic records. ESIGN largely limits its definition of electronic records to the making of mortgage-backed negotiated promissory notes, while UETA's definition of an electronic record is broader and covers other title documents. A little quirk is that ESIGN's provisions relating to mortgage-backed securities expressly preempts any conflicting state law, including UETA.

Today's businessperson intent on using electronic contracts would be well advised to seek out an attorney experienced in ESIGN, UETA, and the other commercial laws of his or her state. While doing business online can supercharge a business, failure to comply with the laws may make your contracts unenforceable.

EDITED BY Paula McCoy-Pinderhughes E-mail: [e-mail]