ON OCT. 1, 2000, the newly enacted Electronic Signatures and Global and National Commerce Act became effective. Under this new federal law, businesses, individuals and governmental bodies will be able to use electronic technology to form and sign contracts, to execute and deliver real estate deeds and leases and to send and receive many of the notices and disclosures required by various laws via electronic media. Most importantly, the act eliminates legal barriers to forming contracts online. Customers will be able to open accounts online, vendors will be able to agree to payment terms via e-mail and eventually borrowers will be able to execute online "transferable records," which will carry the same legal responsibilities as promissory notes.

To date, the tremendous surge in electronic commerce has been constrained by public uncertainty as to whether signatures delivered electronically may be enforced to the same extent as manual signatures, and if so, by the inability to predict how signatures deemed acceptable locally might be treated under the laws of other states. The E-Sign Act resolves these concerns by providing that to the extent a transaction occurs in interstate commerce, electronic signatures are to have the same legal effect as manual signatures, and by deeming those laws that require certain agreements to be in writing (e.g., the common law Statute of Frauds and certain consumer protection laws) be satisfied when the agreement is captured in a reliable electronic format. Looking to the future, electronic records and electronic signatures are defined broadly to include information delivered by optical cable or transmitted wirelessly utilizing infrared.

Prior to E-Sign, businesses attempting to enter into contracts online were required to deal with a mishmash of state electronic signature and electronic contract laws. These various state statutes attempted to deal with two principal issues. First, how may an individual's affirmation, such as his or her signature on a contract, be evidenced electronically? As a coded response, such as a password? Or as an encrypted message or document? If encrypted, how strong must the encryption be to reasonably qualify as an acceptable electronic signature? Secondly, every state has adopted a judicial policy that some contracts, by virtue of their nature and importance, must be in writing in order to be enforceable. By definition, these statutes of fraud laws prohibit the use of electronic contracts. What attributes must an electronic record possess in order to be deemed as reliable as a tangible document?

The Uniform Commercial Code has long held that a signature may be provided in ways beyond the manual signature provided by a person. A signature may be expressed by an "X," or through particular uses of a company's letterhead, or by a symbol, such as a logo or image, provided such markings are provided with the intent to authenticate a specific writing. Accordingly, it is not a particularly great leap from a legal perspective to accept a string of electronic bits as a signature. But states have traditionally differed on how those bits should be manifested.

Utah pioneered the practical use of electronic signatures by enacting its Digital Signature Act in 1995. Under the Utah scheme, an electronic signature was deemed legally effective as a signature provided that it was created using public/private asymmetric cryptography, also referred to as public key infrastructure or PKI. (Technically, only electronic signatures created by PKI are referred to as digital signatures. Statutes that refer to all electronic signatures broadly as digital signatures are imprecise.) On the one hand, PKI utilizes the most robust encryption, and the attendant protection from alteration, that is currently available. On the other hand, by tying electronic signatures exclusively to PKI, future technologies that may be equally effective or superior to PKI are discouraged. Additionally, PKI, by virtue of its structural complexity (e.g., public/private keys and perhaps certificating authorities, etc.) may be an overly cumbersome system for simple, minimal-dollar contracts.

After thoughtful consideration, California inaugurated a different approach to qualifying the means of providing an acceptable electronic signature. Rather than linking the acceptability of an electronic signature to an existing and proven technology, California proposed a system that established minimum performance standards expected of an electronic signature. Under the California system, an electronic signature would be deemed legally effective if demonstrated to be: (i) unique to person using it; (ii) capable of verification; (iii) under sole control of the person using it; and (iv) linked to the electronic record (contract or document) in such a way that a change to the record would invalidate the signature. Several states have subsequently adopted the California approach to electronic signature statutes - including New Hampshire, to the limited extent the state has legislated in the area of electronic signatures. There has been more support for the California approach because of the perception that further development of electronic signature technologies should continue to be encouraged and a recognition that, depending on the level of risk involved, electronic signatures could reasonably be provided utilizing a range of security regimes.

The United Nations Committee on International Trade Law (UNCITRAL) Uniform Rules on Electronic Signatures adopts a close variation of the California approach. (See Article 6: Compliance with a requirement for a signature.) In addition to the criteria identified under California's statute, Article 6(1) of the UNCITRAL Uniform Rules explicitly holds that in order to be effective, the method of providing the electronic signature must be as "appropriate for the purpose for which the data message was generated or communicated." This provision allows parties to use a sliding scale of formality based on a cost-benefit analysis of the transaction.

E-Sign and the Uniform Electronic Transactions Act (UETA), approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL), generally take a third approach. Like the California and New Hampshire line of statutes, E-Sign and UETA reject a legislative approach that favors a specific technology. But unlike the California line of statutes, as a general rule neither E-Sign nor UETA establishes a performance capability floor for acceptable electronic signatures, although under certain compelling conditions E-Sign permits Federal agencies to do so. E-Sign and UETA have adopted by implication what the UNCITRAL framers declared explicitly in the Uniform Rules: the means selected to provide an electronic signature should be appropriate to the message generated and the circumstances involved.

Enacted with the express intention of validating electronic signatures in order to shift more business activity online, the Act declines to establish a particular technological method of generating electronic signatures, but instead opts to enable businesses, their customers and suppliers to adopt those technologies which reasonably meet their mutual needs under the circumstances. As a result, a business may employ a generally secure procedure to form online sales contracts with customers if the value of the purchased goods is modest, but be expected to adopt more stringent procedures if significantly higher dollar amounts are involved.

While intended to promote increased online contracting, the E-Sign Act honors a principle throughout that online contracting shall not be made mandatory for any party. Governmental agencies - when not acting as a market participant - seem to be the lone exception to this rule. As written, the act implies that governmental agencies are required to use and accept electronic records or electronic signatures. Governmental agencies are authorized to specify performance standards for the electronic records submitted to, and retained by, an agency to assure such records' accuracy, integrity and accessibility. The act also allows governmental agencies to establish standards and formats for public submission of governmental filings. The act does not, however, attempt to dictate the technology necessary to create an electronic signature. Security protocols may be as simple as a password, or may utilize such new technologies as thumb print scanners.

The act authorizes businesses to deliver many of the notices and disclosures required by other laws electronically, provided the consumer has granted his or her prior consent to such delivery method. The general form the request for the consumer's consent must take is prescribed by the act, and involves affirmatively confirming that the consumer has the means, in terms of equipment and software, to receive and access the disclosures.

The E-Sign Act also makes clear that it has no effect on current consumer protection laws, other than those requiring paper delivery of notices and disclosures. As a result, existing consumer protection laws, particularly those establishing the content and timing of notices and disclosures and prohibiting fraud and deception, continue to apply with the same force.

The act also defines the applicability of electronic signature law to consumer transactions, preserving the substantive requirements of existing consumer law but authorizing the delivery of informational statements and notices by electronic means, provided the consumer consents to their receipt. The consumer's consent must demonstrate that the consumer has the means to receive the information, and may be withdrawn or limited by the consumer at any time.

Perhaps the act's most expansive step is the introduction of a new creature of electronic commerce called a "transferable record." Transferable records must be linked to secured real property loans, and are intended to be the online equivalent of paper promissory notes. Transferable records will bear many of the protections now available under UCC Article 3 Negotiable Instruments Law, such as the ability to acquire "holder-in-due-course" status. Utilizing transferable records, banks and mortgage lenders will encounter reduced costs in converting individual notes into securitized financial instruments.

The Act preempts virtually all of the states' existing electronic signature laws impacting interstate commerce, with a few limited exceptions. The legislation intentionally takes this extraordinary and controversial step as a means of establishing immediately a uniform approach to recognizing and construing electronic signatures and agreements. While states are free to legislate purely internal transactions conducted electronically, businesses are likely to resist adopting different standards for intrastate and interstate transactions. States may avert the consequences of E-Sign by adopting the proposed version of UETA promulgated by NCCUSL in July 1999. E-Sign also follows the UETA model and excludes non-commercial transactions, such as wills, adoptions, court filings, notices of termination and default, recall notices, hazardous material notices and bills of lading.

New Hampshire has proceeded cautiously in proposing electronic signature legislation. The existing New Hampshire Digital Signature Act (RSA 294-D) is limited in scope to apply exclusively to dealings involving state entities and agencies. In addition, the New Hampshire Digital Signature Act does not attempt to reach those laws requiring certain agreements to be in writing. As a result, New Hampshire law as currently constructed does not adequately address the legal barriers faced by businesses and consumers to the creation and signing of agreements and contracts online. The byproduct of New Hampshire's limited reach in this area, however, is the absence of any substantive conflicts with the newly enacted E-Sign Act.

While many of the benefits of the E-Sign Act are foreseeable, many of the opportunities the act will create are presently only at the edge of the imagination. Once the preponderance of commercial documents is maintained in electronic form, what becomes of the warehouses full of paper documents? Will businesses risk storing these electronic documents in only one location, or will they limit risk by maintaining several electronic repositories? What are the most developed and cost-effective technologies available to generate electronic signatures? In terms of costs and risk management, does the best corporate strategy require multiple levels of electronic signature technology? Whatever the answers, the act will certainly be a powerful fulcrum for hastening the transition of American business into the Electronic Age.

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