Electronic Signatures and Online Contracts

When electronic signatures are used, contracts created online are as legal as those on paper.

By , Attorney

Countless business transactions occur over the Internet every day, without any face-to-face interaction between the parties involved. Purchasing insurance, signing real estate contracts, using credit cards, and entering into financial agreements are just a few of the actions that people perform electronically.

Even though electronic transactions are so common, many people remain unsure about whether electronic signatures (e-signatures) and electronic contracts (e-contracts) are safe, valid, and legal. The good news for businesses and consumers alike is that e-contracts and e-signatures are, for the most part, safe and reliable methods for doing business. The parties involved in e-contracts and e-signatures should, though, take certain steps to ensure the validity of their agreements.

Federal and State Electronic Transactions Laws

Federal legislation enacted in 2000, known as the Electronic Signatures in Global and National Commerce Act (ESIGN), made most e-contracts and e-signatures just as legal and enforceable as traditional paper-and-ink contracts and signatures.

All states have adopted either the Uniform Electronic Transactions Act (UETA) or their own e-signature laws that establish the legal validity of electronic signatures and contracts in a similar manner as the federal law (ESIGN). The combination of federal and state laws ensures that most e-contracts and e-signatures are valid regardless of where the parties live or execute the contract.

What Is an Electronic Contract?

An e-contract is an agreement created and "signed" in electronic form—no paper is used. An example is a contract that you write on your computer and email to a business associate and that the business associate emails back with an electronic signature indicating acceptance.

An e-contract can also be in the form of a "click to agree" contract, which commonly comes with downloaded software: The user clicks an "I agree" button on a page containing the terms of the software license before being able to complete the transaction.

Also, making an online purchase involves a form of e-contract. Even without signing anything, the buyer agrees to pay the seller a certain amount in exchange for the seller's promise to provide the buyer a product.

What Is an Electronic Signature?

An e-signature is a digital file or symbol—such as a scanned pen-and-ink signature or a typed name—that someone attaches to or places on a contract or file to show that person's intent to sign the contract or file.

People e-sign documents in many different ways, including by typing the signer's name into the signature area, pasting in a scanned version of the signer's signature, clicking an "I accept" button, or using cryptographic "scrambling" technology.

Some of these e-signing methods are more secure than others. Most people use the term "electronic signature" to refer broadly to all forms of e-signatures, even the unreliable methods. A couple insecure signature formats are the signer's name typed into the signature area and a scan of the signer's pen-and-ink signature. Although these formats are still legally binding, they leave effectively no way of confirming that the person who placed the mark on the document is the person you intended to sign the document.

"Digital signatures," on the other hand, are more sophisticated, secure e-signatures. They use digital identification to authenticate the signer. The signature is then electronically bound to the document using encryption. You don't have to be a computer expert to create a digital signature—many software programs, such as DocuSign, HelloSign, Adobe, and SignNow, make the process of securely creating and e-signing e-contracts simple and affordable.

E-Signature and E-Contract Requirements

Under ESIGN, UETA, and most state laws, individuals and businesses must take certain measures to make e-contracts and signatures valid and enforceable. These measures often include the following, but you should check all applicable laws for additional or different requirements.

  • Obtain consent from signers. Signers have to affirmatively consent to using an e-contract or e-signing. In most cases, signers can demonstrate their consent by agreeing in an email or simply e-signing an emailed contract. In some instances, though, the law might require an explicit agreement to conduct business electronically.
  • Fully inform signers about what their signature means. Signers are supposed to receive a clear indication that they are agreeing to be bound to the terms of a document when they sign. It must be clear that they're not signing to indicate they merely received or reviewed the document.
  • Give signers other options. E-signature laws make paper unnecessary in many situations, but some consumers and businesses still might want to use paper. Most e-signature laws require that anyone wishing to use paper be allowed to opt out of using e-contracts.
  • Inform signers that they can withdraw consent. Signers need to be informed that they can withdraw their consent to use e-signatures or e-contracts at any time. They also need an explanation of the procedure for withdrawing consent.
  • Keep copies of the documents. The party creating the contract is supposed to keep electronic or paper copies of the signed documents and either provide copies to the other party or let the party know how to get copies.

To make sure that they're complying with the relevant law, businesses and individuals regularly using e-contracts should consult with a qualified attorney to review their electronic practices and disclosures.

Contracts That Must Be on Paper

Not all contracts can be executed electronically under ESIGN. In other words, certain contracts must be signed in traditional paper and ink format. ESIGN specifically excludes:

  • wills, codicils, and testamentary trusts
  • documents relating to adoption, divorce, and other family law matters
  • court orders, notices, and other court documents like pleadings and motions
  • notices of cancellation or termination of utility services
  • notices of default, repossession, foreclosure, or eviction
  • notices of cancellation or termination of health or life insurance benefits
  • product recall notices affecting health or safety, and
  • documents required by law to accompany the transportation of hazardous materials.

Even though ESIGN bars e-signatures for these documents, some state laws might allow e-signatures under certain circumstances. For example, many courts allow pleadings and motions to be e-signed when the parties follow specific court procedures. Also, ESIGN's e-contract exclusions are subject to change—ESIGN lets federal regulatory agencies allow e-signatures if the agencies determine that the relevant exclusion is no longer necessary for the protection of consumers and eliminating the exception wouldn't increase the risk of harm to consumers. (15 U.S.C. § 7003(c)(2) (2019).)

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