THE PROCESS OF ELECTRONIC CONTRACTING:
NEW RULES FOR THE NEW COMMERCE
by
Jeffrey C. Selman
Special Counsel
Heller Ehrman White & McAuliffe LLP
Menlo Park, California
TABLE OF CONTENTS
SECTION
PAGE
Introduction..................................................................................................................................... 1
Enforceability of Electronic Contracts............................................................................................ 1
1. E-SIGN .................................................................................................................................. 1
2. UETA..................................................................................................................................... 3
3. UCITA ................................................................................................................................... 6
Trust Between Parties ..................................................................................................................... 7
1. Attribution.............................................................................................................................. 8
2. Authentication........................................................................................................................ 9
Special Procedural Rules .............................................................................................................. 11
1. Timing Issues....................................................................................................................... 11
2. Electronic Errors .................................................................................................................. 12
3. Notarization ......................................................................................................................... 13
4. Consumer Rules................................................................................................................... 13
Conclusion .................................................................................................................................... 14
i
Introduction
Despite the recent closure of many dot-coms, their legacy of electronic commerce lives
on. The Internet revolution has brought many changes in the way business is done. But none
may be more widespread than the way in which commerce is now being conducted. Electronic
contracting has become a reality. And in an attempt to keep pace, new commercial rules are
being developed to provide structure for electronic contracting.
In recent years, we have seen a proliferation of legislative efforts concerning electronic
contracting. During the summer of 1999, the National Conference of Commissioners of Uniform
State Laws (NCCUSL) promulgated two statutes that address electronic contracting issues – the
Uniform Electronic Transactions Act (UETA),1 which more than half of the States have now
adopted, and the Uniform Computer Information Transactions Act (UCITA)2 which has been
adopted to date in Maryland and Virginia. On the Federal level, Congress last summer enacted
the Electronic Signatures in Global and National Commerce Act (E-SIGN)3, which took effect
on October 1, 2000. Internationally, the European Union issued two directives – the first being
the Electronic Signature Directive issued on December 13, 19994 and the second the Electronic
Commerce Directive of June 8, 2000.5 In addition, many countries have adopted statutes based
on the Model Law on Electronic Commerce6 drafted by the United Nations Commission on
International Trade Law (UNCITRAL). And these are just the tip of the iceberg.
All of these statutes try to deal with certain fundamental issues concerning electronic
contracting. First, whether the parties can conduct the transaction in an electronic form and how
the parties must effect the transaction to enable it to be legally enforced. Second, the means for
establishing trust between the parties in the transaction. Third, the rules that govern the parties’
conduct with respect to the transaction. This paper will consider how the three significant efforts
in the U.S., E-SIGN, UETA and UCITA address these issues.
Enforceability of Electronic Contracts
A basic question concerning all contracts is enforceability. The requirements of offer and
acceptance, consideration, and the like must be met to have a valid and enforceable contract.
This is true in the electronic realm, but certain other issues also may arise that impact the
creation of an enforceable electronic contract.
Legal concepts such as the statute of frauds – which can readily be satisfied in a paper
world – become more complex when the contract, although “written”, is stored in digital ones
and zeros. Does an electronic document satisfy a writing requirement if it hasn’t been printed?
Also, what about the tangibility of paper versus the ephemeral nature of those digital ones and
zeros? Questions such as these are what legislative bodies have tried to answer. The results to
date are as follows.
1.
E-SIGN
The most recently drafted of the U.S. statutes, E-SIGN, with a very broad stroke that
preempts inconsistent state law provides that for any interstate transaction:
(1)
a signature, contract or other record relating to such transaction may not
be denied legal effect, validity, or enforceability solely because it is in electronic
form; and
(2)
a contract relating to such transaction may not be denied legal effect,
validity, or enforceability solely because an electronic record was used in its
formation.7
With this language in E-SIGN Section 101(a), Congress removed almost all requirements that
contracts be written on paper and signed with ink.
E-SIGN applies to all interstate transactions except certain specified transactions. Those
transactions excepted are contracts governed by (i) laws concerning the creation and execution of
wills, codicils or testamentary trusts,8 (ii) state laws regarding adoption, divorce or other family
law matters,9 and (iii) the Uniform Commercial Code other than sections 1-107 and 1-206 and
Articles 2 and 2A.10 Also excepted from the effects of E-SIGN Section 101 are (i) court orders
and documents,11 (ii) notices of (a) cancellation of utility services,12 (b) default, acceleration,
repossession, foreclosure or eviction, or the right to cure, under a credit agreement secured by, or
a rental agreement for, an individual’s primary residence,13 (c) cancellation of health insurance
or benefits or life insurance (excluding annuities),14 or (d) product recalls,15 or (iii) documents
required to accompany transportation or handling of hazardous or dangerous materials.16
E-SIGN Section 102 also exempts certain state statutes from its preemptive effect. First,
a state statute “may modify, limit, or supersede the provisions of” E-SIGN Section 101 if it
“constitutes an enactment or adoption of the Uniform Electronic Transactions Act as approved
and recommended for enactment in all the States by the National Conference of Commissioners
on Uniform State Laws in 1999.”17 Second, a state statute that “specifies the alternative
procedures or requirements for the use or acceptance (or both) of electronic records or electronic
signatures to establish the legal effect, validity, or enforceability of contracts or other records”, if
such procedures are consistent with E-SIGN and do not favor a specific technology, may also
“modify, limit, or supersede the provisions of” E-SIGN Section 101.18
Although E-SIGN enables electronic contracts for those interstate transactions that it
covers, it does not require that a party conduct a particular transaction in electronic form.19
Thus, a party to a transaction can refuse to enter into an electronic transaction, and may instead
negotiate with the other party to the transaction the form that it will take and the method of
communication that will be used.
In addition, electronic contracts need not be entered into solely by humans. Computer
generated electronic agents,20 without any human involvement, may also engage in transactions.
E-SIGN acknowledges the validity and enforceability of the contracts created in such
transactions. E-SIGN provides:
A contract or other record relating to a transaction in or affecting interstate or
foreign commerce may not be denied legal effect, validity, or enforceability solely
because its formation, creation, or delivery involved the action of one or more
2
electronic agents so long as the action of any such electronic agent is legally
attributable to the person to be bound.21
E-SIGN, however, is silent on what legally attributes an electronic agent to a person.
Another issue specific to the electronic world that impacts on enforceability is the
tangibility of the electronic contract. It is not sufficient to enable parties to enter into a contract
electronically that is legally required to be in writing if they cannot tell moments later to what
they have agreed, a very real possibility where the communication means are not also means of
storage. Therefore, E-SIGN provides that the enforceability of an electronic contract that legally
must be in writing depends upon the contract being “in a form that is capable of being retained
and accurately reproduced for later reference by all parties or persons who are entitled to retain
the contract.”22 This does not mean, however, that the contract must be stored or printed, but
rather, that it is capable of such, although it is unclear whether it must be capable of retention and
reproduction at all times, or merely for some period of time which may be as short as
immediately after entry. At a minimum for any electronic contract that must be in writing, it is
important to make sure that the ability to maintain a record of the contract exists and is not
inhibited.
Similar to being able to satisfy for contracts that must be in writing the requirement of the
ability to retain, is being able to satisfy the requirement of accurate retention of a contract if such
recordkeeping is legally required. Many regulatory schemes require that parties to a transaction
maintain accurate records of the transaction. The fleeting nature of electronic communications,
therefore, must not only be made tangible, but also accurate in order to satisfy these schemes.
E-SIGN provides that any retention requirements are satisfied if the electronic record (i)
“accurately reflects the information set forth in the contract”,23 and (ii) “remains accessible to all
persons who are entitled to access by [law] for the period required by [law] in a form that is
capable of being accurately reproduced for later reference, whether by transmission, printing, or
otherwise.”24 The requirement to retain a contract, however, “does not apply to any information
whose sole purpose is to enable the contract or other record to be sent, communicated, or
received.”25
2.
UETA
As a result of the exemption to preemption set forth in E-SIGN Section 102 for UETA, it
is important to examine what that statute says about whether electronic contracts are authorized.
Using language that has the same result as E-SIGN Section 101(a), UETA Section 7 provides
that a “record or signature may not be denied legal effect or enforceability solely because it is in
electronic form”,26 a “contract may not be denied legal effect or enforceability solely because an
electronic record was used in its formation”,27 if “a law requires a record to be in writing, an
electronic record satisfies the law”,28 and if “a law requires a signature, an electronic signature
satisfies the law.”29 Thus, UETA, like E-SIGN, enables electronic transactions by providing that
a contract may be enforced even though in electronic form.
It is important to note, however, that UETA is not as absolute as E-SIGN in providing
that the electronic form is as good as paper. UETA Section 8(b) provides:
3
(b)
If a law other than this Act requires a record (i) to be posted or displayed
in a certain manner, (ii) to be sent, communicated, or transmitted by a specified
method, or (iii) to contain information that is formatted in a certain manner, the
following rules apply:
(1)
The record must be posted or displayed in the manner specified in
the other law.
(2)
Except as otherwise provided in subsection (d)(2), the record shall
be sent, communicated, or transmitted by the method specified in the other law.30
This section defers to any other statute’s requirements that a record be sent or communicated in a
particular way. Thus, if another statute requires that a record be sent by U.S. mail, this
requirement must still be met notwithstanding the fact that UETA provides that the record can be
electronic.
Concerned that this could override the policy eliminating requirements that elevate the
necessity of paper for contracts, Congress inserted into E-SIGN a specific exception to the
exemption to preemption set forth in E-SIGN Section 102(a)(1). E-SIGN Section 102(c)
provides that enactment of UETA “does not permit a State to circumvent this title or title II
through the imposition of nonelectronic delivery methods under section 8(b)(2) of the Uniform
Electronic Transactions Act.”31 Thus, Congress prohibits a state from relying upon UETA
Section 8(b)(2) to require a party to deliver a record through nonelectronic means if another law
requires such nonelectronic delivery.
UETA also excludes from its coverage certain transactions. As does E-SIGN, UETA
does not apply to transactions subject to (i) laws governing the creation and execution of wills,
codicils or testamentary trusts,32 (ii) the Uniform Commercial Code other than sections 1-107
and 1-206 and Articles 2 and 2A,33 (iii) UCITA,34 or (iv) other laws identified by an enacting
state.35 E-SIGN speaks to this last exclusion, providing that any such exception to the scope of
UETA enacted by a state pursuant to UETA Section 3(b)(4) is preempted to the extent such
exception is inconsistent with E-SIGN.36
For any state that enacts UETA, the combination of that Act with E-SIGN enables
electronic contracts for all transactions, both intrastate and interstate, that are within their
combined scope.
However, UETA, like E-SIGN, does not require that a transaction be conducted
electronically. UETA Section 5(a) specifies that the “Act does not require a record or signature
to be created, generated, sent, communicated, received, stored, or otherwise processed or used by
electronic means or in electronic form.”37 UETA, however, goes further in this regard than does
E-SIGN. The benefits of UETA only apply to “transactions between parties each of which has
agreed to conduct transactions by electronic means.”38 Thus, UETA is a voluntary act whereby
parties must agree to receive its benefits. “Whether the parties agree to conduct a transaction by
electronic means is determined from the context and surrounding circumstances, including the
parties’ conduct.”39 The Official Comments to UCITA Section 5 reference several different
examples that may constitute an agreement to conduct a transaction by electronic means. These
4
range from an explicit agreement to engage in electronic transactions entered into prior to
entering into an electronic transaction, to delivery of a business card listing an e-mail address
from which a recipient may infer that business communications can be delivered to that e-mail
address, to a party to a transaction entering into a transaction at another party’s website that is
equipped to handle such a transaction.40
Because whether a party agreed to conduct a transaction by electronic means may be
uncertain, and as a result, the applicability of UETA to a transaction is also uncertain, parties
looking to ensure the enforceability of electronic contracts under UETA may desire to include
provisions in such contracts that the parties consent to conducting the transaction electronically.
Failure to do so, however, may not render the electronic contract unenforceable as the rules of
E-SIGN may still apply as a result of the federal preemption.41
Related to the issue of consent to enter into an electronic contract is another provision of
UETA that states that a party who has given its consent to “conduct a transaction by electronic
means may refuse to conduct other transactions by electronic means.”42 This provision may not
be waived by agreement of the parties.43
UETA also recognizes the enforceability of contracts formed by electronic agents.44
UETA Section 14(1) provides that a “contract may be formed by the interaction of electronic
agents of the parties, even if no individual was aware of or reviewed the electronic agents’
actions or the resulting terms and agreements.”45 Furthermore, a contract may be formed
through the interaction of a human with an electronic agent, “including by an interaction in
which [an] individual performs actions that the individual knows or has reason to know will
cause the electronic agent to complete the transaction or performance.”46
Another area of common ground between UETA and E-SIGN is the ability to retain
records. UETA contains a prohibition on a sender inhibiting the ability of a recipient to store or
print an electronic record. If the sender does inhibit the recipient’s ability, then the electronic
record is not enforceable against the recipient.47 Unlike E-SIGN, however, this provision does
not only apply to contracts that legally must be in writing. Thus, even if parties agree to deal
with each other electronically, this per se rule, if violated by the sender invalidates the
enforceability of the electronic contract. This cautions parties subject to UETA to make sure that
a record can be stored or printed, although, as with E-SIGN, the timeframe during which this
ability must be preserved is unclear.
Furthermore, UETA provides that a legal requirement for the accurate retention of
records can be met if an electronic record “accurately reflects the information set forth in the
record after it was first generated in its final form as an electronic record or otherwise”,48 and
“remains accessible for later reference.”49 This requirement may be satisfied by using the
services of another person.50 Again, as in E-SIGN, this requirement does not apply to any
information whose sole purpose is to allow for communication of the record.51
5
3.
UCITA
As noted above, transactions governed by UCITA are excluded from the application of
UETA. The reason for that is that UCITA contains its own sections governing the enforcement
of electronic contracts within the scope of UCITA.
UCITA, unlike E-SIGN and UETA, is not a procedural statute the main purpose of which
is to enable electronic transactions. UCITA’s main purpose is to create a uniform set of rules for
contracts in “computer information”. It applies only if a contract is to create, modify, transfer, or
license computer information or information rights in computer information.52 “Computer
information” is defined as “information in electronic form which is obtained from or through the
use of a computer or which is in a form capable of being processed by a computer.53 As such,
UCITA is a substantive contract law act. That being said, however, by necessity, UCITA
addresses procedural issues. Furthermore, because UCITA governs contracts in computer
information, including contracts entered into through computers for the online exchange of
computer information, the procedural issues addressed by UCITA include electronic contract
procedural issues.
Among these electronic contract procedural issues is again the basic issue of
enforceability of an electronic contract. UCITA Section 107(a) provides that a “record or
authentication may not be denied legal effect or enforceability because it is in electronic form.”54
This electronic contract enabling language is almost identical to that provided in UETA Section
7(a), the sole difference being substitution of the word “signature” used in UETA with the word
“authentication” used in UCITA.55
UCITA also follows E-SIGN and UETA and “does not require that a record or
authentication be generated, stored, sent, received, or otherwise processed by electronic means or
in electronic form.”56 UCITA does not, however, require that parties have to agree to conduct a
transaction by electronic means.
Another area in which UCITA is similar to E-SIGN and UETA is that it too accepts the
validity of contracts formed by electronic agents.57 UCITA Section 107(d) provides that a
“person that uses an electronic agent that it has selected for making an authentication,
performance, or agreement, including manifestation of assent, is bound by the operations of the
electronic agent, even if no individual was aware of or reviewed the agent’s operations or the
results of the operations.”58 This is similar to the comparable provision set forth in UETA
Section 14(1), but is stated more strongly. UETA’s attribution section59 states only that an
electronic record or electronic signature is attributable to a person if it was the act of the person.
The Official Comments to UETA Section 9, however, spells out that a person’s actions include
actions taken by electronic agents of that person.60 UCITA Section 107(d) moves this concept to
the statute itself, and uses more conclusive language: a person is bound by the acts of an agent
that it selects.
By doing so, however, the drafters of UCITA may have eliminated a potential defense to
the enforceability of contracts formed by electronic agents available under UETA. Under
UETA, the relevant test is whether the act of an electronic agent was the act of the person, and
the person may defeat attribution through an invalidating cause such as fraud or forgery.61 Thus,
6
the acts of an electronic agent in some contexts may be so clearly mistaken or unauthorized that
they do not constitute the acts of the person that selected the agent. UCITA Section 107(d)
would appear to disregard whether an invalidating cause intervenes in attributing the act of the
electronic agent to the person as it attributes the act of the electronic agent insofar as the person
chose the electronic agent.
Whether UCITA Section 107(d) does disregard invalidating causes may, however, be
rendered less important by UCITA Section 206(a) which provides first that a “contract may be
formed by the interaction of electronic agents” but then goes on to state that “a court may grant
appropriate relief if the operations [of the electronic agents] resulted from fraud, electronic
mistake or the like.”62
A discussion of UCITA should not only mention the similarities that it shares with
E-SIGN and UETA on the issues of enforceability, but also the differences. Before discussing
those differences, it is important to at least recognize the potential preemptive effect of E-SIGN
on UCITA. Although transactions covered by UCITA are outside the scope of UETA, such
transactions are not excluded from the application of E-SIGN. As a result, if a state were to
adopt UCITA but not UETA, the electronic contracting sections of UCITA could be preempted
by E-SIGN to the extent inconsistent with E-SIGN. Furthermore, this may be the case even if a
state enacted both UETA and UCITA. The issue of whether E-SIGN preempts the electronic
contracting sections of UCITA is outside the scope of this paper, however, and will not be
discussed further.
What is within the scope of this paper, however, is that UCITA, as a substantive contract
law does differ from the two procedural acts on the issues of ability to retain and accurate
retention of records. Whereas both of the procedural acts provide that if a substantive law
requires the ability to retain and accurate retention of records, that these requirements must be
met in order to have an enforceable electronic contract, UCITA, as a substantive law, does not
require either the ability to retain or accurate retention of records. In fact, the formal
requirements of a record under UCITA are quite minimal. As stated in the Official Comments to
UCITA Section 201:
A record, when required, must (1) indicate that a contract was formed, (2)
reasonably identify the copy or subject matter involved, and (3) have been
authenticated by the party against whom the contract is asserted. No other
formalities are required.63
The Official Comment further provides that this means that there is no requirement that a record
be retained.64
Trust Between the Parties
The formal requirement of authentication of a record noted in the Official Comments to
UCITA Section 201 raises a second concern that the electronic contracting legislation has
attempted to address – the establishment of trust between the parties to a transaction both that
they are in fact dealing with each other and that they agree on what they are dealing with.
E-SIGN is silent in creating rules intended to engender the trustworthiness of an electronic
7
transaction. UETA and UCITA, however, are not, introducing concepts such as attribution and
authentication into electronic contracting.
1.
Attribution
As discussed above, UETA addresses the concept of attribution. UETA Section 9(a)
provides:
An electronic record or electronic signature is attributable to a person if it was the
act of the person. The act of the person may be shown in any manner, including a
showing of the efficacy of any security procedure applied to determine the person
to which the electronic record or electronic signature was attributable.65
The means of determining attribution are many, but the one specifically provided for in the Act –
showing the efficacy of a security procedure – raises unique issues in the electronic contract
context.
UETA defines a “security procedure” as:
a procedure employed for the purpose of verifying that an electronic signature,
record, or performance is that of a specific person or for detecting change or
errors in the information in an electronic record. The term includes a procedure
that requires the use of algorithms, or other codes, identifying words or numbers,
encryption, or callback or other acknowledgment procedures.66
This language is adopted in part from Uniform Commercial Code Article 4A which governs
funds transfers.67
The concept of a security procedure is used in Article 4A to enable a financial institution
to verify the source of a request for a payment order as coming from the person on whose behalf
the payment order is submitted and not an imposter. Similarly, UETA allows a party to an
electronic transaction to look to a security procedure for verification purposes. The Official
Comments to UETA Section 9 explain:
In certain processes, a technical and technological security procedure may be the
best way to convince a trier of fact that a particular electronic record or signature
was that of a particular person. In certain circumstances, the use of a security
procedure to establish that the record and related signature came from the
person’s business might be necessary to overcome a claim that a hacker
intervened. 68
UCITA also uses a similar concept, referring to it, however, as an “attribution procedure’.
UCITA Section 102(a)(5) defines an “attribution procedure” as:
a procedure to verify that an electronic authentication, display, message, record,
or performance is that of a particular person or to detect changes or errors in
information. The term includes a procedure that requires the use of algorithms or
8
other codes, identifying words or numbers, encryption, or callback or other
acknowledgment.
Although UETA Section 9(b) provides that the efficacy of an “security procedure” may
establish attribution, UETA does not address how to determine the efficacy of an “security
procedure”. UCITA, however, does answer this question with regard to “attribution procedures”,
providing that the “efficacy, including the commercial reasonableness, of an attribution
procedure is determined by the court.”69 In making this determination, the court must apply the
following rules. First, a statutorily required attribution procedure is effective for all transactions
within the coverage of the statute.70 Second, “commercial reasonableness and effectiveness is
determined in light of the purposes of the procedure and commercial circumstances at the time
the parties adopted the procedure.”71 Third, any security device that is commercially reasonable
in a given situation may be used.72
By establishing the efficacy of an attribution procedure under UCITA, a party can
establish the act of another party to a transaction,73 and in doing so, attribute “an electronic
authentication, display, message, record or performance” to that other party to the transaction.74
Thus, compliance with an attribution procedure that has a level of effectiveness that is suitable
within the context of the transaction or is commercially reasonable may be treated as having met
the burden of establishing attribution.75 However, showing the efficacy of an attribution
procedure is not the sole means for establishing attribution. The proof offered to show
attribution may include any act of the person in addition to the efficacy and other characteristics
of any attribution procedure.
Finally, under both UETA and UCITA, the effect of attributing an electronic record or act
to a party is determined from the context and surrounding circumstances at the time of creation,
execution or adoption of the electronic record, including the agreement between the parties and
legal requirements.76
2.
Authentication
The rules set forth in UCITA Section 213 concerning attribution are intertwined with
UCITA Section 108 which governs the proof and effect of authentication. As discussed above,
UCITA uses the word “authenticate” to refer to the concept of signing. According to UCITA
Section 108(a), the authentication of a record can be proven by any method. This includes a
showing that a party made use of information that it could only have possessed if it engaged in
conduct that authenticated the record. 77 In addition, UCITA Section 108(b) provides that
compliance with a commercially reasonable attribution process either adopted by the parties or
required by law for authentication authenticates the record as a matter of law.78 Thus, by
complying with such an attribution procedure, a party shows that authentication was intended or
occurred. However, according to the Official Comments to UCITA Section 108, this still does
not address the question of to whom the authentication should be attributed as that question, as
discussed above, is addressed by UCITA Section 213.79
The rule posited in UCITA Section 108(b), like the concept of an “attribution procedure”,
is also adopted in large part from Uniform Commercial Code Article 4A which uses a security
procedure to help assure both the attribution and authenticity of the message directing a payment
9
order. Pursuant to Uniform Commercial Code Section 4A-202(b), a person in whose name a
payment order is issued is considered to be the sender of the order if the order is “verified”
pursuant to a security procedure in compliance with that section.80 Uniform Commercial Code
Section 4A-202(b) specifically provides:
(b)
If a bank and its customer have agreed that the authenticity of payment
orders issued to the bank in the name of the customer as sender will be verified
pursuant to a security procedure, a payment order received by the receiving bank
is effective as the order of the customer, whether or not authorized, if (i) the
security procedure is a commercially reasonable method of providing security
against unauthorized payment orders, and (ii) the bank proves that it accepted the
payment order in good faith and in compliance with the security procedure and
any written agreement or instruction of the customer restricting acceptance of
payment orders issued in the name of the customer. The bank is not required to
follow an instruction that violates a written agreement with the customer or notice
of which is not received at a time and manner affording the bank a reasonable
opportunity to act on it before the payment order is accepted.81
Thus, when a bank (a) tests a payment order against a commercially reasonable security
procedure, and (b) proves that it accepted the payment order in good faith and “in compliance
with the security procedure”, it can treat the payment order as the order of the customer,
regardless of whether the customer actually authorized the order.
“The effect of Section 4A-202(b) is to place the risk of loss on the customer if an
unauthorized payment order is accepted by the receiving bank after verification by the bank in
compliance with a commercially reasonable security procedure.”82 Thus, the payment order can
be attributed to the customer without risk to the bank, even if the payment order is fraudulent or
otherwise not authorized by the customer. In providing for such attribution, Uniform
Commercial Code Section 4A-202(b) also allows banks to act as if an authentication of a
payment order has occurred.
This authentication or verification concept is at the core of UCITA Section 108(b). Just
as a bank can use compliance with the commercially reasonable security procedure to determine
authenticity of a payment order, compliance with a commercially reasonable attribution
procedure should not only provide for attribution of a record to a party, but should also enable
the other party to determine that an authentication of the record has occurred.
The question remains, however, whether establishment of an authentication of a record
through compliance with a commercially reasonable attribution procedure also attributes the
record. If not, what is the significance of the authentication if the authentication of the record is
not also attributed to a party. But if so, what impact does that have on the requirements for
showing attribution.
In answer to this question, as mentioned above, the Official Comments to UCITA Section
108 state that this section “does not necessarily resolve the issue of to whom the authentication
is attributed.”83 Instead, the Official Comments state that UCITA Section 108 only addresses
whether an authentication occurred. However, it is questionable whether the occurrence of an
10
authentication, if based upon compliance with an attribution procedure, and the attribution that
logically follows the attribution procedure, can be separated in this manner.
If the answer to this question, contrary to the position of the Official Comments, is that
proof of the authentication of a record through compliance with a commercially reasonable
attribution procedure also establishes attribution, then this would appear to be a departure from
the analogous rule set forth in Uniform Commercial Code Section 4A-202(b). That section
requires a bank to both comply with a commercially reasonable security procedure and prove
that it accepted the payment order in good faith before the bank can attribute the payment order
to the customer and determine that an authentication of the payment order has occurred. Unlike
that section, UCITA Section 108(b) does not contain a good faith proof requirement for
accepting a record.
With regard to the good faith proof requirement, the Official Comments to UCITA
Section 213 suggest that in establishing attribution there may be a requirement for showing that
an attribution procedure was followed in good faith.84 However, UCITA Section 213 does not
contain an explicit good faith proof requirement. To the extent that there is an implicit good
faith proof requirement in UCITA Section 213 regarding what is necessary to establish
attribution, it is unclear whether this requirement is also implied for determining whether an
authentication has occurred through compliance with a commercially reasonable attribution
procedure pursuant to UCITA Section 108.
Special Procedural Rules
Special rules have also been drafted to govern the conduct of parties entering into
electronic contracts. These rules concern issues as diverse as timing of when an electronic
record is sent or received and how to deal with errors in the electronic message.
1.
Timing Issues
Timing address the issue of when a message or record is sent and received, and is
relevant to issues such as offer and acceptance. Related to timing is the place of sending and
receipt. UETA states that, unless otherwise agreed, an electronic record has been sent when the
following three things have occurred:
A.
The electronic record is properly addressed to the computer or information
processing system designated by the recipient and from which the recipient may retrieve
the electronic record.85
B.
The recipient’s designated computer or information processing system can
process the electronic record.86
C.
The electronic record (a) enters a computer or information processing
system outside of the sender’s control or (b) enters a region of the recipient’s designated
computer or information processing system.87
11
As for this third condition, the first alternative concerns electronic records sent from one
computer system to another, whereas the second concerns electronic records sent within the same
system (i.e., the sender and recipient each use the same ISP to retrieve e-mail communications).
Receipt occurs under UETA when the converse occurs.88 Furthermore, receipt occurs
“even if the place the information processing system is located is different from” the recipient’s
place of business.89 In addition, even though the receipt occurs elsewhere in such a situation,
receipt is deemed to occur at the recipient’s place of business, and the electronic record is
deemed to have been sent from the sender’s place of business, unless otherwise agreed.90 In
addition, receipt also occurs “even if no individual is aware of receipt”.91
UCITA concurs with this last rule, providing that “receipt of an electronic message is
effective when received even if no individual is aware of its receipt.92 This rejects the “mail
box” rule that a notice is effective upon dispatch, thus shifting the burden of effective delivery
from the recipient to the sender. Receipt means “being delivered to and available at a location or
system designated by agreement for that purpose.”93 If there is no agreement, then receipt
means:
coming into existence in an information processing system or at an address in that
system in a form capable of being processed by or perceived from a system of that
type by a recipient, if the recipient uses, or otherwise has designated or holds out,
that place or system for receipt of notices of the kind to be given and the sender
does not know that the notice cannot be accessed from that place.94
A final point on receipt that is raised by UCITA is that even though an electronic record is
effective because it has been received, “the receipt being effective does not create a presumption
that the message contains no errors, that its content is adequate or that it was sent by any
particular person.”95
2.
Electronic Errors
Electronic communications are more prone to changes or errors, both accidental and
intentional. UETA provides that if the parties have agreed to use a security procedure to detect
changes or errors and only one party conforms the procedure, that party may avoid the effect of
changed or erroneous electronic records if the other party would have discovered the change or
error had it to conformed.96 Similarly, UCITA provides that the parties may agree to an
attribution procedure that detects changes or errors (or one may be established by law), and if
one party, as a result of nonconformance, fails to detect a change or error, then the other party
may avoid the effect of the error or change absent an agreement between the parties to do
something different as a result of the noncompliance.97 Thus, UCITA gives a little more
flexibility to determine the impact of not following an attribution procedure intended to
determine changes or errors.
Both UETA and UCITA also provide some protection if there is an error resulting in an
automated transaction. UCITA Section 214 creates a statutory electronic error98 correction
procedure for a consumer that is meant to supplement the common law concept of mistake. This
section does not apply to transactions that do not involve consumers.99
12
UCITA Section 214(b) provides that in automated transactions a consumer is not bound
by an electronic message that the consumer did not intend and which was caused by an electronic
error, if the consumer,
(1)
promptly on learning of the error:
(A)
notifies the other party of the error, and
(B)
causes delivery to the other party or, pursuant to the reasonable
instructions received from the other party delivers to another person or
destroys all copies of the information; and
(2)
has not used, or received any benefit or value from, the information or
caused the information or benefit to be made available to a third party.100
UCITA Section 214(c) provides that if UCITA Section 214(b) does not apply, other law will
determine the effect of the error.101 Also, it should be noted that to the extent that parties to a
mixed transaction involving subject matter within the scope of UCITA choose, pursuant to
UCITA Section 104 to opt out of the applicability of UCITA, they may not alter the applicability
of UCITA Section 214.102
The rule in UETA is similar, but it applies to changes or errors which may occur in a
transmission between all types of parties, including not only consumers, but also commercial
parties.103 However, this rule applies only when dealing with an electronic agent, and then, only
“if the electronic agent did not provide for the prevention or correction of the error.”104 This
suggests that for any party that uses electronic agents to enter into transactions with humans, use
of such an error prevention or correction mechanism would be prudent as it would have the
effect of removing the ability of another party avoiding the effects of their errors.
3.
Notarization
Sometimes it is legally necessary to notarize or otherwise verify a signature or document.
If so, both UETA and E-SIGN provide that the notarization or other verification requirement is
satisfied so long as the person authorized to perform these acts attaches to or logically associates
with the signature or record being notarized, its electronic signature and all other information
required to be included.105
4.
Consumer Rules
California was the first state to enact UETA in 1999.106 However, the version of UETA
enacted in California was not uniform, and excepted from its application many consumer
protection statutes. As mentioned above, E-SIGN may preempt this version of UETA, and a
clean version of UETA has been introduced into the California State Senate to replace the
version on the books.107 In enacting E-SIGN and providing an exemption to its preemption only
for clean versions of UETA, although Congress limited the ability of a state to except consumer
protection statutes from the applicability of E-SIGN, Congress did add specific consumer
protection rules that must be adhered to when electronically contracting. Namely, E-SIGN
13
provides for consumer disclosures and consent if another law requires the provision of written
information to a consumer.108
E-SIGN Section 101(c) provides that an electronic record can only be used to make
information required by another law available to a consumer in certain circumstances.109 Those
circumstances are as follows.
A.
The consumer must have affirmatively consented.110
B.
Prior to giving its consent, the consumer is provided with a clear and
conspicuous statement that (i) informs the consumer of the right to receive paper,111 (ii)
informs the consumer of the right to revoke its consent,112 (iii) informs the consumer of
any conditions, consequences or fees in the event of withdrawal,113 (iv) informs the
consumer whether the consent applies only to the particular transaction that gives rise to
the obligation to provide the record, or to identify categories of records that may be made
available during the parties’ relationship,114 (v) describe the procedures for withdrawing
consent or updating contact information,115 and (v) informing the consumer how to obtain
a paper copy of an electronic record, including any cost.116
C.
Also prior to giving consent, the consumer is provided with a statement of
the hardware and software necessary to access and retain the electronic record, and the
consumer demonstrates its ability to access the information that is the subject of the
consent by giving its consent electronically.117
D.
If after consent is given, the hardware or software needed to access or
retain the electronic record is change, notice of the new required hardware or software
and an opportunity to withdraw consent without the imposition of fees or consequences
must be given to the consumer if the new hardware or software creates a material risk that
the consumer will not be able to access the electronic information.118
The failure to have the consumer demonstrate its ability to access the information by giving its
consent electronically does not, however, destroy the legal effect or validity of an electronic
contract.119 Furthermore, the withdrawal of consent does not affect the legal effect or validity of
contracts entered into prior to such withdrawal.120
Conclusion
Legislative efforts have gone a long way to remove statutory impediments to electronic
contracting by equating electronic records to paper documents. However, these efforts must be
met halfway by parties engaging in electronic commerce. These parties must understand the new
rules and effectively use the procedural tools provided to them to ensure that electronic contracts
are valid and enforceable. By doing so, they will ensure that their various interests will be
procedurally protected.
14
1
Uniform Electronic Transactions Act (1999), approved by NCCUSL at its Annual
Conference of July 23-30, 1999 (referred to in this paper as “UETA”). A copy of UETA is
available through http://www.law.upenn.edu/bll/ulc/ulc_frame.htm.
2
Uniform Computer Information Transactions Act (Last Revisions or Amendments
Completed Year 2000), approved by NCCUSL at its Annual Conference of July 28-August 4,
2000, as successor to the version approved by NCCUSL at its Annual Conference of July 23-30,
1999 (referred to in this paper as “UCITA”). A copy of UCITA is available through
http://www.law.upenn.edu/bll/ulc/ulc_frame.htm.
3
P.L. 106-229 – June 30, 2000, 15 U.S.C. 7001, et seq. (referred to in this paper as “E-
SIGN”).
4
Directive 1999/93/EC of the European Parliament and of the Council of 13 December
1999 on a Community framework for electronic signatures, Official Journal L 13, 19/1/2000
p. 12-20.
5
Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on
certain legal aspects of information society, in particular electronic commerce, in the Internal
Market (“Directive on electronic commerce”), Official Journal L 178, 17/07/2000 p. 1-16.
6
United Nations, UNCITRAL Model Law on Electronic Commerce 1996, with
additional article 5 bis as adopted in 1998, available at
http://www.uncitral.org/english/texts/electcom/ml-ec.htm.
7
E-SIGN Section 101(a), 15 U.S.C. 7001(a).
8
E-SIGN Section 103(a)(1), 15 U.S.C. 7003(a)(1).
9
E-SIGN Section 103(a)(2), 15 U.S.C. 7003(a)(2).
10
E-SIGN Section 103(a)(3), 15 U.S.C. 7003(a)(3).
11
E-SIGN Section 103(b)(1), 15 U.S.C. 7003(b)(1).
12
E-SIGN Section 103(b)(2)(A), 15 U.S.C. 7003(b)(2)(A).
13
E-SIGN Section 103(b)(2)(B), 15 U.S.C. 7003(b)(2)(B).
14
E-SIGN Section 103(b)(2)(C), 15 U.S.C. 7003(b)(2)(C).
15
E-SIGN Section 103(b)(2)(D), 15 U.S.C. 7003(b)(2)(D).
16
E-SIGN Section 103(b)(3), 15 U.S.C. 7003(b)(3).
17
E-SIGN Section 102(a)(1), 15 U.S.C. 7002(a)(1).
18
E-SIGN Section 102(a)(2)(A), 15 U.S.C. 7002(a)(2)(A).
15
19
E-SIGN Section 101(b)(2), 15 U.S.C. 7001(b)(2).
20
An “electronic agent” is defined in E-SIGN as “computer program or an electronic or
other automated means used independently to initiate an action or respond to electronic records
or performances in whole or in part without review or action by an individual at the time of the
action or response.” E-SIGN Section 106(3), 15 U.S.C. 7006(3).
21
E-SIGN Section 101(h), 15 U.S.C. 7001(h).
22
E-SIGN Section 101(e), 15 U.S.C. 7001(e).
23
E-SIGN Section 101(d)(1)(A), 15 U.S.C. 7001(d)(1)(A).
24
E-SIGN Section 101(d)(1)(B), 15 U.S.C. 7001(d)(1)(B).
25
E-SIGN Section 101(d)(2), 15 U.S.C. 7001(d)(2).
26
UETA Section 7(a).
27
UETA Section 7(b).
28
UETA Section 7(c).
29
UETA Section 7(d).
30
UETA Section 8(b).
31
E-SIGN Section 102(c), 15 U.S.C. 7002(c).
32
UETA Section 3(b)(1).
33
UETA Section 3(b)(2).
34
UETA Section 3(b)(3).
35
UETA Section 3(b)(4).
36
E-SIGN Section 102(a)(1), 15 U.S.C. 7002(a)(1).
37
UETA Section 5(a).
38
UETA Section 5(b). It should be noted that in the version of UETA enacted in
California, an agreement to deal electronically is insufficient to trigger UETA if made in a
standard form written contract whose primary purpose does not concern electronic transactions.
Cal. Civil Code § 1633.5(b). E-SIGN, however, may preempt California’s version of UETA.
Presently pending in the California State Senate is SB 97 (introduced January 18, 2001) which
would resolve any potential preemption problems and would rewrite section 1633.5(b) to make it
the same as UETA Section 5(b).
16
39
UETA Section 5(b).
40
See Official Comments to UETA Section 5.
41
Pursuant to E-SIGN Section 102(a)(1), UETA may modify E-SIGN Section 101, but if
UETA does not apply to a particular transaction because of the failure of parties to agree to deal
with each other electronically, the rules of E-SIGN may still be applicable to the transaction as
not being modified by UETA.
42
UETA Section 5(c).
43
UETA Section 5(c).
44
“Electronic agents” for purposes of UETA are essentially the same as for E-SIGN. See
UETA Section 2(6).
45
UETA Section 14(1).
46
UETA Section 14(2).
47
UETA Section 8(c).
48
UETA Section 12(a)(1).
49
UETA Section 12(a)(2).
50
UETA Section 12(c).
51
UETA Section 12(b).
52
UCITA Section 102(a)(11).
53
UCITA Section 102(a)(10).
54
UCITA Section 107(a).
55
UCITA Section 102(a)(6) defines “authenticate” as:
(A)
to sign; or
(B)
with the intent to sign a record, otherwise to execute or adopt an
electronic symbol, sound, message, or process referring to, attached to,
included in, or logically associated with, that record.
UETA does not define “sign” or “signature”. UETA Section 2(8) does, however, define
“electronic signature as “an electronic sound, symbol, or process attached to or logically
associated with a record and executed or adopted by a person with the intent to sign the record.”
17
Thus, although the wording of these definitions are slightly different, the terms “authenticate”
and “sign” are intended to mean the same things.
56
UCITA Section 107(b).
57
UCITA Section 206(a) (providing for formation of contracts through the interaction of
electronic agents) and UCITA Section 206(b) (providing for formation of contracts through the
interaction of a human and an electronic agent.)
58
UCITA Section 107(d).
59
UETA Section 9.
60
Official Comments to UETA Section 9, comment 1.
61
Official Comments to UETA Section 9, comment 2.
62
UCITA Section 206(a).
63
Official Comment to UCITA Section 201, comment 3(b).
64
Official Comment to UCITA Section 201, comment 3(b).
65
UETA Section 9(a).
66
UETA Section 1(14).
67
See Uniform Commercial Code Section 4A-201 which provides that a “security
procedure” is:
a procedure established by agreement of a customer and a receiving bank for the
purpose of (i) verifying that a payment order or communication amending or
canceling a payment order is that of the customer, or (ii) detecting error in the
transmission or the content of the payment order or communication. A security
procedure may require the use of algorithms or other codes, identifying words or
numbers, encryption, callback procedures, or similar security devices.
68
Official Comment to UETA Section 9, comment 4.
69
UCITA Section 212.
70
UCITA Section 212(1).
71
UCITA Section 212(2).
72
UCITA Section 212(1).
73
UCITA Section 213(b).
18
74
UCITA Section 213(a).
75
Official Comments to UCITA Section 213, comment 3.
76
UETA Section 9(b); UCITA Section 213(c).
77
UCITA Section 108(a).
78
UCITA Section 108(b).
79
Official Comment to UCITA Section 108, comment 3.
80
Uniform Commercial Code Section 4A-202(b).
81
Uniform Commercial Code Section 4A-202(b).
82
Official Comment to Uniform Commercial Code Section 4A-203, comment 5.
Although not relevant for purposes of this discussion, Uniform Commercial Code Section 4A203(a) provides exceptions to the rule set forth in Uniform Commercial Code Section 4A-202(b).
83
Official Comment to UCITA Section 108, comment 3.
84
See Official Comment to UCITA Section 213, comment 3.
85
UETA Section 15(a) (1).
86
UETA Section 15(a)(2).
87
UETA Section 15(a)(3).
88
UETA Section 15(b).
89
UETA Section 15(c).
90
UETA Section 15(d). If there is more than one place of business, “the place of
business . . . is the place having the closest relationship to the underlying transaction.” UETA
Section 15(d)(1). If there is no place of business, then the residence of the sender or recipient is
used. UETA Section 15(d)(2).
91
UETA Section 15(e).
92
UCITA Section 215(a).
93
UCITA Section 102(a)(53)(B)(ii).
94
UCITA Section 102(a)(53)(B)(ii)(II).
95
Official Comments to UCITA Section 215, comment 2.
19
96
UETA Section 10(a).
97
UCITA Section 213(d).
98
UCITA Section 214(a) provides that “electronic error means an error in an electronic
message created by a consumer using an information processing system if a reasonable method
to detect and correct or avoid the error is not provided.”
99
See Official Comments to UCITA Section 214, comment 4 which provides that
UCITA Section 214 does not apply “in transactions that do not involve consumers or where
consumers use electronic agents.”
100
UCITA Section 214(b).
101
UCITA Section 214(c).
102
UCITA Section 104(2)(A).
103
UETA Section 10(2).
104
UETA Section 10(2).
105
E-SIGN Section 101(g), 15 U.S.C. 7001(g); UETA Section 11.
106
Cal. Civil Code §§ 1633.1, ,et seq.
107
California Senate, SB97 (introduced January 18, 2001).
108
E-SIGN Section 101(c), 15 U.S.C. 7001(c).
109
E-SIGN Section 101(c)(1), 15 U.S.C. 7001(c)(1).
110
E-SIGN Section 101(c)(1)(A), 15 U.S.C. 7001(c)(1)(A).
111
E-SIGN Section 101(c)(1)(B)(i)(I), 15 U.S.C. 7001(c)(1)(B)(i)(I).
112
E-SIGN Section 101(c)(1)(B)(i)(II), 15 U.S.C. 7001(c)(1)(B)(i)(II).
113
E-SIGN Section 101(c)(1)(B)(i)(II), 15 U.S.C. 7001(c)(1)(B)(i)(II).
114
E-SIGN Section 101(c)(1)(B)(ii), 15 U.S.C. 7001(c)(1)(B)(ii).
115
E-SIGN Section 101(c)(1)(B)(iii), 15 U.S.C. 7001(c)(1)(B)(iii).
116
E-SIGN Section 101(c)(1)(B)(iv), 15 U.S.C. 7001(c)(1)(B)(iv).
117
E-SIGN Section 101(c)(1)(C), 15 U.S.C. 7001(c)(1)(C).
20
118
E-SIGN Section 101(c)(1)(D), 15 U.S.C. 7001(c)(1)(D).
119
E-SIGN Section 101(c)(3), 15 U.S.C. 7001(c)(3).
120
E-SIGN Section 101(c)(4), 15 U.S.C. 7001(c)(4).
21