Authenticating and Enforcing E-Signatures: Companies Doing Business Over the Internet are Seeking Ways to Replace Traditional Signatures With Valid E-Signatures

by Jonathan Bick

While the Internet continues to replace traditional forms of commerce communication, the use of contracts to memorialize business agreements remains constant. To fully implement the transition to Internet commerce communications, businesses are struggling to find an appropriate replacement for traditional authentication procedures. In short, businesses are looking to replace traditional signatures with lawful electronic signatures. The result is six viable e-signature options.

Enforceability

To be enforceable, state and federal law generally require a significant commercial agreement be signed by the party the agreement seeks to bind. For example, the Uniform Commercial Code’s Statute of Frauds provision 2-201 requires a writing to be “signed by the party against whom enforcement is sought.” When the Internet is used as a communication media for commercial transactions, authenticating the identity of the party is more difficult.

An electronic signature is meant to authenticate a particular writing. The authenticating “signature” is sent electronically, attached to, or logically associated with an electronic message.

Like traditional signatures, electronic signatures appear in many forms. An electronic signature may be a typed name, a digitized fingerprint, a digitized image of a handwritten signature, 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 signatory intends to sign a record, and the e-signature is logically associated with the record.

E-Signature Law

Three separate bodies of law should be considered when applying signatures to electronic contracts: Electronic Signatures in Global and National Commerce Act [E-Sign], the Uniform Commercial Code (UCC), and the common law. It is important to note, however, that these laws do not state that electronic signatures are automatically effective. They merely state that electronic signatures should not be treated differently than written signatures.

E-Sign provides that electronic signatures cannot be denied effect solely because they are in electronic form. 15 U.S.C. 7001-7006. An 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 UCC standardized commercial transaction laws, and Article 2 of the UCC govern the sale of goods. Since electronic transactions were not contemplated when UCC Article 2 was enacted, a revision was proposed.

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.”

A states’ common law applies if a court finds the UCC is not applicable. The common law also applies if gaps in the UCC have to be supplemented. But because common law varies widely among the states, it provides the least predictable source of contract law.

Choice of Law

Internet commercial transactions often involve multiple jurisdictions. 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 UCC; 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 the law where the licensor is situated governs an Internet transaction for the electronic transfer of information. UCITA section 109[c] does, however, provide an exception if the governing jurisdiction is outside of the United States. In that case, the foreign law governs only if it allows for similar protection and rights. Otherwise, the regulations of the state with the most significant relationship to the transaction govern.

In view of the fact that foreign law can only govern if the licensor is sited 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, UCC section 105[1] controls. 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 “[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.

When a dispute involving an electronic signature arises, the law of the seller’s jurisdiction normally governs. This is because in most Internet transactions, the seller creates the commercial contract, and the “choice of law” clause therefore indicates the seller’s jurisdiction.

The seller’s jurisdiction is usually also found to have 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.

Under UCITA, the UCC and the Restatement [Second] of Conflict of Laws, the law of the country where the seller is located normally applies in international electronic transactions.

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 where the contract was made applies. Normally, this means that the laws of the buyer’s country control a dispute over 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 Hybrid Option
A hybrid e-signature solution consists of combining traditional authentication with Internet communication. The seller mails or faxes to the buyer a form — 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 that the electronic contract seeks to bind authenticates the transaction with a traditional signature.

The Biotechnology Option
A biotechnological e-signature is a digital image of a fingerprint or retinal scan attached to an Internet communication.

The Restricted Information Option
The party to be bound includes restricted information — such as credit card data or a previously agreed upon password — in the content of the Internet commerce transaction.

The Third-party Option
A third-party e-signature uses public key/private key encryption technology to prepare the Internet offer and the Internet acceptance of a commercial transaction.

The 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, 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, decrypts the coded contract, and compares it to the coded acceptance. If the two match, then the acceptance is considered e-signed.

The “Per Se” Option
A “per se” e-signature is a typed representation of a name. In practice, Internet technology allows easy message tracing to authenticate the source and content of the message, and can provide evidence the person who signed has authenticated the message.

It should be noted that Internet tracing technology might 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 UCC includes “any symbol made with an intent to authenticate” according to UCC 1-201[39]. Courts in this country have found 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 to accommodate various forms of electronic communication.

The Combination Option
A combination option employs two or more of the aforementioned e-signature options.

Originally published in the 2004 Fall issue of The CampLine.
 

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