The Validity of Electronic Transactions and Contracts

Not all contracts are required to be in writing to be enforceable. However, centuries of western legal tradition have held that written and signed contracts occupy the highest level of presumptive validity, and, in some instances, are required under the law. In 17th century England, an act of parliament established an early form of what is still currently known as the “Statute of Frauds” that requires written and signed contracts in certain contexts. A current example of the Statute of Frauds is found in the Uniform Commercial Code governing the sale of goods:

“Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought...”

Electronic and digital technology broadened the concept of what constitutes “writing” and “signatures” in commercial transactions. Email, electronic documents, digital signature algorithms, public key infrastructure cryptography, etc., are a long way from the parchment and ink used in the 17th century. But the law has endeavored to meet these dramatic technological advances. And while the basic legal concepts of what constitutes “mutual assent” to form an agreement and the “writing” necessary to memorialize one still exist, those concepts have also broadened to keep pace with the new technology.

Electronic transaction statutes

Two laws that address the validity of electronic transactions are the Uniform Electronic Transactions Act (UETA), which was developed in 1999 for adoption by individual states, and the Electronic Signatures in Global and National Commerce Act, or E-Sign Act, which is a federal statute enacted in 2000. According to the Uniform Law Commission, over the past 22 years, 49 states have adopted the UETA. New York adopted its own version of an electronic documents statute.

The E-Sign Act is the federal equivalent to the UETA. These enactments addressed the trend toward the use of electronic methods for memorializing commercial agreements. Recent pandemic-related work restrictions have exponentially increased reliance upon these methods that will likely continue to grow.

The UETA applies at the state level. The overarching E-Sign Act applies to transactions occurring in (or affecting) interstate commerce. The UETA and E-Sign Act share the same policy and work in essentially the same ways to validate the use of electronic records where an applicable statute, rule of law or regulation governing the transaction requires some form of writing to memorialize it (i.e., the Statute of Frauds). Both the UETA and E-Sign Act establish that if electronic transactions and documents follow their requirements, the electronic transaction will be given the same “legal effect,” i.e., “validity” and legal “enforceability” as “tangible” documents.

It is important to understand that these statutes do not require parties to engage in electronic transactions. And, both the UETA and E-Sign Act require the parties to manifest an agreement to engage in the electronic transaction. The E-Sign Act additionally requires that in those instances where a law requires that information be disclosed to a person (such as required by a consumer protection statute), for the electronic transaction to be valid there must be disclosure of that information electronically and the individual must acknowledge consent.

The meaning of assent and signature

The UETA was adopted with written “comments” drafted by the Uniform Law Commission following each section of the statute as an aid to its interpretation. The comments and example scenarios provided are excellent sources for determining the meaning and intent of the statute. The UETA drafters instruct that in order to determine the parties’ assent to transact electronically, “it is essential that the parties’ actions and words be broadly construed in determining whether the requisite agreement exists.” In this sense, an express written representation of intent might not be required if the agreement to transact electronically can be determined from other acts and “conduct” of the parties.

The “comments” section offers an example along the following lines: If on a phone call, Joe says to Joan, “send me an email confirming our transaction,” the assent to transact in electronic form can be created even though no digital record of the agreement to assent exists other than Joan’s email confirming the phone call and transaction.

Courts across the country have held that email exchanges can form electronic contracts. An email sender’s “From:” field with their name may be sufficient to establish a “signature” formalizing the communication as a contract and satisfying the requirements found in such provisions as the Statute of Frauds. At least one court has had to consider whether a “thumbs-up” emoji evinced a signature. A recent case from Florida held that a text message demonstrated an unambiguous and enforceable personal guaranty of the outstanding debts and future invoices incurred by an LLC.

There is no hard-and-fast rule to apply when evaluating what constitutes conduct assenting to electronic transactions. The important consideration is deciding first if electronic communications are to be viewed as “contractual.” If “yes,” then the requirements of the UETA or the E-Sign Act should be met. If the answer is “no,” then communications should be designed accordingly.

We have all seen disclaimers at the end of email correspondence that state unequivocally that while the communication may contain pricing information and proposed terms and conditions of sale, the emails are not to be considered binding agreements, and that only a final written contract signed by the parties will establish their respective rights and obligations. These disclaimers are prudent efforts to stave off an email recipient’s potential claim that an electronic transaction has been undertaken.

It is prudent for the participants in business transactions to understand the current sources of statutory regulation enacted for interpreting the legality of electronic transactions, both to heighten the enforceability of those agreements they want established and to avoid those they do not. A good source for explanations of how the UETA works can be found at uniformlaws.org.