Daily Development for Tuesday, November 28, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

STATUTE OF FRAUDS; ELECTRONIC TRANSACTIONS: Federal ESign legislation revokes Statute of Frauds with regard to electronic transactions.

Electronic Records in Global and National Commerce Act, S. 761 (106th Congress, 2000)

This act, popularly referred to as "ESign," in fact has as one of its primary purposes to repeal state law requirements for written instruments as they apply to electronic agreements. The operative language is quite clear and succinct:

"Notwithstanding any statute, regulation, or other rule of law [other than subsequent parts of this same statute], with respect to any transactions in or affecting interstate or foreign commerce

(1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form; and

(2) a contract relating to such transaction may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used in its formation.

The operative term, obviously, is "transaction." ESign provides a very broad definition:

"The term "transaction" means an action or set of actions relating to the conduct of a business, consumer or commercial affairs between two or more persons, including any of the following types of conduct

(A) the sale, lease, exchange, or other disposition of [personal property and intangibles] (B) the sale, lease, exchange or other disposition of any interest in real property, or any combination thereof. An initial reaction by many familiar with developments in electronic transactions don't find any of this too surprising. They anticipate a brave new world of encrypted signatures managed through elaborate codes, eyeball or DNA recognition, or other sophisticated recognition devices to insure the certainty of agreement that once might have been provided by personal witnesses, signatures, seals and notaries. In other words, one type of formality is replaced with another type. But, in its infinite wisdom, Congress is far, far, beyond this narrow view of transactions. Congress has provided that almost anything can be an electronic signature rendering a party bound to agreement. Here is the statutory language:

"The term "electronic signature" means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record."

That's it. So, for instance, if you sent me an email that said: "I'll buy your property at 450 W. Meyer in Chicago for $50,000, and I typed at the top of this message "OK" and hit "return," it's quite likely that we'd have a binding real estate contract. All you'd have to show is that the typing of the words "OK" indicated my intent to express agreement. The fact that I didn't even type out my name would not matter, since I "attached" an "electronic symbol" to a contract. The contract would still have to meet standards of clarity and certainty. And perhaps an exchange this informal would not meet those standards in some jurisdictions. But the point is that a relatively simple and perhaps thoughtless act arguably could result in the formation of a relatively serious contract.

Perhaps you're wondering whether a voice transmission over a telephone line is also an "electronic sound, symbol or process," taking telephone agreements out of the Statute of Frauds. ESign arguably exempts (at least in consumer agreements) telephone conversations from the impact of its preemptive approval of electronic agreements, but this is not all that clear. Here is the language, which applies only to consumer agreements:

"An oral communication or a recording of an oral communication shall not qualify as an electronic record for purposes of this subsection except as otherwise provided under applicable law."

First, we'd have to conclude that a telephonic communication is an "oral communication." We've got a fighting chance there. But then, note that the exemption language applies to "electronic records" which is a different concept from "electronic signature." What about agreements other than consumer agreements? Another ESign provision, of broader application, states that if an existing local law requires that an agreement be in writing, the enforceability of an electronic record of that agreement may be denied if the record is in a form that cannot be retained and accurately reproduced. Thus, arguably we could not negotiate a real estate agreement over the telephone that would be exempt from the Statute of Frauds unless that conversation was recorded in some way and could be reproduced. But does this provision also require that my telephonic assent to an agreement form sent to me by email or even in writing also be preserved in a reproducible fashion? Possibly.

Note that the Act only applies to transactions in "interstate commerce." But that email message, when it left my computer, conceivably bounced to Irkutsk, then to Geneva, then to Mexico City all on its way to your computer, even if your computer was located in the building next door to mine. Further, it was carried on a variety of communications media commonly association with interstate transactions. The likelihood is quite strong that even the current Supreme Court, with its reputed desire for narrowing the reach of the Interstate Commerce Clause, will have difficulty interpreting around the conclusion that email transactions are in interstate commerce. With respect to local telephone conversations, prior cases have held that telephone conversations are per se within interstate commerce as well, although this conclusion is one that the Supreme Court might change at some point.

It's not hard to argue that this is all exactly what Congress intended. But is it good policy?

The traditional Statute of Frauds has come to mean a requirement for formality in the "typical" real estate transaction (and, of course other important transactions as well). We all know that the requirements of the Statute can often be avoided, through the "part performance doctrine," or through the somewhat related concept of "estoppel." Further, in some cases parties relying upon the statute to avoid obligations have been held liable for fraud, even though they escape the transaction itself. But even though there are many exceptions to which lawyers might result in a pinch, the requirements of the Statute have resulted in standard practices by real estate transactions professionals to comply with the requirements and avoid problems. The result, many would argue, is that parties engaged in the serious business of transacting in real estate get the chance to "think twice" and study the instruments before they are finally bound.

It's that "think twice" aspect that the ESign legislation may take away.

Well advised parties have always been able to protect themselves from thoughtless acts by their agents or employees by setting up restrictions on the way in which they are bound to important contracts. There is nothing in ESign that prevents such practices. A company could, for instance, simply prohibit its employees from assenting to anything through email messages. It could provide notice in advance to its business associates that electronic transmissions cannot result in binding agreements. Such a notice, one hopes, would be binding upon any parties that do business with knowledge of it, since an electronic assent would not then be regarded as expressing an "intent to be bound." (A court, however, could find that the party supplying the warning had waived the restriction by the granting of oral assent notwithstanding the warning.)

But many real estate owners are not "well advised" at the time that they are in the throes of negotiating real estate deals. Lawyers know that all too often there is something on the table before the client shows up for legal advice. Frequently, the presence of the Statute of Frauds has protected such clients basically against themselves. If it's not in writing, it can always be changed to make a more comfortable agreement. Frequently, these situations arise when there has been no part performance or estoppel, and the parties can work out an agreement in a more formal negotiating environment.

Obviously, if ESign makes every telephonic exchange a binding agreement, notwithstanding the Statute of Frauds, this comfy "second chance" that generally is available today will be gone. But even if ESign does not apply to telephonic acceptances, its application to Internet agreements may raise many of the same problems. The fundamental policy question is whether an email exchange ought to be viewed as the equivalent of an exchange of written documents or as the equivalent of a telephone conversation. In the author's view, the Internet exchange falls in between, but in many cases fits closer to the telephone conversation. Remember that Internet exchanges now are carried out through hand held transmitters that "road warriors" bang on while walking through airports.

The best result we can hope for under ESign is that the affixation of a digitized signature or other formal identifier becomes the modern equivalent of the written instrument. As suggested, many who have observed the Internet in operation expect and believe that this will come to pass. The real question is whether ESign permits or even creates a legal context with that level of formality.

What actions or arguments might preserve under ESign the requirement of "electronic formality" that is the equivalent of the Statute of Frauds?

Probably the best legal argument is to claim that an assent expressed on an Internet message that is not a formal digitized signature does not embody an "intent to sign" even if it embodies an expression of agreement. Remember that an electronic signature is something that is attached "with the intent to sign the record." No legal authority on this point yet, and here's hoping that you, and not the author, are the first to make history by raising this argument. But it might work, particularly in contexts in which prior electronic commitments made by the signing party have been done through digitized signatures or other secure devices. Note further that the emphasis in ESign appears to be on the intent of the executing party, not on the apparent agreement as observed by the receiving party.

Another approach is to "repreempt" ESIGN. Section 102 of ESIGN states that a state "statute, regulation or other rule of law" may alter the impact of ESIGN, if such new adoption consists of the adoption of the Uniform Electronic Transactions Act or if it is a subsequent enactment that makes specific reference to ESIGN. So, although any existing formality requirements in state law are preempted to the extent they are inconsistent with ESIGN, new requirements could be established. The adoption of the Uniform Electronic Transactions Act wouldn't help much, since the operative provisions of that statute, such as the definition of "electronic record" and "electronic signature" basically are identical to the ESIGN language. The Uniform Act was in fact the model for ESIGN in this regard.

What about a new state law or regulation implementing the concept of the Statute of Frauds or some other formality requirement for binding real estate agreements? Section 102 does permit that, but requires that any such new law be consistent with the provisions of ESIGN. Consequently, electronic signatures or electronic contracts can't be denied enforceability completely.

Can the state impose a greater requirement of "electronic formality," however, such as a requirement that electronic real estate contracts not be binding in the absence of a digitized secure signature? Answer: Maybe, but only very carefully. The problem is that Section 102 also requires that any "readoption" of state standards must not "require or accord greater legal status or effect to . . . a specific technology or technical specification." The concern here was to prevent local law from inhibiting development of electronic transactions developments by creating monopolies for given technologies or even given proprietary systems. The target was legislation similar to Utah legislation that had adopted standards for electronic transactions that did incorporate ABA recommended guidelines for electronic signatures.

So a statute requiring specific technology is out. But what about the creation of a state administrative agency charged with the approval of systems that meet certain guidelines for formality, regardless of their technology? Will this work? Is it the imposition of a specific "technical specification," or simply the imposition of supervised "performance standards?" Watch for the lawsuit. But first, we'd have to get a state to move in this direction.

The ABA Section of Real Property, Probate & Trust Law has created a committee on electronic commerce that is evaluating this and other issues, and may propose state legislation of this type before too long.

In a recent interview with Pat Frey, who was the Reporter for the Uniform Electronic Transactions Act, and hence is quite familiar with the origins of the language in ESIGN, the author raised some of the questions discussed here. On the question of whether an electronic expression of agreement is different from an electronic signature (a possibility raised above), Pat responded that this was not the intent of the drafters of the definition of "electronic signature." No special formality was envisioned. As to the general notion of the meaning of the Statute of Frauds, Pat pointed out that the Statute of Frauds required a preservable and reproducible record a requirement also retained by ESIGN. (In her view the preservable and reproducible record would have to include the signature as well.) But as to the general requirement of formality imposed by the Statute of Frauds, Pat's view is that it never existed. After all, she points out, the Statute of Frauds would have upheld an agreement scribbled on a cocktail napkin so long as it was initialed. Is this really any different from writing "OK" in a response to an email message? Stay tuned.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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