The U.S. government acknowledged the legitimacy of electronic contracts and documents with the enactment of the Electronic Signatures in Global and National Commerce Act (E-SIGN) in 2000. Extending official recognition and legal standing to these documents has made it possible for businesses to take a further step into the electronic age.

The E-SIGN Act, also known as the "Millennium Digital Commerce Act", was signed by President Bill Clinton on June 30, 2000 and went into effect on October 1, 2000. It established a legal equivalence between:

1. Paper contracts and contracts in electronic forms
2. Handwritten signatures and electronic signatures
3. Other legally required written documents and the same information in electronic form

Specifically, E-SIGN provides that "no contract, signature, or record shall be denied legal effect solely because it is in electronic form." It does "preserve existing authorities, however, to set standards for integrity, accuracy, and accessibility of electronic records and the authentication of electronic signatures".

In addition, E-SIGN recognized electronic signatures on interstate and foreign contracts as legally binding. The Act defined an electronic signature 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 intent to sign the record."

This broad definition has been interpreted to provide that virtually any form of electronic assent constitutes an effective electronic signature, including typing your name into a signature box, pasting in a scanned version of your signature, clicking an "I Agree" button, or using a cryptographic technology.

Cryptographic Signatures
Cyptography is the science of securing information, primarily by systems that scramble and unscramble information. Security experts generally favor a cryptographic signature, also called a "digital" signature. Encrypted digital signatures, which are a subset of electronic signatures, are increasingly used in electronic contracts because they are more secure than the simpler forms of electronic signatures.

Making Your Electronic Contracts Legally Enforceable
According to the E-SIGN Act, documents signed electronically have the same legal protections as those signed with a pen. The question, however, remains, "Will an electronically signed and executed document be admissible in court and enforceable?" Not necessarily, since legal validity, court admissibility and enforceability are not the same things.

Legal Validity

To have legal validity, a contract, electronic or otherwise, must include the following elements:

1. Agreement: an offer by one party and acceptance by the other party.
2. Consideration: something of legal value given in exchange for a promise.
3. Contractual capacity: the parties must be able to legally enter into a contract. A contract entered into by an employee of a company may not be legal if that employee does not have authorization to enter into such a contract.
4. Lawful object: the goal of the contract must be lawful.

If your contract lacks any of these four elements, it will not be a valid contract regardless of how it is created -- in paper format or electronically.

The other essential element to a valid contract is a valid signature. Since it is impossible to sign an electronic contract with a pen, as you would a paper contract, the parties must sign it electronically.

Admissibility

Specific criteria must be met for an e-signature to be admissible in court.

The entity presenting an electronically signed document needs to be able to prove the intent of the signer and the security of the signed document. If there is any possibility that the contract could have been altered or tampered with after it was signed, it's unlikely that a judge will admit it into evidence.

Thus, an e-signed contract may be legally valid, but ruled inadmissible in court due to weaknesses in any of three areas:

• Security: The e-signature system should have bank-level security protocols to ensure that documents and audit records cannot be accessed by unauthorized parties.
• Audit Logs: Audit logs are an important part of legal admissibility. They should be time stamped, detailed, and secured.
• Authentication: The higher the authentication, the more likely the judge will admit the electronic contract into evidence.

  The identity of a signer can be authenticated in three ways:

  1. By something the signer knows (password, pin number, etc.)
  2. By something the signer has (security card)
  3. By something the signer is (a physical characteristic, called a biometric)

  Best practices in e-signature authentication include:

  • biometric authentication, which identifies people based on intrinsic physical traits, such as signature dynamics -- an authentication system that does not record the final image of the signature, but rather how it was produced, i.e. differences in pressure on each character and writing speed; other biometric systems include fingerprint technology and webcam photo authentication.
  • systems that record the email account and IP address of the signatory.
  • checksums -- fixed blocks of information, based on mathematical functions, used to verify and maintain data integrity when storing and transmitting electronic documents
  • signature (digital) certificates including full name, signature, IP address, email address and other identifying details

Enforceability

Once an electronic contract is admitted by the judge, its enforceability is governed by the same legal principles that apply to paper contracts with handwritten signatures:

• Clear terms that the signer can review.
• An action that indicates a clear and unambiguous manifestation of consent.
• A copy of the terms made available for the signer to keep.
• Under E-SIGN, the party proposing an electronic agreement must also describe any hardware or software requirements necessary to read and save the electronic document. A party must also be allowed to opt out and use a paper contract instead.

(Note: electronic versions of certain types of documents are invalid and unenforceable, including court orders and other court documents, wills, trusts, cancellation of utility services, adoptions, divorce and other family matters.)

So, How Do You Construct a Legally Enforceable Electronic Contract?

1. Write the electronic document the way you would write a paper contract -- with an attorney's advice.

   Make sure it meets all four of the requirements for Legal Validity (agreement, consideration, contractual capacity, lawful object), along with those necessary for Enforceability (clear terms, definite action indicating clear consent, ability for the signer to keep a copy of the contract).

   Identify the hardware or software, if any, required to complete the electronic document.

   And, most importantly, provide the potential signer the ability to opt out -- electing to use a paper rather than electronic contract.

2. Utilize the highest level signature authentication technology you can, based on your business requirements (costs, ease of use, contract value, etc.). While "I Agree" buttons and other simple forms of contract acceptance have been ruled admissible in some courts, the more secure and identity-specific the technology, the more likely the signature will be considered legally valid. A web search for "electronic signature software" will find a number of companies that provide such software, including some that offer their software free of charge.
3. Maintain secure, complete and reproducible audit logs.

Contracts are an essential part of doing business. And, while there are a number of advantages to using electronic contracts, it's important to be sure that they are carefully constructed and executed. Few things are worse than finding out the contract you were counting on as basis for payment is worthless because it isn't legally enforceable.

Editor www.highako.com Highako.com is a video-first microlearning platform trusted by over 10,000+ Credit and Collections professionals. Drive skill growth with role-specific, expert video lessons. Measure practical expertise through hands-on assessments. Connect and collaborate with the largest credit community and get access to ready-to-use templates.

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