Rise and Risques of Electronic Signatures and Records

Rise and Risques of Electronic Signatures and Records

Although pen-and-paper contracts are not extinct, the pandemic has encouraged the shift to electronic-only business transactions.

Many businesses have had to adapt to remote working environments due to the COVID-19 pandemic. This has made it difficult to use traditional transaction formats such as paper contracts.

While pen-and-paper contracts may not be extinct, the pandemic accelerated the shift to electronic-only business transactions. Business lawyers and businesses must develop procedures and practices to navigate the new virtual world.

This article will discuss the laws that govern electronic signatures and records, as well as the challenges they present and the best practices.

The applicable laws

The legal environment for electronic signatures and records is governed by two main laws: the Federal Electronic Signatures in Global and National Commerce Act, (E-Sign), and the Uniform Electronic Transactions Act, (UETA). Both laws were created to promote and enforce electronic commerce transactions' validity.

E-Sign, UETA and other electronic signatures remove any barriers to electronic commerce. They ensure that electronic records and signatures have equal legal effect as paper records or manually signed signatures.

E-Sign

E-Sign is a system that validates electronic signatures and contracts for transactions in or affecting foreign or interstate commerce. This Act allows electronic records to be created if the parties agree to use electronic methods to comply with any statute or law that requires written records.

E-Sign is not applicable to transactions or records that are governed under:

  • A statute, regulation, rule, or order governing testamentary trusts, codicils or wills.
  • A statute, regulation, and/or rule that governs family law, adoption, divorce, and other related matters.
  • The Uniform Commercial Code (UCC) is the only exception to Section 1-107, which governs waiver of claims after breaches, Section 1-206, which governs statute of frauds for personal properties, and Articles 2a and 2A, which govern sales and leases.

E-Sign is not applicable to:

  • Court orders, notices and other official documents are required for court proceedings.
  • Any notice of:
    • The cancellation or termination of utility services
    • In default, acceleration, repossession or foreclosure, or the right of cure under a credit agreement secured or a rental agreement, for a primary residence.
    • The cancellation or termination or both of your benefits or life insurance;
    • Recall of a product or material failure of a product that could endanger safety or health;
    • Any document that is required to be included in any transport or handling of dangerous or hazardous materials, pesticides or other toxic or harmful materials.

There is a preemption provision that allows the state to amend and supersede E-Sign's basic provisions through the enactment UETA.

UETA

UETA was approved by the National Conference of Commissioners on Unified State Laws (NCCUSL). It was also endorsed by Congress and recommended to states for enactment. UETA was created to promote uniformity between states in electronic transaction laws. It has been adopted by most states, including Wisconsin.

This Act covers transactions that relate to business, commercial, or governmental matters. It authorizes electronic signatures and records between parties who have agreed to transact electronically. E-Sign is not affected by most of the above-mentioned prohibited records.

Wisconsin Law

Wisconsin adopted UETA in 2003, with minor changes that were not substantial. An electronic contract, record, or signature can't be denied legal effect and enforceability simply because it's in electronic format.7 Electronic records can satisfy the requirement that the record must be written. A binding contract can only be made electronically if it is not otherwise valid.

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To make the law apply, certain conditions must be met:

  • Electronic transactions must be agreed upon by the parties. It is best to indicate in writing that the parties intend to execute the transaction.
  • At the time of receipt, the electronic record must be able to be retained by the recipient.

This law covers a large number of electronic records as well as transactions. There are however certain transactions and records that do not allow electronic formats. Wisconsin law prohibits the use of electronic formats for the same transactions.

Remote Notarization

Notarization is required for many transactions. Historically, documents must be signed in person by a notary.

The pandemic clearly impacted the ability to meet in-person notarization requirements. This urgently required the creation of a virtual notarization option. Wisconsin now allows digital notarization of documents if the signer uses an electronically signed signature and appears in front of a notary using audio/video technology.

Wisconsin's 2019 Wisconsin Act 125 was passed in March 2020 to allow remote notarization. To execute the document, the new law doesn't require that the notary must be present with the signatory. Act 125 provides that the notary must be present with the signatory to execute the document.

Remotely located individuals may comply with s.140.06 (the law requiring the individual to sign a signature in order to appear personally before a notarial officer). This can be done by using communication technology to appear prior to a notary public.

Although it is now easier and more convenient for you to execute transactions, some transactions still need to be notarized in person. These include the creation and execution:

  • Wills, testamentary trusts or codicils;
  • Living trusts and trust amendments are for personal use only
  • Powers of attorney
  • Marital property agreements;
  • Powers of attorney for healthcare, declarations to doctors (or living wills), authorizations for the use and disclosure protected health information.

If all the following are true, a notarial act involving communication technology to locate a remote individual is permissible

  • Wis. Stat. 140.07(1) and 140.07(2) require that the notary public identify remote individuals. Sections 140.07(1) & 140.07(2).
  • The notary public can confirm that the record is still valid after the signature was signed by the remote individual;
  • The notary public records the performance of the notarial act.

The Wisconsin Department of Financial Institutions is responsible to promulgate the rules that govern the execution of notarial acts.

Challenges

Although electronic signatures and contracts are legally binding and can be challenged, they can still not be invalidated. Although technology has made it easier to conduct transactions, there are still concerns about their validity, authenticity, or fraud.

How can you make sure that the electronic signature is linked to the electronic record?

There is no guidance in the law as to what platform or format to use for electronic signatures. It is important to confirm that the signatory is the person who signed the document. If the counterparty denies it signed the document, the other party will need evidence that the signature is valid and attribute it to the signatory. In the event of a challenge to the electronic signature, it is important that there is admissible evidence.

eSignly offer electronic signature services that allow you to collect signatures and attach them to documents. They also provide a digital audit trail, time stamp and time stamp for each signature, which demonstrates the chain of custody. These services collect information such as IP addresses and the history of document activity (such as viewing and printing, sending and signing) and also provide a digital audit trail and time stamp to prove that the electronic record is in the right hands. These data make it easier to verify signature authenticity.

It is important for businesses to establish a procedure to trace the signature back to the signer. Signatory should know about the pending signature request, what format it is expected to arrive in, and the relationship between electronic record and signature.

To increase security and prevent tampering, you can provide an authentication code or text or email verification, personalized questions, or any other form of identification to verify the information.

Security measures that are more robust will reduce disputes over signatures or document tampering.

Best Practices

Although electronic contracting can be cost-effective and efficient, it is still a practice that has not been fully tested by the courts.

While electronic communications can create binding contracts in many forms, practitioners should be cautious and use accepted methods of electronic contracting, especially for important transactions.

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It is important that you confirm that the law allows the transaction or legal instrument to take place electronically.

Both parties must consent to the use of electronic signatures and agree to keep an electronic record. It is best for the parties to sign a written agreement to the electronic contract.

Finally, confirm the preferred method of exchanging electronic signatures. The signatures are attached to the record or document and associated with it.