Sealing Contracts With Digital Signatures

Contracts are a fundamental part of our society. Without exception, you enter into a contract in one form or another on a daily basis.

The process is so familiar as to be second nature — the document, be it a credit card slip or contract of sale for a new car, is put in front of you and you sign it. Nothing fancy, just your signature and a deal has been struck.

Even in the most sophisticated transactions, which involve negotiating the terms of the contract, the process of execution — of placing the signature on the page — is given little consideration.

We take it for granted that the signature on the page uniquely and incontestably identifies the person who signed it. E-commerce, however, is changing the manner in which contracts are executed and is rapidly making ink a thing of the past.

Technology Forces Change

Electronic commerce is booming and transforming the way in which we buy and sell goods and services. Customers are no longer identified by a face, but only an email address.

Contracting on the Internet, while enabling a business to reach customers it may once only have dreamed of, has the corresponding problem of allowing the identity of the person on the other side of the deal to be concealed.

The key element of basic contract formation that is relied upon so automatically, being able to verify the identity of the parties to the transaction and that they have agreed to the contract by executing it, is difficult in electronic deal making.

Enter digital signatures.

A digital signature is actually nothing like a traditional written signature. Rather, it is an encryption technology that verifies the integrity of the document and authenticity of the sender.

While there are several different digital signature technologies, most commercial digital signature products use public key cryptography. Public key cryptography operates by means of matching cryptographic keys that are associated with the user and the recipient of the message. Only the intended recipient of the message can decrypt it, and by doing so, the identity of the sender is confirmed. Thus forms the basis for online contracting.

Utah enacted the first law regulating the use of digital signatures in electronic commerce in 1995. Since that time, most states have enacted or proposed legislation recognizing the validity of digital signatures, although the approach taken by each differs substantially.

Some state statutes are applicable to all electronic transactions, while others are limited to contracts between public agencies or specified types of transactions. Common among all of the statutes, however, is the requirement that the digital signature be unique to the person using it and capable of verification.

One of the broadest state statutes is the recently-enacted New York statute. This statute defines an “electronic signature” as “an electronic identifier, including without limitation a digital signature, which is unique to the person using it, capable of verification, under the sole control of the person using it, attached to or associated with data in such a manner that authenticates the attachment of the signature to particular data and the integrity of the data transmitted, and intended by the party using it to have the same force and effect as the use of a signature affixed by hand.”

Significantly, the New York statute provides that “an electronic record shall have the same force and effect as those records not produced by electronic means.” By comparison, California only recognizes electronic signatures for specific transactions.

Uniformity?

In July of 1999, the Uniform Electronic Transactions Act (UETA) was adopted by the National Conference of Commissioners on Uniform State Laws and recommended to the states for adoption. The UETA provides for the general recognition of electronic signatures and is intended to establish uniformity among states. Pending its adoption by the states, however, significant differences will remain concerning the recognition of the electronic signatures under state law.

To address the variances in state law pending the adoption of the UETA by most states, Congress has proposed H.R. 1714, known as the “Electronic Signatures in Global Commerce Act.”

Recognizing that “the growth of electronic commerce . . . represents a powerful force for economic growth, consumer choice, improved civic participation and wealth creation,” Congress is attempting to give consumers and business greater security and certainty regarding the legality of electronic signatures.

The Act generally provides that the validity or enforceability of a contract shall not be denied on the ground that such contract is not signed if the contract “is signed or affirmed by an electronic signature.”

“Electronic signature” is defined as “electronic sound, symbol or process attached to or logically associated with an electronic record by a person or an electronic agent and executed or adopted by a person with the intent to sign the electronic record.”

Although Congress can only regulate commerce between two states, to a certain extent, the Act would preempt state law by requiring the recognition of both the electronic version of the contract and the electronic signature even in states which do not, if the commerce falls within Congress’ power of regulation. Although H.R. 1714 has not been adopted by Congress and faces an uncertain future, it is likely that some form of this proposed legislation will ultimately become law.

The result of the present state and federal legislative actions is that electronic contracts and signatures will be given recognition in the states that have adopted legislation, subject to the limitations of the state statute.

The potential differences between state statutes pending the adoption of the UETA proposal or the federal Act highlights the importance of legal forum selection clauses. These clauses, which are normally inserted by the party that drafted the contract, specify the law, which is to apply in the event of the breach of the contract.

As a result, a party proposing an electronically executed contract must investigate the law of the state in which it resides to ensure that the contract will be recognized and enforced. Absent such an inquiry, the parties could be left with an unenforceable contract.

In the future, however, state statutes that follow the UETA or the federal Act should ensure that electronic signatures are universally recognized.