1. Legality of Electronic Signatures and Contracts
2. Digital Signatures
3. Opting Out of Electronic Contracts
4. How to Create an Electronic Contract
5. Warnings

Electronic contracts are used when both parties use the Internet as a medium. While this has the advantage of being able to be done in seconds, it is easier to make mistakes. For example, in 2002, Eastman Kodak accidentally placed a camera on its UK website for sale at L100 instead of L329 and were hit with thousands of orders. They initially refused to honor the orders, stating that the orders were bids and that trade on the Internet was a gray area. However, they were eventually forced to fill the online contracts at great expense.

Legality of Electronic Signatures and Contracts

E-commerce has grown rapidly and the total American e-commerce market is between $100 to $130 billion and growing. Electronic signatures and electronic contracts are as legally binding as a pen-and-ink contract. Federal legislation passed the Electronic Signatures in Global and International Commerce Act (ESGICA) in 2000, removing most of the uncertainty around the legality of electronic contracts.

The law technically states that electronic signatures are valid as long as both parties agree to that method of signing the contract. This can result in substantial savings for both businesses and customers. A common form of electronic contract is a customer clicking an "I Agree" box online.

Since a traditional signature in ink is not possible, there are multiple ways to indicate acceptance online. Customers can type their name into the signature box, paste a scanned copy of their signature, or use "scrambling" technology. As a general rule, "digital signature" is used for cryptographic signing and "electronic signature" is used for other methods of online signing.

Digital Signatures

Cryptographic signing is done by scrambling and then unscrambling the signature to keep it secure. The most favored method is the Public Key Infrastructure method, or PKI, which uses an algorithm to scramble documents so only authorized parties can access them. This prevents fraudulent signatures. It is similar to a PIN for a bank card.  PKI technology has become widely accepted since ESGICA's passage.

There are many other electronic signature systems, such as:

  • Scanning and recording a fingerprint,
  • Using hardware that records signatures electronically. 
  • The Worldwide Web Consortium (W3C), the organization that sets Internet standards, has developed XML-compliant guidelines governing digital signatures.

Opting Out of Electronic Contracts

While electronic contracts are becoming more popular, there is an option to opt out and use paper. A business must inform customers prior to signing if paper contracts are available and that if they change their minds after signing, they can use a paper contract instead of an electronic contract.

They must also detail any fees for using paper, and the business must state whether the customer's consent is to the particular transaction or open-ended. This is a disadvantage for customers who are not techno-savvy.

The business must also list what hardware and software are necessary to read the electronic contracts as well as save them. If these requirements change, the business must notify customers and allow them to revoke their consent to use an electronic contract and change to a paper one for free.

How to Create an Electronic Contract

Aspects of a contract remain the same whether it is electronic or on paper. To create an electronic contract, first shop around for the required software. Try out demos and examine templates at software providers. Find the one that is right for you.

When you create an electronic contract, place all updated contact information on the first page and after the signatures. Change the variable aspects of the contract based on the needs of your customers.  You should be able to do this regardless of what software you use.  Term adjustment is easier on an electronic contract because it can be done without crossing out lines or wasting paper.

Add an electronic signature section to your contract for all parties involved. Include lines for:

  • Names, 
  • Social Security numbers,
  • Job titles. 
  • In addition, include a standard signature line. 

This identifying binds each party to the contract. Request a hard copy of each electronic contract.

Ban editing options before you send out the electronic contract. This will prevent accidental adjustments and confusion. Use your software's security features before the final edit.

Warnings

Remember, jurisdiction over electronic contracts remains unclear. Since the geography of the contract may cross state lines or national borders, national or international issues may arise if the contract is breached. Keep records of the offending party's communications to help establish proper jurisdiction.

If you need help drafting electronic contracts, post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers, who come from law schools such as Harvard and Yale and average 14 years of experience, including work with or for companies like Google, Menlo Ventures, and Twillo.