Using Electronic Signatures

Over the last decade, electronic signatures have become ubiquitous.  As a society, we have become accustomed to the ease and convenience of clicking the “I Accept” button when a cell phone company updates its terms and conditions, typing our name into the signature block of an insurance contract or using a software program like DocuSign or Adobe Sign (formerly EchoSign) to sign an apartment lease.

The proliferation of electronic signature practices has also impacted corporate law, and many companies now use software programs to execute corporate documents.  Every once in a while, the question is posed as to whether an electronic signature affects the enforceability of a document.  This article helps answer that question and offers issues for parties to consider before using electronic signatures.

What is an Electronic Signature?

The terms “digital signature” and “electronic signature” are often used interchangeably. Although a digital signature contains an electronic signature, they are not the same thing. An electronic signature can be accomplished with a click of the mouse or using a finger to trace a handwritten signature onto a document. A digital signature, on the other hand, contains encryption/decryption technology that contains a secure code linking the document with the identity of the signatory and helps to verify the authenticity of the signed record. The link is then permanently embedded into the document, allowing the user to see if someone has attempted to tamper with the signature. Electronic signatures, which do not have this secure coding, are essentially an image placed on a document of a signature. Therefore, it is important to clarify the type of security (or lack thereof) underlying the signature.

An Overview of Applicable Law

In 2000, the U.S. enacted the Electronic Signatures in Global National Commerce Act (E-Sign Act).  The E-Sign Act provides that any transaction in or affecting interstate or foreign commerce cannot be denied legal effect, validity or enforceability because (i) the signature, contract or other record relating to the transaction is in electronic form, or (ii) an electronic signature or electronic record was used in its formation.  An “electronic signature” under the E-Sign Act means an electronic sound, symbol or process attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.  Courts have typically interpreted this definition to apply to any overt action that manifests an agreement on behalf of the parties. The E-Sign Act preempts any state laws governing written contracts that affect interstate or foreign commerce. However, a state law may modify, limit or supersede the E-Sign Act if a state either (i) has already adopted the Uniform Electronic Transactions Act (UETA), or (ii) adopts other procedures that are consistent with the E-Sign Act and accept electronic records or signatures to establish legal effect.

UETA was published in 1999 and has been adopted by 47 states, including Delaware and North Carolina (see 6 Del. § 12A-107 and NCGS § 66-317).  UETA has not been adopted by Washington, Illinois and New York; however, those jurisdictions have adopted similar laws to address the enforceability of electronic signatures. UETA only applies to transactions where each party involved has agreed to conduct the transaction electronically. Like the E-Sign Act, UETA provides that electronic signatures have the same legal effect as manual signatures.  The definition of “electronic signature” under UETA also mirrors the same definition under the E-Sign Act.

Notwithstanding their broad applicability, the E-Sign Act and UETA generally do not apply to transactions that are subject to:

  • laws governing wills, codicils or trusts;
  • laws governing adoption, divorce or other family law matters;
  • all articles of the UCC (except Section 1-107, Section 1-206 and Articles 2 and 2A);
  • court orders or other official court documents that a party must execute in connection with court proceedings;
  • various notices focused on consumer protection, including notices of termination of health insurance, product recall, default under a residential mortgage and others;
  • any document accompanying the transportation of hazardous or dangerous materials; and
  • other specific laws identified as excluded in the version of UETA adopted by a state.

Considerations When Using Electronic Signatures

Before using electronic signatures, parties should consider the following:

  • Remember that general contract principles still apply.  While the E-Sign Act and UETA laws have recognized the enforceability of electronic signatures, parties still must comply with general contract law principles.  Accordingly, an electronically signed agreement still needs to satisfy the fundamental elements of a contract (offer, acceptance and consideration) and be able to survive any challenges that formation did not occur (capacity, duress, statute of frauds, mistake, etc.).
  • Evaluate how the identity of each of the signing parties can be verified.  As with manual signatures, there is always the risk that the signatory is an imposter, thereby making the contract unenforceable against the intended party.  Parties should consider how they can verify the identities of each of the signatories.  One potential option may be using third party software providers like DocuSign or Adobe Sign, which provide built-in verification processes like a single sign-on and an audit trail.
  • Assess whether unauthorized changes to the document can be made or detected.  The signing party may claim the contract was altered after it was executed. Parties should consider whether certain procedures or technological settings or configurations can eliminate the possibility that a document can be altered after signing.  It is likely that any preventative measures that are employed will be helpful if the document is ever admitted into evidence.
  • It may be necessary to include express language in the agreement to indicate that the parties agreed to the use of electronic signatures.  Under both UETA and the E-Sign Act, it is important to show that the parties agreed to execute the agreement electronically. This may be shown by the parties’ conduct and circumstances.  Another way to show this intent is to include a provision in the agreement similar to the language below whereby the parties expressly agree to the use of electronic or digital signatures.

The parties agree that any signature, whether it be electronic, digital or a .pdf copy of a manual signature, is intended to authenticate this Agreement and have the same effect as a manual or original signature.

  • Analyze the admissibility in the relevant jurisdiction of documents executed using an electronic signature.  The rules of evidence apply to documents signed manually, as well as electronically, and there is always the risk that a court will not admit evidence of the electronic documents. A person hoping to introduce an electronic signature in court must be able to prove the intent of the signatory and the security of the signed document, including showing that it has not been tampered with or altered in any way. Even a legally valid electronic signature may be ruled inadmissible in court due to weakness in security, audit logs or authentication.
  • Evaluate whether applicable law (including securities laws), the company’s formation documents, exchange rules or a shareholders’ agreement address the use of electronic signatures.  Many states’ corporate laws allow certain actions by directors or shareholders to be taken via electronic transmission or by some other electronic means.  Parties should also check their governing documents to confirm that there are not any restrictions on their ability to take certain corporate actions electronically. It is also worth noting that certain securities laws and exchange laws may require manual signatures for certain transactions or filings.
  • Confirm that the subject matter of the agreement is such that the provisions of the applicable state’s UETA laws or the E-Sign Act apply.  As stated above, there are certain transactions or matters to which UETA and the E-Sign Act do not apply.  These may vary from state to state, and it would be prudent for the parties to review the subject matter of the transaction against the statutes to confirm that the use of electronic signatures is accepted.

Parties should evaluate the above considerations and risks against the risks associated with obtaining a manual signature.  Given the development and enhancements of signature software solutions, parties may find that many of these risks can be adequately addressed by properly configuring the electronic signature process.  For example, signature campaigns can be configured so that audit trails containing matching vital information such as the signing parties’ names, digital signatures, IP addresses, and chain of custody are included.

While risks still remain, the use of electronic signatures has become commonplace. Proper attention to those risks can make them acceptable.

Elizabeth Trenary also contributed to this article.  Elizabeth is an associate in Parker Poe’s business law department that focuses on mergers and acquisitions.

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