Electronic Contracts?

The increase in the use of the Internet in business transactions has caused many businesses to question whether contracts or agreements that had been traditionally created on paper can or should now be entered into electronically. As the development of the Internet is new, complicated and unpredictable, so to is the legislative and court created law of electronic contracts.

While only certain types of contracts are required to be written to be legally enforceable in the United States, businesses typically use written contracts to formally establish contract terms and conditions. Absent unusual circumstances, a party that signs a contract is strictly held to each term of the contract. In a typical transaction, each party negotiates the terms of a contract and signs the final version. Each party then retains an identical copy of the final contract. Any dispute regarding the subject of the contract is resolved utilizing and interpreting the terms of the contract. In this typical situation, the handwritten signature makes it reasonably easy to identify if a term of the contract had been changed by one of the parties by comparing each party’s final executed copy. The handwritten signature also allows you to confirm through the uniqueness of the signature, the identity of the person signing to show that each party accepted the terms.

In creating contracts purely via the Internet, an electronic version of a contract is negotiated and is never put on paper and manually signed. It is clear from federal laws, the legislation of many states and the few court cases that have considered the enforceability of these purely electronic contracts that such contracts are or will be just as enforceable and valid as a paper contract. A recently passed federal law confirms the use of electronic signatures and many states have enacted legislation that recognizes electronic signatures and digital signatures as satisfying requirements that documents be signed or written.

The fact that purely electronic contracts are generally enforceable, does not solve the issue of proving the terms of the contract and that those terms where agreed to by the parties to the contract. The use of an electronic signature or a digital signature may be used to acknowledge the acceptance of a contract by a party, to identify who is actually accepting and to establish that no changes have been made after the contract was accepted.

An electronic signature generally utilizes a password or any electronic mark that signifies agreement. An example of an electronic signature is a scanned image of a party’s handwritten signature that is pasted into a document. A type of electronic signature is a digital signature. While there are also many types of digital signatures, one type generally provides a unique electronic "key" that only an authorized party may use to read a document that has been encrypted with another "key" associated with that authorized party. Once a final document is accepted utilizing a typical digital signature, the authentication procedure will identify any further changes to the document. A properly created digital signature that is uniquely tied to an individual can actually create greater reliability and less chance of forgery than a handwritten signature and can ensure that the contents of a contract are confidential, secure and unaltered. The creation and use of digital signatures, however, can be complicated and expensive.

In converting any contracts previously written on paper to electronic contracts, businesses must analyze the new federal law and the current laws in each state in which they do business. The new United States federal law is the Electronic Signatures in Global and National Commerce Act. States are currently considering two uniform acts that effect electronic contracts: The Uniform Computer Information Transaction Act (UCITA) and The Uniform Electronic Transaction Act (UETA). Those that do business internationally must also be cautious as most developed nations have adopted provisions relating to electronic or digital signatures. While digital signatures can provide great accuracy and reliability, the implementation of such a system can be costly. Businesses must weigh the cost and benefit against the risks associated with more simple verification procedures.