COVID-19 Driving Increased Use of Electronic Execution of Contracts

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Faegre Drinker Biddle & Reath LLP

Practical uses and demand for electronic signatures have become widespread in the United States in the two decades since Congress enacted the Electronic Signatures in Global and National Commerce Act (the E-SIGN Act) in 2000. More recently, the widespread outbreak of COVID-19 and the resulting mitigation and containment measures have caused some of the remaining holdouts to re-examine whether “wet ink” signatures or “paper originals” are required.

Electronic Signatures Usually Adequate

The good news is that U.S. federal and state laws permit most types of contracts to be executed electronically through one or more methods of creating an enforceable electronic signature (or e-signature), without any requirement to generate or retain a “wet ink” signature or a “paper original.”

The E-SIGN Act expressly authorizes the use of electronic signatures in interstate and foreign commerce (subject to certain exceptions, several of which are discussed below), and preempts state laws that purport to limit the use of electronic signatures in those contexts. In addition, all 50 states, as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands, have adopted legislation that authorizes the use of electronic signatures in interstate commerce. In most cases, these states and territories have adopted a form of the Uniform Electronic Transactions Act (UETA). Only Illinois, New York and Washington have adopted electronic signature legislation specific to their jurisdictions.

Together, these laws generally allow virtually any non-consumer corporate or commercial contracts between businesses to be executed using electronic signatures. Both the E-SIGN Act and state electronic signature laws include several exceptions (some of which are described below) and you should identify and evaluate the laws applicable to the execution and delivery of a particular contract to confirm their application to a particular transaction.

What does it take to properly execute a document electronically? Both the E-SIGN Act and the UETA define an electronic signature as any “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.” This is intentionally broad and is generally viewed to include sending a scanned PDF of a manual signature, using a stylus, mouse or finger to sign electronically, pasting in an image of a signature, typing in a “conformed” signature or sending an email confirmation. While the E-SIGN Act and the UETA do not dictate a particular type of technology to be utilized when obtaining electronic signatures, the following requirements must be satisfied:

  • Association: The electronic signature must be “attached to or logically associated with” the agreement being signed. This can be accomplished in many ways. The common practice of collecting labeled “broken off” signature pages executed separately by each party and compiling them together with the agreement as a fully executed copy, circulated to all parties, is generally viewed as satisfying this requirement. In general, regardless of the manner in which an electronic signature is obtained, heightened specificity in identifying the agreement associated with the electronic signature is recommended.
  • Attribution: The electronic signature must be “the act of the person” to whom the signature is attributable. Attribution can be evidenced in any manner and is generally determined from the context and surrounding circumstances. Many are comfortable relying on the course of dealings to provide such context when dealing with known, reputable counterparties and having direct contact with the applicable signatory. Depending on the significance of the underlying transaction, it may be prudent to retain records to support attribution (such as a copy of the email by which the signatory transmitted their counterpart signature page or by which counsel confirmed that the parties participated in a telephonic conference call and “released” their signatures) or to apply enhanced security procedures to definitively establish the electronic signature is attributable to the signatory. Most commercial services, such as DocuSign and Adobe Sign, can be configured to include varying levels of authentication, encryption and validation features that can build a record to support attribution. Similar to the association requirement, heightened specificity with regards to the identity of the signatory is recommended, especially for electronic signatures provided in the body of an email.
  • Intent: The electronic signature must have been executed or adopted with the intent to sign the agreement. This is usually established by context, but consider including language that clarifies the signatory’s intent to execute a particular agreement, or, in some cases, a particular version of an agreement. It is also wise to clearly memorialize the “release” of any electronic signatures that are held “in escrow.”
  • Consent: Parties to the contract must consent to the use of electronic signatures. Consent may be implicit and is usually readily apparent where parties mutually exchange electronic signatures. For the avoidance of doubt, parties may consider including “counterparts” language such as the following: “This agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This agreement may be executed electronically. Without limiting the generality of the foregoing, delivery of an executed signature page to this agreement (or any related agreement or instrument) by e-mail attachment, other means of electronic transmission with authorization to attach it to this agreement (or any related agreement or instrument), or any other means of electronic transmission used to obtain an electronic signature shall be deemed to have the same legal effect as delivery of an original signed copy.
  • Retention: Each counterparty must have the ability to accurately retain the document and the corresponding electronic signature. Again, promptly circulating fully executed PDFs that compile the agreement and various signatures generally satisfies this requirement.

What About Corporate Seals?

Some agreements have historically been executed “under seal.” More often than not this is simply an archaism — “worthless surplusage” that once held meaning under common law, but which now persists only as a matter of tradition or inertia. However, there actually are still some legal distinctions in certain states that favor execution of a contract under seal (also called a “deed” or “specialty contract”).

Regardless of whether a contract actually needs to be executed under seal or is effectively just using the seal as a decoration, an electronically applied seal is generally adequate. If a digital image of the seal is not readily available, courts in key jurisdictions have recognized that simply writing the word “SEAL” or the abbreviation “L.S.” (which stands for Locus Sigilli, Latin for “the place of the seal”) next to the signature has been adequate to create a sealed contract as long as the circumstances otherwise make clear the parties intended to treat the contract as executed under seal.

Remote Online Notarization

In general, notaries public are also allowed to apply their signature and seal electronically in the United States. However, the application of a notary’s signature and seal is only one part of the “notarial act.” Traditional laws also require an individual to appear personally before a notary public whenever the public notary performs a notarial act regarding a contract signed by that individual. The requirement for a personal appearance negates many of the benefits of electronic signatures. Additionally, regardless of the governing law included in the pertinent agreement, the law of the state in which the agreement is notarized governs the ability of the parties to utilize “remote online notarization.”

Fortunately, over the past few years, many states have adopted legislation expressly providing for remote online notarization. This allows certain notaries the use of communication technology, such as WebEx or Zoom, that enables the signatory and the notary to communicate via audio and video during the execution of a document together with identity-proofing technology as a substitute for the personal appearance requirement. The typical legislation authorizing remote online notarization comes with many technical requirements and caveats, including requirements that a notary public using remote online notarization must have first notified the commissioning agency, that the technology used comply with certain standards, that a recording be generated and that the certificate of notarial act indicate it was performed using communication technology. Many notaries choose not to satisfy these heightened requirements, but a variety of web-based services equipped to meet these standards make remote online notarization readily available for one-time or regular use.

Given the pervasiveness of social distancing guidelines throughout the United States, remote online notarization has become an increasingly effective way for signatories to legally obtain the signature of a notary in certain scenarios. As of April 2020, the following 23 states had adopted legislation related to remote online notarization:

Additionally, as of April 17, 2020, Alabama, Arkansas, Colorado, Connecticut, Illinois, Mississippi, Missouri, New Hampshire, New Mexico, New York, Pennsylvania, Rhode Island, West Virginia and Wyoming have authorized the emergency use of remote online notarization during the COVID-19 pandemic via executive order. Given the widespread attention that has been given to the notarization process during the COVID-19 pandemic, legislatures across the United States are likely to consider the adoption of remote online notarization legislation in the near future.

Regardless of whether remote online notarization is an option for your transaction, you may want to confirm whether notarization is really necessary at all. There are important reasons why some documents must or should be notarized, but in some circumstances, it may not be strictly necessary.

Some Caveats

Before finally banishing traditional execution methods, there are a few caveats that apply. The general observations in this article may not apply to your particular circumstances.

First, be sure that any existing contracts governing the situation don’t impose special requirements. For example, some of the long-standing open-ended indentures that many large companies use to issue debt securities from time to time impose particular formalities for instruments evidencing those securities.

Second, know that every electronic signature law specifies the circumstances in which it does and does not apply. Although most states have adopted a form of the UETA, the actual legislation is tailored to each state. Consult the law applicable to the execution and delivery of a particular contract to confirm it is within the scope of the applicable law. Exceptions to the availability of electronic signatures in certain jurisdictions include, among others:

  • Estate planning documents, such as wills and trusts
  • Family law documents
  • Consumer agreements and notices
  • Filings with courts or governmental agencies, including recorded real estate documents
  • Notices of utility termination, default or foreclosure under a mortgage or lease, termination of health or life insurance, or product recalls
  • UCC notices and disclosures (other than under Article 2 and 2A)

Third, consider the likelihood that your counterparty might challenge the validity of their electronic signature and balance security versus validity. The laws are flexible in allowing parties to use context and surrounding circumstances to prove association, attribution, intent, consent and retention, but using a robust solution that offers strong proof to easily satisfy a jury could spare you a messy, fact-intensive dispute. Consider also whether that proof will be there when you need it: For example, a cloud-based, third-party solution could become worthless if the provider goes out of business.

Lastly, although many jurisdictions outside the United States have similarly embraced electronic signatures, others have not. Consult with qualified counsel regarding any required formalities for contracts governed by foreign law or executed by foreign entities.

Conclusion

Fortunately, the validity of electronic signatures for most transactions is well established in the United States, allowing transactions to proceed efficiently even during unprecedented situations like the present COVID-19 pandemic.

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