E-Contracting: E-Contracting: The Basic RulesThe Basic Rules

Shawn E. TumaAttorney at Law

February 2, 2001

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MythsMyths

Internet contractingIs not

– Just for “.com” or “e-” businesses– Is not a revolutionary new area of law

Is– For every business– Simply a tool

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Why Are The “Rules” Why Are The “Rules” Important?Important?

We all know that contracts can be made verbally

Why should we worry about electronic contracts?

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Statute of FraudsStatute of Frauds

A writing is required for– Decedent estates– Answering for another’s debts– Real estate transactions– Agreements not performable within one year– Loan agreements– Investment securities

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Uniform Commercial CodeUniform Commercial Code

A writing is required for– Certain leases– Sale of goods in excess of $500– Transfer of personal property

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Prudence!Prudence!

Seriousness of client’s interests

Cost of our services

Professionalism

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Three GoalsThree Goals

1. Inform you of major bodies of law

2. Alert you to key issues

3. Encourage you to obtain these laws and use them as a reference

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Three Areas of CoverageThree Areas of Coverage

1. Sources of e-contracting laws

2. When the laws apply and the key provisions of the major laws

3. Effect of the laws on common issues

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Sources of LawSources of Law

Texas FederalProposed Uniform Laws

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TexasTexas

Texas LegislatureLittle opportunity to address most e-

commerce issuesShould be significant interest in e-

commerce issues this session– Proposed uniform laws– Substantial equivalent

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Texas has two different laws entitled “Digital Signature”

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Business & Commerce Code, section 2.108

– Documents with digital signatures are just as valid as documents with manual signatures

– A “digital signature” is “an electronic identifier intended by the person using it to have the same force and effect as the use of a manual signature”

– Bare minimum requirements

– Applies to the UCC

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Government Code, section 2054.060

– Allows digital signatures to be used in communicating with State governments and agencies, as long as the signatures meet certain requirements

– Guidelines for agency rules are more stringent, requiring true “digital signature” technology as Mr. Ward discussed

– Application is limited to contacts with State and local governments and agencies

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FederalFederal

Transactions Affecting Interstate or Foreign Commerce

– E-Sign

– Public Law Number 106-229; 114 Stat. 464 (June 30, 2000)

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Transactions Affecting Interstate or Transactions Affecting Interstate or Foreign Commerce (E-Sign)Foreign Commerce (E-Sign)

When does it apply?

– Effective date: October 1, 2000

– E-Sign applies to all transactions Affecting Interstate or Foreign Commerce

Commerce Clause is the limit

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Preemption

State law may preempt E-Sign if the state law Is an enactment of the UETA, or (1) Specifically addresses electronic records, (2) Is consistent with E-Sign, (3) Doesn’t favor any particular technology, and (4) Specifically refers to E-Sign if adopted

subsequently.

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Key provision

A contract can not be challenged solely because it is in electronic form, or because an electronic signature or record was used

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Consumer Disclosures

– Applies when required to make certain disclosures to consumers and making the disclosures available electronically

– Detailed and thorough list of rules and procedures that must be followed before the consumer can consent to electronic disclosures

Ensure consumers – Understand what they are doing– Are given an option

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Retention of Electronic Documents

– Electronic retention is acceptable if Accurate Accessible

– Applies to Contracts & Records Originals Checks Notarizations and verifications

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Electronic Agents

– Electronic agents are computer programs or systems “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.”

– A contract cannot be denied simply because an electronic agent was used.

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Exceptions to E-Sign

– Testamentary documents– The Uniform Commercial Code– State acting as market participant– Court documents– Cancellation of utility services– Consumer housing matters (i.e., default, acceleration,

repossession, foreclosure, eviction)– Cancellation of health and life insurance benefits– Product recalls

3 Year review of exceptions Possible administrative elimination

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Proposed Uniform LawsProposed Uniform Laws Uniform Electronic Transactions Act

– UETA Uniform Computer Information Transactions Act

– UCITA Drafted by the National Conference of

Commissioners on Uniform State Laws Each state must adopt

– Texas likely will– Treat as the law

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Uniform Electronic Uniform Electronic Transactions Act (UETA)Transactions Act (UETA)

When is it applicable?

– UETA “applies to electronic records and electronic signatures relating to a transaction.”

Very broad in scope Very similar to E-Sign

– Only if the parties agree to conduct transactions by electronic means

Agreement can be inferred from a person’s actions Consent can be revoked

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Exceptions

– Testamentary documents– Uniform Commercial Code

Except Sections 1-107 & 1-106, and Articles 2 & 2A, to which it does apply

– UCITA– Fewer exceptions than E-Sign

Real estate transactions– UETA applies the actual transaction process, but it does not

displace State recording laws Consumer protection

– UETA applies to many consumer but contains requirements that (1) give the consumer an option and (2) allow the consumer to understand his or her actions.

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Key Provisions

UETA is intended to facilitate the use of electronic signatures and records

A contract, record, or signature may not be denied legal effect or enforceability solely because it is in electronic form

“If a law requires a record to be in writing, an electronic record satisfies the law”

“If a law requires a signature, an electronic signature satisfies the law”

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Key Points

– UETA does not validate electronic contracts

– UETA does not require the use of electronic signatures or records

– Parties may alter the terms of UETA by agreement

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Limited Nature of UETA

– UETA does not affect other provisions of law

– Substantive laws governing the form and substance of contracts and records must be followed

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Attribution of Electronic Records and Signatures

Electronic records or signatures are attributable to a person if it resulted from that person’s action

“Electronic agents” actions are attributable to the “principal” and not legal effect on the basis that it was not an actual person

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Electronic Agents

– “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 of the agreements.”

– This is the very essence of “B2B e-Commerce”

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Time and Place of Sending and Receipt

– Electronic records are deemed sent upon dispatch, from the sender’s place of business

– Electronic records are deemed received when the recipient is first able to retrieve the electronic record

This effectively eliminates the “Mailbox Rule” discussed in the materials

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Effect of Change or Error

– The law of “mistake” is expressly made applicable with regard to electronic contracts

– When the parties agree to use security procedures (e.g., encryption technology) and a party fails to use the agreed procedure, the conforming party may avoid the mistake if the non-conforming party would have detected the mistake by using the procedure

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Notarization and Acknowledgment

– Electronic signatures may be used when the law requires a signature or record be notarized, acknowledged, verified, or made under oath

– All other requirements for these procedures must be followed

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Retention of Electronic Documents

– Electronic retention is acceptable if Accurate Accessible

– Applies to Contracts and records Originals Checks

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Admissibility of Electronic Records & Signatures

– “In a proceeding, evidence of a record or signature may not be excluded solely because it is in electronic form.”

– Very important should the validity of the contract be challenged in court

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Uniform Computer Information Uniform Computer Information Transactions Act (UCITA)Transactions Act (UCITA)

Generally

UCITA is highly specialized and detailed

UCITA is analogous to Articles 2 and 2A of the UCC (i.e., sale or lease of goods) for computer information transactions

Originally proposed as UCC Article 2B

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When does it apply?UCITA is limited to “computer information transactions”

“Computer information transaction” means an agreement or the performance of it to create, modify, transfer, or license computer information or informational rights in computer information.

“Computer information” is “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. The term includes a copy of the information and any documentation or packaging associated with the copy.”

UCITA does not apply simply because electronic communications or the Internet was used to complete the transaction.

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Three Very Basic Points

– Electronic records and signatures

– Electronic agents

– The Mailbox Rule is abandoned

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Mechanics of Creating Mechanics of Creating Enforceable Contracts Over Enforceable Contracts Over

the Internetthe Internet

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#1#1

Know and understand the traditional requirements for a contract

– Offer– Acceptance– Consideration– Intent to contract

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#2#2

Make sure – The object of the contract is legal– There is no fraud, mistake, or duress in the

execution True “digital signature” cryptology is very helpful

in preventing, detecting, and resolving such problems

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#3#3

Make sure all parties agree to contract electronically

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#4#4

Know the object of your agreement so as to determine which body of law applies

– Does that body of law have special requirements for electronic contracts?

– Does it have any “formal” requirements for the electronic contract to be valid?

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#5#5

Use a valid signature in “signing” the contract– Typically, any mark with the intent to form a

contract meets the minimum requirements– Prudence requires more because of the potential

for fraud or mistake Use true “digital signatures” with encryption

technology as discussed by Mr. Ward so as to ensure the integrity of the process

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#6#6Keep Accurate Records!Keep Accurate Records!

This is most important These laws do not validate electronic contracts They only prevent contracts from being

invalidated solely because they are electronic Electronic contracts can still be challenged in

court and when they are, your records will provide valuable evidence

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The Internet: Source for the The Internet: Source for the Laws and Acts DiscussedLaws and Acts Discussed

Texas Laws– http://www.capitol.state.tx.us/capitol.htm

E-Sign– http://thomas.loc.gov– Search for “S. 761”

UETA & UCITA– http://www.law.upenn.edu/bll/ulc/ulc_frame.ht

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Remember . . .Remember . . . Follow the six steps Refer to the source laws for specific questions and

issues Feel free to contact me with any questions:

– Shawn E. Tuma– http://www.e-lawcounselor.com– (214) 698-3854

The EndThe End