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.
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