Electronic Contracts and Signatures Are Here -- An Overview
© 2001 Gorman & Williams

by:

Francis J. Gorman
Gorman & Williams
FJGorman@gandwlaw.com
www.gandwlaw.com
Phone: 410-528-0600 (Baltimore)
202-628-0564 (Washington)
Fax:   410-528-0602 (Baltimore)

     The days of paper contracts and ink signatures are waning.  Many of us have already entered the world of electronic contracts by purchasing books online and clicking “I agree” to the terms of a software license.

     But technology and law are rapidly enabling more complicated transactions to be done with electronic contracts and signatures.  For centuries, the Statute of Frauds and other laws have required many contracts to be signed in writing.  Technology is changing all of this.  Computers and software programs have spawned digital data over the Internet.  We have moved far beyond e-mail into electronic contracting and business on the world wide web.  In 2000, Congress passed the Electronic Signatures in Global and National Commerce Act (E-SIGN), and most states passed their own legislation, to make electronic contracts and signatures as valid as paper and ink contracts.

     There are a growing number of electronic transactions today. The bank recognizes the combination of the number on your ATM card and your PIN as an electronic signature.  When logging onto a web site, the combination of your user name and password is an electronic identification.

     What about more sophisticated transactions?  Would you buy a house and take on a mortgage loan without any paper and ink documents?  Technology has provided the tools for this kind of electronic transaction.  Using unique numerical sequences, we can create electronic signatures to authorize transactions.  Digital signatures provide a higher degree of security than electronic signatures by using data encryption or biometric and voice recognition technology. 

     Real estate sales and mortgage loans are now happening online.  The real estate industry successfully lobbied Congress last year to make sure that the federal E-SIGN legislation would permit electronic notes and mortgages in real estate transactions.  To enforce rights under electronic negotiable documents (called “transferable records”), the holder must show the existence of a secure system that tracks the issuance and transfer of the document and can produce a single, unique, identifiable, and unalterable copy.  The holder must also establish that access to the document is restricted.

     Software engineers are designing sophisticated encryption programs usable in everyday life.  The most popular encryption methods are two-key systems called “public key infrastructures” (PKI).  In a nutshell, the creator and/or sender of a document encrypts the data with one key so that it can only be “unscrambled” by the intended receiver who holds the second key.

     Some caution is justified in the trend to electronic contracts and signatures. For example, these laws do not currently permit electronic contracts or signatures in matters of adoption and divorce, wills, the checks you write, court filings, notices terminating your utilities or insurance policies, or product recalls.  Some day, these transactions will also be electronic.

     So is it goodbye to paper and ink?  Not really.  The comfort level with paper documents and  handwritten signatures will be hard to replace.  Nevertheless, for many of life’s  transactions, more electronic documents and signatures are coming.

Mr. Gorman spoke on the topic of electronic contracts and signatures in the Spring, 2001 Gorman & Williams seminar series.