United States: E-sign Will Transform Business

Article appeared in the July 4, 2000 issue of Delaware Law Weekly.

The new federal Electronic Signatures in Global and National Commerce Act, known as E-Sign, became effective on October 1, 2000.

It will give electronic, or digital, signatures and documents the same legally binding effect as one’s handwritten signature and paper documents.

The force of the law will be to prohibit one from making a claim that a contract is invalid for the sole reason that an electronic signature was used in its making. Section 101(a) states that a signature, contract or other record relating to "any transaction in or affecting interstate or foreign commerce… may not be denied legal effect, validity, or enforceability solely because it is in electronic form." The law establishes uniformity by setting a national standard.

The form of electronic signature to be used in a transaction is left up to the participants to agree on. There is an array of possibilities that include capturing a signer’s handwritten signature and binding it into the electronic text of the contract, encryption, and biometrics, which is technology that identifies or verifies individuals based on their physiological characteristics.

One method the public might be comfortable with is the use of signature dynamics technology. Here, the parties to a transaction simply write their signatures on a digitizer pad attached to their computer. A computer program then records an image of the signature, as well as the time and date.

The law not only facilitates use of the Internet for numerous transactions, it is bound to save companies and consumers enormous amounts of time and money because of the lack of paperwork and the elimination of turnaround time.

For example, Microsoft has projected that the paperwork reduction from electronic contracts could cut up to $2,000 off the cost of closing a home mortgage.

Consumers will be able to conclude contracts for such things as mortgages, insurance policies, brokerage accounts and bank loans online with their electronic signatures.

However, the law specifically exempts certain documents in section 103. Those documents still required to be in paper form include testamentary instruments, such as wills or testamentary trusts; adoption or divorce papers, and any contract governed by the Uniform Commercial Code (as in effect in any state, other than sections 1-107 and 1-206 and Articles 2 and 2A).

In addition, court orders and official court documents, insurance company or utility company termination and cancellation notices, eviction notices, foreclosure of a mortgage and product recalls must still be done in paper form.

In sum, this new legislation will affect anyone who does business online and everyone will be expected to know about the ramifications of this new law.