Viable e-Signature Options

While the Internet continues to replace traditional forms of commerce communication, the use of contracts to memorialize business agreements remains constant. In order to implement more fully the transition to Internet commerce communications, businesses are struggling to find an appropriate replacement for the traditional authentication procedures. In short, businesses seek lawful electronic signatures to replace traditional signatures. This query has resulted in six viable e-signature options.

Background

State and federal law generally require that significant commercial agreements be signed by the party the agreements seek to bind in order to be enforceable. For example, the Uniform Commercial Code's (U.C.C.) Statute of Frauds provision 2-201 requires some writing to be “signed by the party against whom enforcement is sought.” The use of the Internet as a communication media for commercial transactions makes the determination of the identity of the party to bound more difficult. Typically, traditional agreements are authenticated with a written signature. Internet communications are not easily susceptible to transactional authentication.

Just as many versions of the traditional signature exist, so do many versions of the electronic signature. Electronic signatures have been composed of a wide variety of letters, characters, or symbols sent electronically with the intent to authenticate a particular writing. E-signatures have been composed of data sent electronically, or attached to, or logically associated with, an electronic message that was intended to serve as a method of authentication.

Like traditional signatures, electronic signatures may appear in many forms. An electronic signature may be a name typed at the end of an e-mail message, a digitized fingerprint, a digitized image of a handwritten signature that is attached to an electronic message, a retinal scan, a pin number or a three-party encryption system called a “digital signature.”

Electronic signatures have two elements in common: The electronic signature user executes the e-signature with the intent of that person to sign a record, and the e-signature is logically associated with the record.

e-Signature Law

Generally, a signature may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation (See, 15 U.S.C.A. ”7001-7006). Nevertheless, both traditional and e-commerce business are struggling to find appropriate and binding electronic signatures.

e-Commerce depends upon electronic contracts. Such contracts, in turn, require electronic authentication that must comply with prescribed statutes in order to make the consequences of using electronic authentication systems the same as the consequences of traditional writings. In sum, the objective of any electronic authentication system is to ensure that electronic signatures are accorded appropriate legal recognition. Virtually every jurisdiction has laws that require that certain types of documents be “signed,” or “in writing,” or any one of countless other formulations that could be construed to require a physical document or hand-written signature.

Three separate bodies of law should be considered when applying signatures to electronic contracts: the Electronic Signatures in Global and National Commerce Act (E-Sign), the U.C.C., and the common law.

E-Sign (15 U.S.C. ”7001-7006) was enacted to encourage the use of electronic signatures in interstate commerce. As noted above, E-Sign states that electronic signatures cannot be denied effect solely because they are in electronic form. E-Sign applies only to transactional signatures. According to E-Sign, a transaction is “an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons.” However, there are specific exceptions. E-Sign would apply to summer camp contracts between the parents of a summer camper and camp officials but not to execution of a will. Under E-Sign, “electronic signature” is defined as “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.”

The Uniform Commercial Code standardized commercial transaction laws, and Article 2 of the U.C.C. governs the sale of goods. The U.C.C. provides substantive contract law rules.

Since electronic transactions were not considered when U.C.C. Article 2 was enacted, a proposed revision of U.C.C. Article 2 aims to enable such transactions that might otherwise be unenforceable under the language of the current version of U.C.C. Article 2. Unlike the current U.C.C, the proposed revision recognizes electronic contracts, records and signatures. It also states that a “record or signature may not be denied legal effect or enforceability solely because it is in electronic form” and that a “contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

State common law applies if a court is of the opinion that the U.C.C. is not applicable. The common law also applies if gaps in the U.C.C. have to be supplemented. Since common law varies widely among the states, it provides the least predictable source of contract law.

It is important to note that United States laws that deal with electronic signatures do not state that electronic signatures are automatically effective. They merely state that electronic signatures should not be treated differently than written signatures.

Choice of e-Signature Laws

Internet commercial transactions often involve more than one jurisdiction. Since jurisdictions may not adhere to a common set of e-signature requirements, conflict of laws rules should be considered. The most important conflict of laws rules regarding contracts are found in The Uniform Computer Information Transactions Act (UCITA), the U.C.C., the Restatement (Second) of Conflict of Laws (1971), the Restatement (First) of Conflict of Laws (1934) and the common law. Since commercial transactions may also involve more than one country, it should be noted that all these sources of law are applicable to interstate and international cases.

UCITA provides a straightforward rule. In the absence of a choice of law agreement, UCITA section 109(b)(1) states that an Internet transaction for the electronic transfer of information is governed by the law where the licensor is situated. UCITA section 109(c) does, however, provide an exception if the jurisdiction whose law governs is outside of the United States. In this case, the foreign law governs only if it allows for similar protection and rights afforded under UCITA. Otherwise, the regulations of the state that has the most significant relationship to the transaction governs.

In view of the fact that foreign law can only govern if the licensor is situated outside the United States, this clause inherently protects United States customers and licensees. In all other cases, UCITA espouses the rule of the Restatement (Second) of Conflict of Laws.

In the absence of effective choice by the parties, U.C.C. section 105(1) describes how to resolve the germane law. U.C.C. section 105(1) directs the forum to employ its own law if the transaction bears “an appropriate relation to this state.” In the same situation, section 188(1) of the Restatement (Second) of Conflict of Laws requires that “[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties.” Approximately, half of the states have enacted statutes that codify the Restatement (Second) rules.

Normally, the laws concerning signatures of the seller's jurisdiction are applied to Internet commercial transactions because it is the seller who normally makes the commercial transaction contract using his or her jurisdictional law. Also, usually the jurisdiction in which the seller is to be found has the most significant relationship to the transaction. Likewise, due to the seller's performance requirements, an international electronic transaction normally bears an appropriate relation to the seller's state. Therefore, generally under UCITA, the U.C.C. and the Restatement (Second) of Conflict of Laws, in international electronic transactions the law of the country where the seller is located normally applies.

The circumstances become significantly more convoluted when the Restatement (First) of Conflict of Laws pertains. The Restatement (First) distinguishes between contract validity and contract performance issues. If the validity of a contract is in dispute, the law applies where the contract was made. Normally this means that the buyer's national law controls a dispute that refers to the validity of an electronic transaction contract. If the performance of a contract is in dispute, the law of the country where the performance occurs rules. It is likely that in the case of an electronic contract, the choice would focus on where the buyer receives the information to form the contract.

Six Viable e-Signature Options

The first viable e-signature option is known as the hybrid option. A hybrid e-signature solution consists of combining traditional authentication with Internet communication. In particular, the seller mails or faxes to the buyer a form, either before or after completing an Internet commerce transaction which authorizes the use of the Internet to conduct business or confirms that the business conducted via the Internet is enforceable. The party to whom the electronic contract will be enforced authenticates the transaction with a traditional signature.

The second viable e-signature option is known as the bio-technology option. A bio-technological e-signature solution consists of attaching a digital image of a fingerprint or retinal scan to an Internet communication.

The third viable e-signature option is known as the restricted information option. A restricted information e-signature solution consists of including information generally restricted to the party to be bound in the content of the Internet commerce transaction. Such information might be credit card data or a password that the parties had previously agreed to use to authenticate the transaction.

The fourth viable e-signature option is known as the third-party option. A third-party e-signature consists of using public key/private key encryption technology to prepare the Internet offer and the Internet acceptance of a commercial transaction. Public key/private key technology consists of three parts: a public key accessible by recipients of a digitally signed document, a private key which is used by the signer of the document to encrypt the signature, and a digital certificate issued by an intermediate third-party, which contains the public key and simultaneously decodes and authenticates the digital signature.

With this option a seller prepares a contract and sends both an encrypted and unencrypted copy to the buyer. After the buyer receives the Internet agreement, the buyer gets the decryption key from a trusted third-party who decrypts the coded contract and compares it to the coded agreement. If the two match, then the agreement is considered e-signed. To accept the agreement, the buyer prepares an acceptance reply and sends both an encrypted and unencrypted copy to the seller. After the seller receives the Internet acceptance, the seller gets the decryption key from a trusted third-party, who again decrypts the coded contract and compares it to the coded acceptance.

If the two match, then the acceptance is considered e-signed.

The fifth viable e-signature option is known as the “per se” option. A “ per se” e-signature consists of a typed representation of a name. In practice, Internet technology allows easy message tracing which permits the authenticity of the source and content of the message, and can provide evidence that the person who signed has authenticated the message. It should be noted that Internet tracing technology may even allow the attribution of electronic documents without a signature, such as e-mails or instant messages, to a particular person.

In fact, state and federal law generally allow almost anything to qualify as a signature. A signature for the purposes of U.C.C. includes “any symbol made with an intent to authenticate” according to U.C.C. 1-201(39). U.S. courts have found that a wide variety of marks qualify as authentications. Consider Hillstrom v. Gosnay, 614 P.2d 466 (Mont. 1989), where the court relaxed the signature requirement considerably to accommodate various forms of electronic communication.

The sixth viable e-signature option is known as the combination option. A combination option employs two or more of the aforementioned e-signature options.

While the Internet continues to replace traditional forms of commerce communication, the use of contracts to memorialize business agreements remains constant. In order to implement more fully the transition to Internet commerce communications, businesses are struggling to find an appropriate replacement for the traditional authentication procedures. In short, businesses seek lawful electronic signatures to replace traditional signatures. This query has resulted in six viable e-signature options.

Background

State and federal law generally require that significant commercial agreements be signed by the party the agreements seek to bind in order to be enforceable. For example, the Uniform Commercial Code's (U.C.C.) Statute of Frauds provision 2-201 requires some writing to be “signed by the party against whom enforcement is sought.” The use of the Internet as a communication media for commercial transactions makes the determination of the identity of the party to bound more difficult. Typically, traditional agreements are authenticated with a written signature. Internet communications are not easily susceptible to transactional authentication.

Just as many versions of the traditional signature exist, so do many versions of the electronic signature. Electronic signatures have been composed of a wide variety of letters, characters, or symbols sent electronically with the intent to authenticate a particular writing. E-signatures have been composed of data sent electronically, or attached to, or logically associated with, an electronic message that was intended to serve as a method of authentication.

Like traditional signatures, electronic signatures may appear in many forms. An electronic signature may be a name typed at the end of an e-mail message, a digitized fingerprint, a digitized image of a handwritten signature that is attached to an electronic message, a retinal scan, a pin number or a three-party encryption system called a “digital signature.”

Electronic signatures have two elements in common: The electronic signature user executes the e-signature with the intent of that person to sign a record, and the e-signature is logically associated with the record.

e-Signature Law

Generally, a signature may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation (See, 15 U.S.C.A. ”7001-7006). Nevertheless, both traditional and e-commerce business are struggling to find appropriate and binding electronic signatures.

e-Commerce depends upon electronic contracts. Such contracts, in turn, require electronic authentication that must comply with prescribed statutes in order to make the consequences of using electronic authentication systems the same as the consequences of traditional writings. In sum, the objective of any electronic authentication system is to ensure that electronic signatures are accorded appropriate legal recognition. Virtually every jurisdiction has laws that require that certain types of documents be “signed,” or “in writing,” or any one of countless other formulations that could be construed to require a physical document or hand-written signature.

Three separate bodies of law should be considered when applying signatures to electronic contracts: the Electronic Signatures in Global and National Commerce Act (E-Sign), the U.C.C., and the common law.

E-Sign (15 U.S.C. ”7001-7006) was enacted to encourage the use of electronic signatures in interstate commerce. As noted above, E-Sign states that electronic signatures cannot be denied effect solely because they are in electronic form. E-Sign applies only to transactional signatures. According to E-Sign, a transaction is “an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons.” However, there are specific exceptions. E-Sign would apply to summer camp contracts between the parents of a summer camper and camp officials but not to execution of a will. Under E-Sign, “electronic signature” is defined as “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.”

The Uniform Commercial Code standardized commercial transaction laws, and Article 2 of the U.C.C. governs the sale of goods. The U.C.C. provides substantive contract law rules.

Since electronic transactions were not considered when U.C.C. Article 2 was enacted, a proposed revision of U.C.C. Article 2 aims to enable such transactions that might otherwise be unenforceable under the language of the current version of U.C.C. Article 2. Unlike the current U.C.C, the proposed revision recognizes electronic contracts, records and signatures. It also states that a “record or signature may not be denied legal effect or enforceability solely because it is in electronic form” and that a “contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

State common law applies if a court is of the opinion that the U.C.C. is not applicable. The common law also applies if gaps in the U.C.C. have to be supplemented. Since common law varies widely among the states, it provides the least predictable source of contract law.

It is important to note that United States laws that deal with electronic signatures do not state that electronic signatures are automatically effective. They merely state that electronic signatures should not be treated differently than written signatures.

Choice of e-Signature Laws

Internet commercial transactions often involve more than one jurisdiction. Since jurisdictions may not adhere to a common set of e-signature requirements, conflict of laws rules should be considered. The most important conflict of laws rules regarding contracts are found in The Uniform Computer Information Transactions Act (UCITA), the U.C.C., the Restatement (Second) of Conflict of Laws (1971), the Restatement (First) of Conflict of Laws (1934) and the common law. Since commercial transactions may also involve more than one country, it should be noted that all these sources of law are applicable to interstate and international cases.

UCITA provides a straightforward rule. In the absence of a choice of law agreement, UCITA section 109(b)(1) states that an Internet transaction for the electronic transfer of information is governed by the law where the licensor is situated. UCITA section 109(c) does, however, provide an exception if the jurisdiction whose law governs is outside of the United States. In this case, the foreign law governs only if it allows for similar protection and rights afforded under UCITA. Otherwise, the regulations of the state that has the most significant relationship to the transaction governs.

In view of the fact that foreign law can only govern if the licensor is situated outside the United States, this clause inherently protects United States customers and licensees. In all other cases, UCITA espouses the rule of the Restatement (Second) of Conflict of Laws.

In the absence of effective choice by the parties, U.C.C. section 105(1) describes how to resolve the germane law. U.C.C. section 105(1) directs the forum to employ its own law if the transaction bears “an appropriate relation to this state.” In the same situation, section 188(1) of the Restatement (Second) of Conflict of Laws requires that “[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties.” Approximately, half of the states have enacted statutes that codify the Restatement (Second) rules.

Normally, the laws concerning signatures of the seller's jurisdiction are applied to Internet commercial transactions because it is the seller who normally makes the commercial transaction contract using his or her jurisdictional law. Also, usually the jurisdiction in which the seller is to be found has the most significant relationship to the transaction. Likewise, due to the seller's performance requirements, an international electronic transaction normally bears an appropriate relation to the seller's state. Therefore, generally under UCITA, the U.C.C. and the Restatement (Second) of Conflict of Laws, in international electronic transactions the law of the country where the seller is located normally applies.

The circumstances become significantly more convoluted when the Restatement (First) of Conflict of Laws pertains. The Restatement (First) distinguishes between contract validity and contract performance issues. If the validity of a contract is in dispute, the law applies where the contract was made. Normally this means that the buyer's national law controls a dispute that refers to the validity of an electronic transaction contract. If the performance of a contract is in dispute, the law of the country where the performance occurs rules. It is likely that in the case of an electronic contract, the choice would focus on where the buyer receives the information to form the contract.

Six Viable e-Signature Options

The first viable e-signature option is known as the hybrid option. A hybrid e-signature solution consists of combining traditional authentication with Internet communication. In particular, the seller mails or faxes to the buyer a form, either before or after completing an Internet commerce transaction which authorizes the use of the Internet to conduct business or confirms that the business conducted via the Internet is enforceable. The party to whom the electronic contract will be enforced authenticates the transaction with a traditional signature.

The second viable e-signature option is known as the bio-technology option. A bio-technological e-signature solution consists of attaching a digital image of a fingerprint or retinal scan to an Internet communication.

The third viable e-signature option is known as the restricted information option. A restricted information e-signature solution consists of including information generally restricted to the party to be bound in the content of the Internet commerce transaction. Such information might be credit card data or a password that the parties had previously agreed to use to authenticate the transaction.

The fourth viable e-signature option is known as the third-party option. A third-party e-signature consists of using public key/private key encryption technology to prepare the Internet offer and the Internet acceptance of a commercial transaction. Public key/private key technology consists of three parts: a public key accessible by recipients of a digitally signed document, a private key which is used by the signer of the document to encrypt the signature, and a digital certificate issued by an intermediate third-party, which contains the public key and simultaneously decodes and authenticates the digital signature.

With this option a seller prepares a contract and sends both an encrypted and unencrypted copy to the buyer. After the buyer receives the Internet agreement, the buyer gets the decryption key from a trusted third-party who decrypts the coded contract and compares it to the coded agreement. If the two match, then the agreement is considered e-signed. To accept the agreement, the buyer prepares an acceptance reply and sends both an encrypted and unencrypted copy to the seller. After the seller receives the Internet acceptance, the seller gets the decryption key from a trusted third-party, who again decrypts the coded contract and compares it to the coded acceptance.

If the two match, then the acceptance is considered e-signed.

The fifth viable e-signature option is known as the “per se” option. A “ per se” e-signature consists of a typed representation of a name. In practice, Internet technology allows easy message tracing which permits the authenticity of the source and content of the message, and can provide evidence that the person who signed has authenticated the message. It should be noted that Internet tracing technology may even allow the attribution of electronic documents without a signature, such as e-mails or instant messages, to a particular person.

In fact, state and federal law generally allow almost anything to qualify as a signature. A signature for the purposes of U.C.C. includes “any symbol made with an intent to authenticate” according to U.C.C. 1-201(39). U.S. courts have found that a wide variety of marks qualify as authentications. Consider Hillstrom v. Gosnay, 614 P.2d 466 (Mont. 1989), where the court relaxed the signature requirement considerably to accommodate various forms of electronic communication.

The sixth viable e-signature option is known as the combination option. A combination option employs two or more of the aforementioned e-signature options.