Years ago, commercial transactions were executed with a pen and paper agreement. But as technology has changed, so has the landscape of these transactions. Today, the traditional paper closings have largely been replaced with the exchange of electronic documents. But this raises some important questions. Namely, what constitutes an electronic signature, and are these signatures just as good as a written one in commercial transactions?
An electronic signature is defined as an electronic sound, symbol or process that is attached to or logically associated with a contract or other record. It has to be executed by a person with the intent to sign the record. Based on this definition, an electronic signature can be anything from a typed name in a document, to an image, to scans of an handwritten signature.
And yes, generally speaking electronic signatures are enforceable. There are two main laws that govern their validity – the Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act (ESIGN). There are some variations among these laws, but the goal is the same: to provide an effective way to recognize electronically signed documents.
ESIGN is a federal law that was enacted in 2000 and applies to interstate transactions (those moving across state lines) or federal matters. UETA, which has been adopted by 47 states, including California, applies to intrastate transactions. New York, Illinois and Washington have not enacted UETA, though each has its own laws that govern electronic signatures. For example, New York has its own electronic signature law called the Electronic Signatures and Records Act.
Both ESIGN and UETA provide that a document or signature cannot be denied legal effect or enforceability solely because it is in electronic form. But unlike ESIGN, where signatures are effective by default unless otherwise agreed, UETA requires that parties opt-in. That means whether a signature is valid depends on whether the parties have agreed to operate under UETA. Such agreement doesn’t necessarily have to be an explicit agreement; it can inferred from the context of the transaction.
Electronic signatures do have some other limitations. They are not enforceable in some real estate documents, such as deeds, probate documents and Uniform Commercial Code documents. Various court documents, family law matters (including documents relating to adoption and divorce), foreclosure notices and termination of health or life insurance benefits, among other things, must also be provided in traditional paper and ink format.
The U.S. is not alone is recognizing electronic signatures. Many other countries have adopted their own set of laws. The United Kingdom, for instance, established the equivalent to ESIGN in 2000, with what is known as the UK Electronic Communication Act. And more than two dozen European countries have implemented European Directive 1999/93/EC, which establishes a framework for the use of electronic signatures in the European Union.
Whether in the U.S. or abroad, is important you are familiar with the law in the relevant jurisdiction to be sure the electronic signature in your transaction is legally binding. Good record keeping is also extremely important for companies relying on electronically signed documents. UETA specifically requires certain records – those required by law be provided to the other party in a transaction – be retainable (i.e. able to be stored or printed by that party). Agreements should remain easily accessible to the company as well, and include information about the verification process. The ability to reproduce these documents if a dispute should arise is critical. Companies can verify the signing party’s identity using things like password-protected logins or by identifying the sender’s email address. There are also third-party vendors who have reliable verification methods.