Digital Signatures Good from Arctic to Rio Grande

  • Written By: D. Geller
  • Published: July 10 2000

Digital Signatures Good from Arctic to Rio Grande
D. Geller - July 10, 2000

Event Summary

The Electronic Signatures in Global and National Commerce Act' passed by the U.S. Congress establishes that contracts may not be declared void solely on the grounds that they are recorded electronically or that they are signed or affirmed by an electronic signature.

The law applies only to contracts within the jurisdiction of the Congress, those involving interstate or foreign commerce. While contracts with individual states are subject only to state law, there is a body of laws, with titles like "Uniform Commercial Code" and "Uniform Electronic Transactions Act" that are worked out between the states and then generally adopted to assure that business rules stay largely the same from state to state. There is already a draft Uniform Electronic Transactions Act being developed by the National Conference Of Commissioners On Uniform State Laws

The newly passed Federal law contains a number of protections for those who retain their fondness for paper. All parties to a contract must agree to the use of electronic record or signatures; as we read the bill they are permitted to use e-mail to establish that agreement. In cases where a law requires that a paper document be provided to a consumer, the consumer must agree "by means of a consent that is conspicuous and visually separate from other terms" to the use of electronic records, and before giving consent must be presented with the hardware and software requirements for accessing the document.

Certain kinds of documents, including wills, living wills, and adoption and divorce documents are exempted from the law. Also exempted are notices of termination of utility services, cancellation of health or life insurance policies, and notices of loan defaults. The new law specifically makes electronic records and signatures legal for the purchase and sale of stock

The Canadian provincial governments are busy passing similar laws. Ontario's parliament will begin considering such a law, following in the steps of Saskatchewan and Manitoba, with Quebec reportedly next in line.

Market Impact

It must be noted that the new law does not specify which technologies would be acceptable, beyond leaving it to the parties of a contract to decide among themselves. In fact, the section on the application of the law to stock transactions specifically denies the Securities and Exchange Commission the ability to "discriminate in favor of or against a specific technology, method, or technique of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; or discriminate in favor of or against a specific type or size of entity engaged in the business of facilitating the use of electronic records or electronic signatures." The law thus leaves it open for the marketplace to develop secure and efficient methods for electronic record handling.

The immediate effect will be on companies already heavily involved in e-commerce, such as those using various kinds of trading exchanges. While CFO's will initially be leery of electronic contracts and signatures, they will soon be visited by a barrage of salespeople from companies like Verisign, and they will eventually change their minds.

Among those companies visiting will undoubtedly be a flock of startups, since the new law will certainly spur new technological approaches - or new ways to package older technologies - for recording and verification. Following upon their heels will be a new breed of consultants who offer to work with smaller companies to advise then as they enter into their first digital contracts; larger companies will be served by their traditional large consulting partners. In short, sit back and watch the creation of a new industry.

Consumers will by-and-large be more wary even than CFOs about electronic records; we think that they will be happier to provide electronic signatures than to accept them. On-line stock traders will be among the earliest adopters, but we suspect that most will require some kind of incentive from their on-line brokers - which is only fair since the brokers are the ones who stand to save from the reduction of paper flow.

User Recommendations

The question you must ask first is what happens when your electronic record differs from those in the hands of your contract partners? More than security, we think that the real concern is to protect documents from being changed. In particular, what happens when a contract that you have signed electronically is modified before being presented to a third party?

You would probably not be liable for any damages if someone else cooked the contract, but the results might nevertheless be disastrous for you. For example, now that architects can provide electronic drawings, they run the danger that a contractor will make changes before passing the documents to a subcontractor. Whatever the architects' liability, the end result might be a building that differs in look, function or quality from the one that their clients signed off on. This kind of thing is generally not good for business.

The IT executive may be put in a difficult position. Verification technologies are somewhat esoteric to begin with. Furthermore, the details of the use of electronic signatures will be worked out through court cases that probe and elucidate the details of the written law. Therefore choosing a technology to suit the business needs of the company and to provide appropriate protections is only partly technological in scope.

However, since the essential concept embodied in the law is so simple, perhaps it won't end up being a headache that involves the IT department with Finance, Legal, and other confused and angry executives. We can always hope.

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