REALTOR® Association Executive Magazine, Spring 2001

Legal Update:

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Electronic Signatures: As legal as pen on paper?

by Michael Thiel, NAR Legal Affairs

Many REALTOR® associations depend on the Internet to provide services to their members, but do they overlook it as a means for conducting their own business?

Up until recently, uncertainty about the effectiveness of electronic signatures has caused associations, like many other businesses, to shy away from doing business exclusively online. Would the courts give an electronic application for membership, for example, the same weight as the traditional pen and paper application? Would the courts recognize and enforce the application, which, once accepted, is much like a contract between the new member and the association, if it existed only in an electronic form? Electing to err on the side of caution, most associations have chosen to retain a pen and paper component for their commerce and other business of electronic origin.

Times may be changing. Both state and federal legislation is being approved to facilitate the use of the electronic signatures for the same purposes as pen and paper signatures. This has not, however, been accomplished in a single step. The legal process for recognizing electronic signatures has been developing over the last several years.

Traditionally, many types of transactions or agreements have been required to be in writing to be enforceable in the courts. This “statute of frauds” requirement, which dates back centuries, was intended to protect all parties by ensuring that only agreements entered into with the appropriate formalities would be given effect in the courts. Of course, a writing originally was done with a pen, but over time most courts have come to recognize telegrams and facsimiles as having the same effect.

Though these changes came about slowly without legislative involvement, Internet development has been rapid and its use in commerce fostered a need for certainty with regards to the effectiveness of the contracts created via the Internet. That could only be accomplished through the intervention of the legislatures. Thus, several years ago state legislatures began passing laws that recognized electronic signatures for specific types of transactions, often between the state government and individuals or businesses. These early laws proved the usefulness of electronic communications in creating agreements between parties, but they usually had a very narrow focus.

Recognizing the commercial value of electronic contracts, a few states then began to pass laws that generally accepted the validity of electronic signatures to formulate any type of contract. In some instances these laws went the next step, specifying the types of electronic signatures whose security features would cause them to be presumed valid and authentic. Such security features usually involved certain technologies ensuring both that the person whose electronic signature appeared in an agreement was the same person who put it there and that the agreement had not been altered since the time the electronic signature was first affixed.

The legislative acknowledgement of electronic signatures, however, was both slow and inconsistent among the states. This meant that Internet businesses had to deal with different laws in different states, and thus could be required to change how they did business depending on the state in which the customer lived.

To address these problems, the National Conference of Commissioners on Uniform State Laws developed the Uniform Electronic Transactions Act. This act had the advantage of uniformity but at the cost of some state-specific developments, including what constitutes an electronic signature, which had begun to appear in individual state laws. UETA also would take time for most states to adopt, and could be altered by states in the adoption process.

In response to this situation, the federal government adopted the Electronic Signatures in Global and National Commerce Act (E-Sign Act). This act, which was signed into law by President Clinton last year, said that the legal validity of any agreement regarding or involved in interstate commerce shall not be denied solely because it was signed with an electronic signature. Ironically, though the act was intended to facilitate the acceptance of electronic signatures, the president signed it with a pen as well as with his electronic signature.

The E-Sign Act signaled the government’s intent that agreements entered into with electronic signatures should be given the same respect as their traditional counterparts. It is important to understand, however, that the E-Sign Act only facilitates the use of electronic signatures in commerce. The act does not require the use of electronic signatures, nor does it allow any party to require another party to use an electronic signature.

Because an electronic signature can only be used where all parties have agreed to its use, it is probably impossible to adopt a policy of exclusively electronic agreements, particularly in the context of something like an association membership application. Some paper-based alternative may always be needed for those who do not want to use an electronic signature.

The E-Sign Act also says nothing about determining the validity of the signature or the authenticity of the agreement to which the signature is attached. Instead, the E-Sign Act intentionally took a step away from dictating the form electronic signatures should take, leaving that issue to be determined by the parties to the agreement. In fact, the federal law was intentionally so technology neutral that it preempted any state law that did establish technology standards for an electronic signatures even if those standards were intended to address the issues of validity and authenticity. Indeed, the E-Sign Act went on to preempt all state laws that were inconsistent with it and were not adoptions of UETA.

To ensure that consumers are not disadvantaged by the use of electronic signatures, the E-Sign Act also contains a number of safeguards, such as obtaining consent in a conspicuous manner, making access available to the consumer, and disclosing the hardware and software needed for that access. These safeguards may not all apply to the business-to-business environment of the REALTOR® association, but it may make sense to adopt them to ensure and demonstrate that the voluntary agreement to the use of electronic signatures was obtained from all parties. Although both the E-Sign Act and UETA require the consumer’s consent to the use of electronic signatures to form an agreement, only the E-Sign Act calls for such additional consumer notices and options.

For many businesses, of equal importance to the acceptability of electronic signatures will be the record retention provisions of the E-Sign Act. Much of the paper previously required to be retained by a host of laws and regulations, and that used to fill up file cabinets and storage lockers, will now be able to be stored on electronic media. The E-Sign Act allows that if the law requires a contract, agreement, or record to be in writing and retained, that requirement is met by retaining an electronic copy as long as the electronic record accurately reflects the information and remains accessible for the period required by the law for later reference, transmission, and printing.

As REALTOR® associations broaden the areas they serve, physical contact with new or prospective members may be decreasing. One way of dealing with this may be through the use of electronically-signed documents such as member applications. However, associations thinking about using electronic applications and other documents should work with their legal counsel to ensure that the results will actually accomplish their goals.

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