|
This
article is published with the permission of Alex
Modelski to provide information to
entrepreneurs. It is intended to be
informational and does not constitute legal
advice regarding any specific situation. It may
be reprinted without the express permission of
Alex Modelski so long as it is reprinted in its
entirety including this title page. If you have
any questions or would like additional
information, contact Alex using the contact
information provided below.
|
SO YOU WANT TO
CONTRACT Via EMAIL?
Copyright ã 2001 Alex
Modelski |
|
On October 1, 2000, the
Electronic Signatures in Global and National
Commerce Act went into effect. Popularly
referred to as the E-Signature statute, it was
widely reported, and business owners across
America are now convinced that they may safely
enter into contracts by exchanging
"signed" emails. Unless special care
is taken, email contracts pose special risks to
the health of Washington
businesses. |
|
What’s the Legal Problem?
All States have adopted laws
called Statutes of Frauds. These laws provide
that some contracts (such as those valued in
excess of $500, those that take longer than a
year to perform, real estate contracts, etc.)
cannot be enforced unless they are written.
Typically, the writing must be signed by the
party against whom enforcement is sought. If the
agreement is not in writing, partial performance
of the contract will satisfy the Statute and
create an enforceable contract. Then, the issue
is "what are the terms of the
contract?" If material terms of the
contract cannot be determined by a Court, it
will not enforce the contract. Sometimes, a
Court will look at circumstances outside of the
written documents, the manner in which partial
performance occurred, other elements of the
course of dealings of the parties, industry
customs, or statutes such as the Uniform
Commercial Code, to help fill in the blanks.
The first issue that arises with email
contracts is whether they satisfy the
requirement for a signed writing. Is a bunch of
bits and bytes on my hard drive a writing? How
does one sign such collection of bits and bytes?
With a pen? A signature on a contract normally
identifies the person who is agreeing to the
contract and it indicates their intent to be
bound. When a person dashes off an email and
types their name at the end, do they intend to
be bound by a contract that may take more than a
year to perform and involve more than $500 in
value? $5 Million? If so, what proof will be
evaluated in deciding the terms of the contract?
|
|
What’s the Practical
Problem?
E-mail and other types of
electronic communications are especially prone
to tampering. One reason is that a single,
relatively immutable, original is not created.
Rather, the sender has his "copy" and
the recipient has his/her "copy", and
either or both can be altered without the
other’s knowledge and possibly without
anyone being able to prove the contents of the
"original". As to hard copies, we have
developed excellent forensic techniques of
authentication. As to electronic
"documents", such skills are both rare
and expensive and the necessary evidence has
often been obliterated. While loss or
destruction of all hard copies of a document is
relatively rare, we have all suffered
inadvertent destruction of our only copy of
valued electronic documents.
Also, unless strict protocols are used, we
typically cannot be sure of the identity of the
sender. The typed name at the bottom of the
email does not bear any inherent proof of
identity. The email program’s indication
as to the source of the email merely tells us
whose email account was used to send the
communication. Yet, the email may have been sent
by an unauthorized person, or sent prematurely
("I didn’t mean to hit
‘send’ yet") or the sender may
not have intended to send the email at all.
There is also no guarantee that the
electronic communication sent is an exact
duplicate of the one received. After all, the
document has many points along the communication
path at which it is interpreted by software,
transmitted, filtered, stripped of potentially
noxious elements, possibly re-configured,
copied, re-transmitted and possibly intercepted.
Along the way, it is susceptible to
unintentional and intentional alteration.
Risk can be minimized by dealing only with
trusted parties, using electronic contracting
only for contracts with low dollar exposure,
agreeing that terms will only be honored if
conforming hard copies are delivered within set
time periods, establishing security protocols
such as encryption and passwords. Yet, we have
all read that no absolutely secure system has
been devised and even companies such as
Microsoft are regularly found to be victims of
security defects.
Those who know that electronic communications
are susceptible to alteration and difficult to
authenticate are sometimes unwilling to rely
upon such communications in making decisions or
taking action. |
|
Statutory Solutions
As a response to institutional
reluctance to rely on electronic communications
and in order to solve legal concerns arising
from Statutes of Frauds, various E-signature
laws have been adopted. The laws most relevant
to Washington businesses are:
Federal E-Signature
Uniform Electronic Transactions Act
(UETA)
Uniform Computer Information Transactions Act
(UCITA)
Washington Electronic Authentication Act
(Digital Signature Act)
European Union Electronic Signatures
Directive (EU Directive) |
|
Federal E-Signature
The federal E-Signature law
provides that electronic records and signatures
satisfy legal requirements for writings and
signatures and allows for contract formation by
"electronic agents". Interestingly, an
electronic signature is defined as an electronic
sound, symbol, or process logically associated
with an electronic record (read as electronic
document). This would presumably include voice
mail. However, its effect is limited to
transactions affecting interstate or foreign
commerce. Thus, it probably would not apply to
my agreement for legal services with my clients.
Also, it specifically excludes from its reach a
long laundry list of transactions, including:
most governed by the Uniform Commercial Code;
wills, codicils and testamentary trusts;
adoption, divorce and other family law matters;
court orders and notices; notices of
cancellation of utility services; notices of
default, acceleration, repossession,
foreclosure, or eviction, or the right to cure,
under a credit agreement secured by, or a rental
agreement for, a primary residence of an
individual; any notice of the cancellation or
termination of health insurance or benefits or
life insurance benefits (excluding annuities);
recall notices; and others. Also, federal
E-Signature imposes significant consent
requirements with regard to "consumer
transactions".
Due to drafting problems in the
federal legislation, and due to the global
nature of the Internet, one would almost never
know whether federal E-Signature applies or
whether one of a myriad of State laws apply.
Jurisdiction depends upon things like: the
location of the parties’ places of
business; location of company servers; States of
incorporation, and; location of the
communication devices which transmitted and
received the electronic communication (desktop,
pda, cellular device,
etc.). |
|
UETA
UETA is a proposed State law
proposed by the National Conference of
Commissioners on Uniform State Laws (NCCUSL). As
with the federal E-Signature statute, it
generally provides that electronic records and
signatures can satisfy legal requirements for
writings and signatures. However, unlike the
federal law, it only applies if there is a prior
agreement by the affected parties to use
electronics. This agreement, one would imagine,
would have to be made and proved via hard copy.
By thus conditioning validity of electronic
records and signatures upon a prior agreement,
UETA effectively invalidates most electronic
signatures and contracts. UETA is similar in
scope and construction to federal E-Signature,
but has been approved in many States without the
consumer protection provisions of the federal
statute. It has been approved in approximately
half of the States, but not Washington. The
Report of the Washington State Bar
Association’s Law of Commerce in
Cyberspace Committee (Business Law Section), of
which this author is a signatory, specifically
recommended against adoption of UETA,
concluding:
In the view of the Committee,
UETA unintentionally does more to disable
electronic commerce than to enable it.
Accordingly, its adoption should be approached
with great caution in Washington, a state that
is committed to modernizing its legal structure
to enable electronic
commerce. |
|
UCITA
UCITA is another NCCUSL
proposed uniform act which is intended to create
a uniform commercial code for computer
information transactions (including license and
sale of software and computer support
agreements) and online access contracts. Like
the federal E-Signature statute, it provides
that a contract, signature or record may not be
denied legal effect simply because it is in
electronic form. However, its scope is limited
to computer information transactions and online
access contracts. Thus, it does not apply to
most transactions. Also, it has yet to be
formally introduced for adoption in Washington
(though Washington’s Law of Commerce in
Cyberspace Committee has recommended approval).
It has been adopted in Maryland and Virginia and
is under consideration in Maine, Michigan,
Oregon and Texas. As noted, it conflicts with
UETA in that it gives effect to electronic
contracts, signatures and records without the
need for a separate hard copy agreement. To the
extent that it conflicts with the federal
statute, it would be pre-empted. To further
complicate matters, it does not contain many of
the particular exclusions found in UETA and the
federal statute. |
|
Digital Signature
Washington’s Digital Signature
Act was approved in 1996 and went into effect
in 1998. It provides that a "digital signature"
satisfies any legal signature or writing requirement.
However, it only applies to records (documents)
transmitted via public key-private key encryption
and only if the digital signature is verifiable
to a digital certificate issued by a certification
authority licensed by the Secretary of State.
Only 4 certification authorities have been approved:
Verisign, Inc., Digital Signature Trust Co.,
ID Certify, Inc. and Arcanvs, Inc. Adoption
of this methodology involves a lot of up-front
planning and expense and has not been utilized
by many Washington businesses.
On the other hand, of the statutes reviewed
in this article, it is the only one that provides
particular solutions to some of the practical
problems noted above. Further information regarding
digital signatures is available at the Washington
Secretary of State web site (http://www.secstate.wa.gov/ea/).
|
|
EU Directive
If a Washington firm wishes to
transact business electronically with a foreign
firm, issues exist with regard to the
enforceability of the agreements in the foreign
jurisdictions. The EU Directive, for example,
merely requires EU Member States to establish
mechanisms for supervision of
"certification-service-providers,"
defined as
any person "who issues
certificates or provides other services related
to electronic signatures."
"Certification-service-providers" are
in turn required to use "secure
signature-creation-devices" which ensure
that "signature-creation-data": (i)
used to generate signatures can be kept secret,
and used only once; (ii) can be protected
against forgery; and (iii) can be reliably
protected by the legitimate signatory against
use by others. Thus, the Washington firm would
have to investigate the law of each EU country
in which it wishes to transact business
electronically to evaluate the risk that
agreements might be unenforceable. This problem
is even more pronounced in those countries that
have no Electronic Signature law.
|
|
Conclusion
In conclusion, Washington
businesses must exercise caution and engage in
sound planning before engaging in electronic
contracting. For valuable contracts, involving
known jurisdictions, businesses can afford to
hire lawyers to devise agreements that reduce
risk to acceptable levels. However, casually
forming contracts via simple "signed"
email can be practically and legally
risky. |
|
|
|
|
|
