Electronic signatures in global and national commerce actLeonard A. Bernstein and Gary L. KaplanE-Signature Act, 2000, electronic signatures, electronic commerce
The world of electronic transactions has galloped far beyond the
efforts of the legal community to develop laws to facilitate
traffic on today's electronic transaction raceway. Some states
enacted versions of the Uniform Electronic Transactions Act.
International rules of electronic commerce are developing, but
there was no overarching federal law in place designed to eliminate
the paperuntil now.
On Friday, June 30 President Clinton signed in Philadelphia the
"Electronic Signatures in Global and National Commerce Act" (the
"E-Signature Act"). When most of the new law's provisions take
effect Sunday, October 1, there will be in place for the first time
a national framework for giving validity to transactions handled
In brief, the E-Signature Act allows electronic signatures or
documents to satisfy most existing legal requirements for written
signatures, disclosures, or records. On the other hand, the Act
neither entirely eliminates risks related to E-signatures and
electronic documents, nor ensures their enforceability. Instead,
the E-Signature Act simply provides the opportunity for businesses
and government to adopt technologies and procedures that themselves
provide necessary assurances of attribution, non-repudiation, data
integrity, and reliability.
The limitations of the E-Signature Act require elaboration.
Suppose Bank A and Bank B electronically exchange a contract that
is purportedly executed in the body of the contract itself. (In
other words, each Bank "executes" the contract by typing in a
"signature"). Although the E-Signature Act does not prohibit
enforcement of these "electronic signatures," it likewise says
nothing about their enforceability. In fact, such simplified
electronic signatures are unlikely to withstand legal challenge
because they lack any necessary safeguards.
In the hypothetical, for example, no safeguards assure:
Data IntegrityHow do Banks A and B know that they have "signed"
the same contract?
AttributionHow do Banks A or B know that the other party, as
opposed to a third party, actually signed the contract?
Non-repudiationHow could Banks A or B disprove a false assertion
that the other party never executed the contract?
ReliabilityHow can Banks A or B prove that neither side has altered
the contract subsequent to its execution?
Fortunately, technology has been developed (and is continuing to
develop) that would allow both parties (and the courts) reasonably
to rely on each other's electronic "signature." In adopting
legislation that allows for electronic signatures, but which does
not specify the use of particular safeguards or technology, the
E-Signature Act will allow for the continued development and
improvement of E-commerce mechanisms. On the other hand, the
failure to adopt specific requirements or presumption of
reliability implies that efforts to rely exclusively on electronic
signatures or documents will not be without risk, at least until
there is a greater body of case law addressing their
Legal legitimacy of electronic commerce
At the heart of the E-Signature Act is its pronouncement that a
signature or contract may not be denied legal effect or enforcement
solely because it is in an electronic form. In other words, a
contract relating to a "transaction" cannot be denied legal effect
and enforceability solely because of an electronic signature or
E-mail used in its formation. The E-Signature Act, however, does
not require any person to agree to use electronic signatures.
Electronic consumer disclosures
Many consumer protection laws, such as the federal Truth in Lending
Act, require disclosures to consumers in writing. The E-Signature
Act states that an electronic record (i.e., an E-mail or Web
posting) will satisfy the requirement that the consumer disclosure
be in writing if certain conditions are met. First, the consumer
must have "affirmatively consented" to the use of electronic
communication and has not withdrawn such consent. Presumably, state
and federal regulators will elaborate on the meaning of affirmative
Second, prior to consenting, the consumers must receive a "clear
and conspicuous" statement that informs them:
1. of any right to have the record provided on paper, and the
right to withdraw the consent to have the record provided in
electronic form, together with any conditions or fees that may
arise in the event of such withdrawal;
2. whether the consent applies only to a particular transaction, or
to categories of records that may be provided during the course of
the parties' relationship;
3. the procedures needed to withdraw consent and update information
needed to contact the consumer electronically; and
4. how they may obtain a copy of the electronic message, and
whether any fee will be charged for such a copy.
Third, prior to consenting, the consumers must be provided with
a statement of the hardware and software requirements for access to
and retention of the electronic record. The consumers must then
consent electronically, or confirm their consent electronically in
a manner that demonstrates that the consumer can access the
The E-Signature Act also addresses existing consumer laws that
require consumer disclosure information to be verified or
acknowledged (for example, New Jersey's residential mortgage
application disclosure requirement). Such information may be made
available electronically "only if the method used provides
verification or acknowledgment of receipt..." Presumably, this
means that electronic delivery of such a consumer disclosure should
automatically trigger an opportunity for delivery of a consumer's
Negotiable instruments & real estate
Title 2 of the E-Signature Act deals with "transferable records,"
which are defined to mean electronic records that would be notes
under the Uniform Commercial Code if (a) such record were in
writing, (b) the issuer expressly agrees that the document is a
"transferable record," and (c) the transaction involves a loan
secured by real property. In such cases, a transferable record may
be executed using an electronic signature.
Current law requires forms recorded in real estate transactions and
other formal documents to be notarized according to state law. The
E-Signature Act provides a mechanism for electronic notarization if
the document bears the electronic signature of the notary together
with the other required information, and is "attached to or
logically associated with a signature or record."
Many federal and state laws require certain records to be
maintained for a defined period of time. Well, the record warehouse
industry will eventually face tough times. The E-Signature Act
states that if an existing statute or regulation requires records
to be retained, that requirement is met by retaining an electronic
record of the information.
However, such electronic record must "accurately reflect" the
information set forth in the contract or other record, and must
"remain accessible" in a form capable of being "accurately
reproduced for later reference, whether by transmission, printing,
or otherwise." Again, the E-Signature Act provides the opportunity
for businesses to replace paper records with electronic ones but
does not create a precise road map for doing so. In substituting
electronic records for paper records, a firm may need to adopt
technological, procedural, and administrative safeguards, which
assure that the electronic records are an accurate reproduction of
original materials, and that the electronic records have not been
Although the benefits of electronic records are clear, they also
pose significant risks that should be considered whenever a firm is
contemplating a transition to "paperless" record keeping.
Accordingly, a transition to electronic record keeping should be
accompanied by a review of both security and record retention
Originals and checks
Another overlay of existing law involves original documents. If an
existing law requires a contract or other record to be retained in
its original form, the E-Signature Act states that such requirement
is satisfied by retaining an electronic record. Again, however,
such electronic record of the original must "accurately reflect"
the information set forth in the original and "remain accessible"
in a form capable of being "accurately reproduced for later
reference, whether by transmission, printing, or otherwise."
The provisions of the E-Signature Act, Title 1 that have been
discussed above, become effective Sunday, October 1. However, as
applied to record retention requirements, these E-Signature Act
provisions become effective March 1, 2001. However, that period can
be delayed until June 1, 2001 if a rule-making proceeding is
The E-Signature Act should give a big boost to advocates of
electronic transactions. However, technology to develop reliable
electronic signatures and reliable security procedures will still
need to be learned and understood in order to be implemented. It is
difficult for a law to predict all of the twists and turns of
technological developments. Now, at least Congress has given an
unequivocal green light to those exploring the realm of electronic
Leonard A. Bernstein is Chair of the firm-wide Consumer
Financial Services Group of Reed Smith Shaw & McClay LLP. He is
also Administrative Partner of the firm's New Jersey offices of
more than 70 lawyers in Newark and Princeton. Len is also a member
of Reed Smith's E-Commerce & Technology Law Group. Gary L.
Kaplan is a partner in Reed Smith's Pittsburgh Office and the head
of the firm's Information Technology ("IT") Group.