Electronic Signatures in the Age of COVID-19

The outbreak of the coronavirus (COVID-19), with its social distancing and remote work protocols, has brought renewed focus on the execution of transactional documentation without the traditional inked (wet) signature. Electronic signatures, broadly defined, are generally a valid, statutorily grounded means for creating a contract. Nothing about that has changed during the COVID-19 pandemic. The unprecedented circumstances of the pending health crisis, however, with its forced separation in the conduct of routine transactional activity, provide a good opportunity to review the bases, scope and limitations of e-sign practices. It also presents a convenient time for some observations on the practicalities of electronic signature.

What Are the Statutory Bases for E-Sign?

E-sign is now 20 years old. In 2000, Congress passed the Electronic Signatures in Global and National Commerce (E-SIGN) Act, which states that “a signature, contract, or other record relating to [any transaction in or affecting interstate commerce] may not be denied legal effect, validity, or enforceability solely because it is in electronic form.”^[i] In practice, the E-SIGN Act defers to the states to establish their own statutory framework for the validity of e-signatures, so long as the state statutes do not contravene the federal legislation.^[ii]

Forty-seven states and the District of Columbia have adopted the Uniform Electronic Transactions Act (UETA) as their electronic signature statute. The remaining states — Illinois, New York and Washington — have adopted their own legislation. The New York statute is referred to as the Electronic Signatures and Records Act (ESRA). UETA and ESRA are somewhat broader than E-SIGN, in that they go beyond interstate commerce transactions,^[iii] but there is not much difference of practical import among the three statutes. Individually and collectively, they provide a firm statutory basis for the validity of electronic signatures in transactional agreements and related documentation.

What Constitutes an Electronic Signature?

The e-sign statutes broadly define electronic signatures. Authorized e-signatures run the gamut, and include signatures exchanged in portable document format (PDF) and those created by increasingly sophisticated digital and electronic algorithms or devices. For example, New York’s Office of Information Technology, which is charged with implementing ESRA, enumerates the following varieties of electronic signatures:^[iv]

• Click through or click wrap;
• Personal identification number or password;
• Digitized signatures (a graphical image of a handwritten signature);
• S-signatures (a signature inserted between forward slash marks (i.e., /s/);
• Signature dynamics (a metric created by each pen stroke’s duration, pen pressure, size of loops, etc.);
• Biometrics (digital form of a signer’s physical characteristics, including voice patterns, fingerprints, face recognition, DNA, palm print, gait analysis, hand geometry, and retinal and iris recognition);
• Shared private key (symmetric) cryptography (using a one-time password token, e.g., RSA SecureID, as an authentication mechanism);
• Public/private key or asymmetric cryptography — digital signatures (private/public key authentication); and
• Microchip devices (authentication technologies using a smart card, a USB drive, a watch or a phone).

What Are the Conditions for Validity of an Electronic Signature?

Generally, the e-sign statutes prescribe four conditions for the validity of an electronic signature:^{[v],[vi],[vii]}

Intent to sign

Electronic signatures are valid only if a signer demonstrates a clear intent to sign. For example, using a mouse to draw signatures, typing signatories’ names or clicking a “Click to Sign” button that is clearly labeled provide an indication of intent to sign.

Consent to do transactions electronically

The respective parties must consent to conduct the transaction electronically. It may be safest to embed the consent in the transaction documents themselves, as, for example, where the documents provide for exchange of signature by PDF. But the consent need not be expressed and can be implied by circumstances, including the parties’ conduct.^[viii] A clear and perhaps the most common instance of implied consent arises where the parties simply exchange electronically signed documents.

Association of signature with the record

The electronic signature needs to be affixed to, or connected with, the document being executed, and maintained during transmission and storage. For example, PDF copies of signature pages may be attached to the compiled agreement. More sophisticated arrangements for electronically imprinting signatures with the accompanying documents can be found in commercial digital signature programs.^[ix]

Record retention

Electronic signature records must be capable of retention and accurate reproduction.

What Documents Cannot Be Executed With E-Signature?

Certain documents, including some that may form part of a suite of transactional documents, are outside the scope of the e-sign statutes. These include, among others, promissory notes and other negotiable instruments, stock certificates and other possessory collateral, and mortgages.^[x]

While not relevant to transactional practice, it should be noted that documents such as wills, trusts, powers of attorney and other documents relating to the disposition of an individual’s property and designation of a personal fiduciary (for example, a healthcare proxy) also require wet signatures.^[xi]

Practical Pointers and Takeaways

Express authorization of electronic signatures. It is becoming common practice for transactional agreements to include a section among their “miscellaneous” provisions that states that the parties may execute the documentation in PDF format. While, as noted, consent to electronic signature may be implied, there is no reason not to make express provision for electronic signature. Moreover, the referenced means of electronic signature can go beyond PDF to include other statutorily compliant e-sign methods.

Where there is no need for wet signatures. In circumstances where the parties have consented to the use of electronic signatures, and where the particular document is not excepted from the relevant e-sign statute, there is no need to require or archive wet signatures. The older procedure of supplementing a PDF signature with a distribution of wet signature pages, often with multiple copies, is unnecessary and may be discontinued.^[xii]

Where a party does not consent to electronic signatures. The e-sign statutes permit, but do not require, a transaction to utilize electronic signatures.^[xiii] A party cannot be compelled to accept an electronic signature and can insist on a wet version. In fact, certain financial institutions continue to insist on wet signatures, particularly in lending transactions.

Authorizing another person to affix an electronic signature. There would appear to be no reason why one person could not authorize another to affix an electronic signature on his or her behalf. For example, an executive might direct an assistant to insert an s-signature (/s/) into a document or imprint a signature page sent via PDF with a stamped facsimile of the executive’s signature. The e-sign statutes do not expressly address signature by delegation. However, if there exists a demonstrated intent of the executive to sign, the signature should satisfy the enforceability criteria of the e-sign statutes.^[xiv] In such a case, it would be advisable to memorialize the executing person’s direction to sign, such as through an email or voicemail that can be stored and retrieved.

Signature by email. Although not widely employed, an email may function as an electronic signature, assuming the enforceability criteria are satisfied. In particular, the email must be associated with the document being executed, with which it must be stored and retrieved. (A voicemail might also serve this purpose, although associating it with the relevant document might prove challenging.)

Digital signature programs. The marketplace is replete with a variety of digital signature programs, including DocuSign, Eversign and PandaDoc. These programs offer audit trails and authentication features that comfortably comply with the requirements of the e-sign statutory framework. Their widespread introduction into the world of complex commercial transactions has yet to occur, however.

Ancillary documentation. The suite of documents that memorializes a transaction will typically include a variety of ancillary documents, such as certificates and consents. Assuming the e-sign enforceability criteria are satisfied, these may also be executed using electronic signature.

Negotiable instruments. As noted, negotiable instruments, such as promissory notes, and possessory collateral, such as stock certificates, continue to require wet signatures. The secure preservation of these originals, so that they may be located and retrieved when necessary, requires special attention in circumstances where the majority of the executed documentation may be stored electronically.

Legal challenge. Electronic signatures are subject to legal challenges on the same grounds as wet signatures, including forgery, mistake and duress, which may be introduced to rebut the attribution and validity of electronic signatures.^[xv]

Cybersecurity. Like all other communications over the internet, the exchange of e-signatures is vulnerable to cyberattack. This includes situations in which hackers insert themselves between two parties in a seemingly legitimate transaction or relationship and divert resources or funds elsewhere. It is unlikely that parties in a complex commercial transaction who are in constant communication would experience their documents being secretly hijacked. However, depending on the risk of interference, limited transactional exchanges might warrant more sophisticated forms of electronic signature programs, such as those with audit trails and security features, or that provide for other confirmatory methods. 

Transnational contracts. E-SIGN, UETA and ESRA are domestic U.S. statutes. In cross-border transactions, the parties must also concern themselves with laws governing electronic signatures of the jurisdictions in which their counterparties reside, which could govern the validity of the electronic execution of documentation.

Other statutes. E-SIGN, UETA and ESRA are of general applicability to transactional documentation. But there are additional and specifically targeted statutes that govern electronic signatures in certain circumstances. For example, the Delaware General Corporation Law allows a signature on any instrument authorized to be filed with the Delaware Secretary of State to be “a facsimile, a conformed signature or an electronically transmitted signature.”^[xvi]

Conclusion

Electronic signature, which first came about at the beginning of the 21st century, takes on renewed significance in the context of COVID-19, when transaction participants are acting remotely and without customary administrative and functional support. Cell phones may have to function as scanners; tablets and styluses may replace paper and pen; and digital signature programs that substitute the click of a mouse for a graphic John Hancock may expand in transactional practice. The existing federal and state statutory framework provides a solid basis for utilizing and relying upon the exchange of PDF signature pages and other modalities of e-signatures in these unprecedented times.

^{[i] 15 U.S.C. § 7001(a)(1). At the end of 2018, Congress enacted the 21st Century Integrated Digital Experience Act. Among its provisions is one that required federal agencies to submit to the Office of Management and Budget and to Congress plans to accelerate the use of electronic signatures under the standards of the E-SIGN Act.}

^{[ii] 15 U.S.C. § 7002(a)(1).}

^{[iii] Unif. Elec. Transactions Act § 5(b).}

^{[iv] N.Y. Info. Tech., NYS-G04-001, IT Guideline: Electronic Signatures and Records Act, 9-13, available at https://its.ny.gov/sites/default/files/documents/nys-g04-001_electronic_signatures_and_records_act_ersa_guidelines.pdf}

^{[v] 15 U.S.C. § 7006(5).}

^{[vi] Unif. Elec. Transactions Act § 2(8).}

^{[vii] N.Y. Tech. Law § 302(3).}

^{[viii] Unif. Elec. Transactions Act § 5(b).}

^{[ix] N.Y. Info. Tech., NYS-G04-001, IT Guideline: Electronic Signatures and Records Act, 7, available at https://its.ny.gov/sites/default/files/documents/nys-g04-001_electronic_signatures_and_records_act_ersa_guidelines.pdf}

^{[x] N.Y. Tech. Law § 307(2).}

^{[xi] N.Y. Tech. Law § 307(1).}

^{[xii] One set of commentators, however, has expressed the view that in certain circumstances it may be advisable to obtain wet signatures where there might be a challenge to the authenticity of electronic signatures. See A. Ennis and C. Green, ABA Practice Pointers, Electronic Signatures: Not So Fast (12/17/19). The concern appears to be with digital signatures rather than PDFs. Moreover, a challenge to the authenticity of a digital signature in heavily negotiated M&A or financial transactions is unlikely.}

^{[xiii] N.Y. Tech. Law § 309; Unif. Elec. Transactions Act § 5(c).}

^{[xiv] Unif. Elec. Transactions Act § 9(a).}

^{[xv] See for example the discussion of IO Moonwalkers, Inc. v. Banc of America Merchant Services, 814 S.E.2d 583 (N.C. App. 2018) in the article cited in note xii above.}

^{[xvi] DGCL § 103(h).}