Social distancing imperatives and the resulting surge in remote work polices have led to increased demand for the use of electronic signatures in commercial transactions. Although the method of execution is just one factor to consider when determining the validity and enforceability of a contract, electronic signatures — when appropriately deployed — can provide a convenient replacement for manual wet-ink signatures in many transactions. The U.S. Electronic Signatures in Global and National Commerce Act (E-SIGN), as well as the widespread adoption at the state level of the Uniform Electronic Transactions Act (UETA) or comparable electronic signature laws, provide that electronic signatures and electronic records cannot be denied legal effect, validity or enforceability solely because they exist in electronic form. As workforces suddenly shift to remote operations with siloed employees lacking access to typical office services, yet still facing the same business needs and time demands, companies are reevaluating their electronic signature and records policies and technologies.
Determining whether and how to use electronic signatures in your transaction is a fact-specific assessment. Moreover, certain areas of law do not permit electronic signatures. Set forth below are a few considerations for using electronic signatures in commercial transactions.
1. What law governs electronic signatures?
UETA or other applicable state law governs to the extent not inconsistent with E-SIGN. E-SIGN governs in the absence of applicable state law or to the extent states have laws inconsistent with E-SIGN or have modified UETA in a manner that is inconsistent with E-SIGN. Other than New York and Illinois, every state has adopted (or in the case of Washington, is pending adoption of) UETA. In New York, the Electronic Signatures and Records Act (ESRA), and in Illinois, the Electronic Commerce Security Act also facilitate electronic signatures and electronic records.
2. When are electronic signatures not permitted by law?
Each of E-SIGN, UETA and ESRA excludes certain areas of law such as those governing the execution of wills, codicils and testamentary trusts. The statutes also generally defer to other substantive law applicable to your transaction. For example, regulations promulgated by the Securities and Exchange Commission, laws relating to entity law and the Uniform Commercial Code may have their own provisions for the use of electronic signatures. Moreover, other requirements may affect the form of signatures that can be used, such as recording requirements for real estate documents, which may necessitate manual wet-ink signatures.
3. Will you or your counterparty accept electronic signatures?
Even if the applicable law or regulatory regime permits electronic signatures to be used in your transaction, you or your counterparties may still prefer or require that contracts be manually signed. Some parties simply take comfort in the longstanding precedent of using manual signatures. Other parties may require manual signatures for reasons not directly related to the contract at hand. For example, the purchaser on an asset purchase agreement may need to provide its lender with manual signature pages to receive its acquisition financing, lenders may wish to have manually signed loan and security documents to pledge a loan as security for a borrowing from the Federal Reserve’s discount window, and other counterparties may have record management system requirements that there be manually signed copies of their contracts.
4. Should you add language to your contract to accommodate electronic signatures?
If you and your counterparties are in agreement on the format of signatures you plan to use, consider building that agreement explicitly into the contract itself. Many contracts already include agreements providing the acceptable forms of signatures. Contracting parties should review and update such provisions to ensure that the form of electronic signature that they are considering is included and, even more important, that it is not expressly prohibited. While E-SIGN mandates specific elements for consumer consent to electronic records, establishing the consent of all contracting parties in a commercial context could further mitigate the risk of repudiation of agreements. In addition, allowing the signer’s intent to be expressed as a part of the contract aligns with one of the best practices promulgated under ESRA by the New York Office of Information Technology Services.
5. Does the form of electronic signature that you are considering meet the requirements of the statute?
Each of E-SIGN, UETA and ESRA defines electronic signatures in a broad, technology-neutral manner that focuses on three key elements:
1. authentication to the individual signatory,
2. demonstration of the intent to be bound by the electronic signature, and
3. that the electronic signature is logically associated with the record.
Coordinating electronic execution of contracts to meet these criteria in the relevant electronic signature statute(s) will give contracting parties the best argument for the authenticity, validity and enforceability of a signature obtained electronically.
6. Which form of electronic signatures should you use?
Electronic signature laws are generally technology neutral, so there is no particular form of electronic signature that needs to be used. However, several software companies have developed electronic signature platforms that provide customizable tools for achieving the key elements of electronic signature laws, such as providing for enhanced security and audit trails to support authentication and that the electronic signature was logically associated with the proper document to be executed. This includes multifactor signatory authentication, recording date, time and location of execution information for evidentiary purposes, linking the signature to the contract and maintaining such association during transmission and ultimate storage, and facilitating the delivery of fully executed copies to multiple signatories. Further, given the heightened risk profile of an increased remote workforce and the opportunism of cybercriminals during the COVID-19 crisis, confidentiality and data security should also be considered in choosing, and configuring, your preferred electronic signature platform.
The above describes key considerations regarding the use of electronic signatures in commercial transactions. However, determining whether and how to use electronic signatures in your transaction must be tailored to your specific needs and those of your counterparties. We are happy to assist with that assessment for your transaction.