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Use of electronic signatures will spur major changes

Rochester Business Journal
August 4, 2000
On the last day of June, in Philadelphia, President Bill Clinton signed into law the Electronic Signatures in Global and National Commerce Act, also known as the Electronic Signatures Act. The law takes effect Oct. 1, except for government record retention obligations and pending rules, which have later effective dates.

The significance of the new law goes well beyond the fact that it recognizes and legitimizes the coming of age of electronic contracting in both business and consumer transactions. It also is likely that it will begin to change over 300 years of legal evolution that have made the Statute of Frauds-originally enacted in England in 1677-nearly universally accepted in the modern commercial world as the basis of an enforceable contract.

New York's version of the Statute of Frauds provides that, subject to certain exceptions, "every agreement, promise or undertaking is void, unless it or some note or memorandum thereof is in writing, and subscribed by the party to be charged therewith, or by his lawful agent."

The effect of the Statute of Frauds and its counterparts has been to create a presumption of enforceability if the party seeking to enforce a contract can produce a written version that appears to have been signed by the promisor. Absent a duly executed written agreement, the presumption operates against the party seeking to enforce the agreement, who must convince a trier of fact that the circumstances somehow overcome the presumption against enforceability.

This legal doctrine does not appear to have held back the growth of electronic contracting. Yet there has been a major push by the financial services and e-commerce industries to enact legislation, at the state and federal level, which recognizes the validity of electronic contracts and signatures and accords them parity with written contracts and handwritten signatures.

The primary vehicle for this campaign has been the Uniform Electronic Transactions Act, which has been developed over the past four years by the National Conference of Commissioners on Uniform State Laws.

Through June of this year, UETA has been enacted in 14 states; over 20 other states have enacted similar laws.

In New York, for example, the Legislature last year enacted the State Technology Law. Unlike UETA, New York's law, which became effective March 26, uses a very specific definition of "electronic signature," and differs in a number of significant respects from the model act.

The prospect of a patchwork of 50 different state versions of an electronic signature law prompted proponents of electronic commerce to press even more vigorously for a federal statute. Based on UETA, the federal statute would pre-empt inconsistent state electronic signature laws and affirm the efforts of those states that had enacted UETA in its recommended form. The result is the federal Electronic Signatures Act.

The ESA authorizes the electronic creation and execution of all but a few very specific types of agreements and documents, including court orders, foreclosure and default notices, wills and adoption or divorce decrees.

The possibilities that this law suggests are endless. For instance, mortgage and automobile loans can be originated online, and copies of policies and disclosure statements can be immediately e-mailed to the consumer. Also, the records for millions of transactions of this type can be stored electronically.

One mortgage lender has estimated that widespread use of electronic mortgage origination and closing could save borrowers up to 50 basis points on their rate by slashing what is typically two weeks or more of processing time, reducing the need for lenders to hedge against rate increases following "lock-in."

At the other end of the mortgage loan pipeline, mortgage insurers and wholesale purchasers of mortgages can potentially free up acres of warehouse space now devoted to storing promissory notes and Truth-in-Lending disclosure statements. The insurance industry expects to realize similar gains.

A fundamental aspect of consumer protection statutes imposing plain English requirements and cooling-off periods for certain contracts is the delivery to and acknowledgment of receipt by consumers of written disclosures. A major focus of the new law is how to preserve those protections while permitting the use of electronic documents and e-signatures.

Suppliers of mass market goods and services will find cost advantages in being able to deliver application forms, policies and required disclosures electronically. Consumers will view the new law as a matter of convenience. And if suppliers of goods and services pass some of their cost savings on to their customers, electronic delivery of consumer documents may gain rapid and widespread acceptance.

From a business-to-business standpoint, where both parties to the transaction can realize cost savings in time, paper handling and records storage, the advantages seem quite clear. Indeed, electronic contracting already has gained widespread currency, even in the absence of clear statutory guidance in many states on the enforceability of such agreements.

Not addressed in the new law by design are authentication (fraud prevention) and privacy.

The original purpose of the Statute of Frauds was to prevent, or at least reduce, the use of perjurious testimony or false evidence to prove the existence of a contract. A written agreement, signed and sealed by the parties, and likely witnessed as well, provided substantial safeguards against fraud and perjury.

At the same time, a private contract could remain private, its contents known only to the parties and the draftsmen of the document.

Today, increased use of electronic contracts will require improved means of signature authentication and protection against identity theft. Many observers expect "smart cards" and "dongles" (palm-sized devices to authenticate one's identity online) to gain popularity.

The issue of the privacy of electronic data presents a challenge that industry will need to tackle in cooperation with lawmakers and privacy advocates.

The age of the electronic contract is clearly upon us, and the new Electronic Signatures Act is an important milestone along the information superhighway.

(Justin P. Doyle is a partner with Nixon Peabody LLP. His partner, Bruce Baker, assisted with this article.)

8/4/00--Rochester Business Journal

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