e-Leasing: Building an Effective Process

The federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) became effective in October 2000. ESIGN does not require anyone to use or accept an electronic signature or record; however, the law specifically provides that a signature or record may not be denied legal effect solely because it is in electronic form. In addition to the recognition of an electronic signature, ESIGN: 1) permits delivering documents, which are required to be in writing (even if no signature is involved), exclusively through electronic means; and 2) permits companies to satisfy statutory record retention and retrieval requirements exclusively through electronic means.

ESIGN does not entirely pre-empt state laws dealing with electronic records. In general, ESIGN permits states to adopt the model version of the Uniform Electronic Transactions Act (“UETA”) as promulgated by the National Conference of Commissioners on Uniform State Laws. However, if a state adopts UETA, but in doing so modifies certain provisions, the state's version could be pre-empted by ESIGN. Understanding the interplay between ESIGN and the particular states' versions of UETA is an essential element of developing an effective e-process and should be done in the context of a particular issue. Nevertheless, ESIGN and UETA are consistent on a number of the more relevant provisions.

Selecting the method of electronically signing a document or record is the relatively simple element of an effective e-signature process. Under ESIGN (or the applicable state law) an electronic signature can be as simple or complex as:

• clicking “I Agree”;
• saying into a recording device, “I Agree”;
• digital signature using PKI technology;
• using a peripheral device that records an image of one's signature; or
• other ways using an electronic sound, symbol, or process attached to or logically associated with the document or record, which is executed or adopted by a person with the intent to sign.

Verifications and acknowledgments required by law to be in writing are expressly permitted to be delivered in electronic form under ESIGN in certain circumstances. ESIGN essentially provides that if a law requires a disclosure to be provided by a certain method that includes acknowledgment of receipt, that disclosure may be given electronically if, and only if, the electronic method for providing that disclosure also includes a process or method for capturing electronically an acknowledgment. For consumer transactions, ESIGN expressly permits disclosures that are required by law to be provided to consumers “in writing” exclusively through electronic means if certain conditions are met.

Finally, ESIGN allows an archived electronic record to satisfy applicable statutory requirements that a contract or other document be retained “in writing,” if the electronic record is maintained in a form capable of being retrieved by all parties for later reference. In addition, ESIGN recognizes that records of a transaction (whether completed electronically or not) may be archived exclusively through electronic means, but failure to archive the records in a way that allows the record to be accurately reproduced could result in the unenforceability of the agreement represented by the electronic record and regulatory sanctions for failing to maintain the proper records.

ESIGN and UETA are applicable to arrangements intended to be “true” leases and not financing transactions. These laws provide the framework for making legally effective e-signatures on lease documentation, including master lease agreements, lease schedules and ancillary documents that require a signature. It should be noted that certain contracts and records are not covered by ESIGN or UETA, such as leases that also serve as financing agreements, or leases that serve as collateral in pooling arrangements, which are covered by Article 9 of the Uniform Commercial Code described below.

UCC ' Revised Article 9

Among the exceptions to ESIGN are contracts or other records that are governed by the Uniform Commercial Code (other than sections 1-107 and 1-206 and Articles 2 and 2A). Equipment leases that also serve as “security interests” or leases that are bundled and sold on a secondary market would be covered by Article 9 of the UCC, one of the exceptions to ESIGN. How an e-process might work in these contexts is beyond the scope of this article; however, a brief overview of UCC Article 9, as approved and recommended by the National Conference of Commissioners on Uniform State Laws in July 1998 (“Revised Article 9″) demonstrates that the revisions to Article 9 are intended to eliminate legal barriers to the use of e-signatures and e-records for secured transactions.

Revised Article 9 replaces the concept of a “signed writing” with an “authenticated” security agreement. Section 9-102(a)(7) defines “authenticated” to include both the signing of a writing, and executing or adopting a symbol, or encrypting a record, in whole or in part, with present intent to: 1) identify the authenticating party; 2) adopt or accept a record or term; or 3) establish the authenticity of a record or term that contains the authentication or to which a record containing the authentication refers. In addition, Revised Article 9 allows for the electronic filing of financing statements.

Equipment leases bundled and sold on a secondary market would most likely be characterized as “chattel paper.” Section 9-102(31) of Revised Article 9 creates the concept of “electronic chattel paper.” Electronic chattel paper under Revised Article 9 is essentially a record or records consisting of information in an electronic medium. The comments to the definition of electronic chattel paper indicate that “the concept of electronic medium should be construed liberally to include electrical, digital, magnetic, optical, electromagnetic, or any other current or similar emerging technologies.”

Revised Article 9 also creates the concept of “control” as the method of perfection for electronic chattel paper. Section 9-105 of Revised Article 9 provides that a party has control of the e-chattel paper if the record or records comprising the chattel paper are created, stored and assigned in a manner that a single, unique “authoritative copy” of the record exists. The authoritative copy must identify the secured party as the assignee of the record and must be communicated to and maintained by the secured party (or its designated custodian). In addition, each copy of the authoritative copy and “any copy of a copy” must be readily identifiable as a copy, and any revision to the authoritative copy must be readily identifiable as an authorized or unauthorized revision.

Significant Risks to Implementation of an e-Signature Process

Although processes that rely on e-signatures present risks that are different from traditional paper-based processes, once these risks are examined, in many cases, they can be mitigated to a level at or below the risks associated with more traditional processes. Below are two of the common risks associated with e-processes that may not be present in traditional settings.

Authentication Risk

E-processes do not typically involve face-to-face settings. As a result, traditional ways of authenticating the person signing a document are not practical for e-processes. As a result, the “authentication risk” must be effectively addressed in the e-process.

Electronic processes offer ways for authenticating persons more effectively than the methods normally used in the traditional settings. For example, using a third party to verify a consumer's “out-of-wallet” information, eg, information that only the consumer is likely to know, can be incorporated into an e-process, where the same methodology would be cumbersome in a traditional setting. Verifying the identity of the person to sign electronically can also be done to varying levels to calibrate the risk of the signature failing for a particular document. The challenge is to match the method of authenticating a person with the risk associated with that particular signature failing.

Repudiation Risk

Because electronic data can be easily altered without detection, steps must be taken to properly secure the e-record in order to avoid attempts by a party signing the e-record to repudiate the terms of the record. Traditional methods of establishing that a document has not been altered or modified might not be sufficient. Available technologies such as encryption, along with certain process steps, can be utilized to deal with the repudiation risk.

E-signed records (along with data about the transaction, such as the authentication steps), should be electronically sealed so that the records cannot later be altered without detection. Processes can utilize a number of different approaches to electronically seal a document. For example, using encryption a record can be “hashed-down” so that the record cannot be later accessed without the proper hash value. In addition, secure data files, with limited access, can be useful in establishing security for stored e-records.

Conclusion

ESIGN, UETA and Revised Article 9 provide the foundation for an e-leasing process. Of course, a more detailed legal analysis tailored to the specific transactions in issue would be necessary for actual implementation of an effective e-leasing process; however, a workable legal framework exists for e-leasing. Implementation of an effective process within that framework will require not only an understanding of the legal issues, but effective use of technology and processes to mitigate those risks of an e-process that are not typically present in the traditional setting.

Improved operational efficiencies and the potential for lower-cost market penetration and expansion are just a few of the more common business justifications for adoption of an e-commerce process. These same justifications, as well as others, are sure to resonate with the equipment leasing industry. An initial consideration in adopting any e-commerce process is an analysis of relevant e-signature and e-record laws and the risks inherit in electronic transactions.

Applicable Law: ESIGN, UETA and UCC Revised Article 9

ESIGN and UETA

The federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) became effective in October 2000. ESIGN does not require anyone to use or accept an electronic signature or record; however, the law specifically provides that a signature or record may not be denied legal effect solely because it is in electronic form. In addition to the recognition of an electronic signature, ESIGN: 1) permits delivering documents, which are required to be in writing (even if no signature is involved), exclusively through electronic means; and 2) permits companies to satisfy statutory record retention and retrieval requirements exclusively through electronic means.

ESIGN does not entirely pre-empt state laws dealing with electronic records. In general, ESIGN permits states to adopt the model version of the Uniform Electronic Transactions Act (“UETA”) as promulgated by the National Conference of Commissioners on Uniform State Laws. However, if a state adopts UETA, but in doing so modifies certain provisions, the state's version could be pre-empted by ESIGN. Understanding the interplay between ESIGN and the particular states' versions of UETA is an essential element of developing an effective e-process and should be done in the context of a particular issue. Nevertheless, ESIGN and UETA are consistent on a number of the more relevant provisions.

Selecting the method of electronically signing a document or record is the relatively simple element of an effective e-signature process. Under ESIGN (or the applicable state law) an electronic signature can be as simple or complex as:

• clicking “I Agree”;
• saying into a recording device, “I Agree”;
• digital signature using PKI technology;
• using a peripheral device that records an image of one's signature; or
• other ways using an electronic sound, symbol, or process attached to or logically associated with the document or record, which is executed or adopted by a person with the intent to sign.

Verifications and acknowledgments required by law to be in writing are expressly permitted to be delivered in electronic form under ESIGN in certain circumstances. ESIGN essentially provides that if a law requires a disclosure to be provided by a certain method that includes acknowledgment of receipt, that disclosure may be given electronically if, and only if, the electronic method for providing that disclosure also includes a process or method for capturing electronically an acknowledgment. For consumer transactions, ESIGN expressly permits disclosures that are required by law to be provided to consumers “in writing” exclusively through electronic means if certain conditions are met.

Finally, ESIGN allows an archived electronic record to satisfy applicable statutory requirements that a contract or other document be retained “in writing,” if the electronic record is maintained in a form capable of being retrieved by all parties for later reference. In addition, ESIGN recognizes that records of a transaction (whether completed electronically or not) may be archived exclusively through electronic means, but failure to archive the records in a way that allows the record to be accurately reproduced could result in the unenforceability of the agreement represented by the electronic record and regulatory sanctions for failing to maintain the proper records.

ESIGN and UETA are applicable to arrangements intended to be “true” leases and not financing transactions. These laws provide the framework for making legally effective e-signatures on lease documentation, including master lease agreements, lease schedules and ancillary documents that require a signature. It should be noted that certain contracts and records are not covered by ESIGN or UETA, such as leases that also serve as financing agreements, or leases that serve as collateral in pooling arrangements, which are covered by Article 9 of the Uniform Commercial Code described below.

UCC ' Revised Article 9

Among the exceptions to ESIGN are contracts or other records that are governed by the Uniform Commercial Code (other than sections 1-107 and 1-206 and Articles 2 and 2A). Equipment leases that also serve as “security interests” or leases that are bundled and sold on a secondary market would be covered by Article 9 of the UCC, one of the exceptions to ESIGN. How an e-process might work in these contexts is beyond the scope of this article; however, a brief overview of UCC Article 9, as approved and recommended by the National Conference of Commissioners on Uniform State Laws in July 1998 (“Revised Article 9″) demonstrates that the revisions to Article 9 are intended to eliminate legal barriers to the use of e-signatures and e-records for secured transactions.

Revised Article 9 replaces the concept of a “signed writing” with an “authenticated” security agreement. Section 9-102(a)(7) defines “authenticated” to include both the signing of a writing, and executing or adopting a symbol, or encrypting a record, in whole or in part, with present intent to: 1) identify the authenticating party; 2) adopt or accept a record or term; or 3) establish the authenticity of a record or term that contains the authentication or to which a record containing the authentication refers. In addition, Revised Article 9 allows for the electronic filing of financing statements.

Equipment leases bundled and sold on a secondary market would most likely be characterized as “chattel paper.” Section 9-102(31) of Revised Article 9 creates the concept of “electronic chattel paper.” Electronic chattel paper under Revised Article 9 is essentially a record or records consisting of information in an electronic medium. The comments to the definition of electronic chattel paper indicate that “the concept of electronic medium should be construed liberally to include electrical, digital, magnetic, optical, electromagnetic, or any other current or similar emerging technologies.”

Revised Article 9 also creates the concept of “control” as the method of perfection for electronic chattel paper. Section 9-105 of Revised Article 9 provides that a party has control of the e-chattel paper if the record or records comprising the chattel paper are created, stored and assigned in a manner that a single, unique “authoritative copy” of the record exists. The authoritative copy must identify the secured party as the assignee of the record and must be communicated to and maintained by the secured party (or its designated custodian). In addition, each copy of the authoritative copy and “any copy of a copy” must be readily identifiable as a copy, and any revision to the authoritative copy must be readily identifiable as an authorized or unauthorized revision.

Significant Risks to Implementation of an e-Signature Process

Although processes that rely on e-signatures present risks that are different from traditional paper-based processes, once these risks are examined, in many cases, they can be mitigated to a level at or below the risks associated with more traditional processes. Below are two of the common risks associated with e-processes that may not be present in traditional settings.

Authentication Risk

E-processes do not typically involve face-to-face settings. As a result, traditional ways of authenticating the person signing a document are not practical for e-processes. As a result, the “authentication risk” must be effectively addressed in the e-process.

Electronic processes offer ways for authenticating persons more effectively than the methods normally used in the traditional settings. For example, using a third party to verify a consumer's “out-of-wallet” information, eg, information that only the consumer is likely to know, can be incorporated into an e-process, where the same methodology would be cumbersome in a traditional setting. Verifying the identity of the person to sign electronically can also be done to varying levels to calibrate the risk of the signature failing for a particular document. The challenge is to match the method of authenticating a person with the risk associated with that particular signature failing.

Repudiation Risk

Because electronic data can be easily altered without detection, steps must be taken to properly secure the e-record in order to avoid attempts by a party signing the e-record to repudiate the terms of the record. Traditional methods of establishing that a document has not been altered or modified might not be sufficient. Available technologies such as encryption, along with certain process steps, can be utilized to deal with the repudiation risk.

E-signed records (along with data about the transaction, such as the authentication steps), should be electronically sealed so that the records cannot later be altered without detection. Processes can utilize a number of different approaches to electronically seal a document. For example, using encryption a record can be “hashed-down” so that the record cannot be later accessed without the proper hash value. In addition, secure data files, with limited access, can be useful in establishing security for stored e-records.

Conclusion

ESIGN, UETA and Revised Article 9 provide the foundation for an e-leasing process. Of course, a more detailed legal analysis tailored to the specific transactions in issue would be necessary for actual implementation of an effective e-leasing process; however, a workable legal framework exists for e-leasing. Implementation of an effective process within that framework will require not only an understanding of the legal issues, but effective use of technology and processes to mitigate those risks of an e-process that are not typically present in the traditional setting.