Rise of the Machines: Electronic Signatures and Paperless Closings

December 2016

Once upon a time, not so long ago, attorneys and their clients typically closed transactions by gathering in conference rooms to eat turkey sandwiches, hash out final deal terms, and sign multiple copies of closing documents neatly arranged in manila folders. While turkey sandwiches remain popular, the in-person closing, and the exchange of original, signed documents has become increasingly rare. Electronic signatures have been legally recognized for several years, but their widespread use – often to the complete exclusion of ink signatures – has only more recently become common practice.

The Law of Electronic Signatures

The federal Electronic Signatures in Global and National Commerce Act (E-SIGN) was enacted in 2000. Forty-seven states have also adopted statutes that are based on the Uniform Electronic Transactions Act (UETA), and the other three have adopted similar laws. The key elements of E-SIGN and UETA are that:

  • A record or signature may not be denied legal effect or enforceability solely because it is in electronic form;
  • A contract may not be denied legal effect solely because an electronic record was used in its formation;
  • If a law requires a record to be in writing, an electronic record satisfies the law;
  • If a law requires a signature, an electronic signature satisfies the law; and
  • In a proceeding, evidence of a record or signature may not be excluded solely because it is in electronic form.

Together, these provisions are intended to create equivalency between electronic and manual signatures. Certain exceptions apply, including under the Uniform Commercial Code (UCC) (although in many cases, the UCC defers to other state law) and for wills and trusts.

The definition of an electronic signature under E-SIGN and UETA is deliberately broad, and goes far beyond the garden-variety electronic signature consisting of a manually signed page in PDF format transmitted by email. The definition includes sounds, symbols, processes, and other manifestations of intent (such as click-through screens, check-the-box web pages, the entry of unique passwords or personal identification numbers, retinal scanners, or fingerprints). Even a simple email transmission with no attachment can constitute an electronic signature under some circumstances.

Practical Issues Relating to Electronic Signatures

The use and acceptance of electronic signatures is not mandatory. Some parties (including many banks) still insist on receiving original signed documents before closing. Generally, electronic signatures will be binding only when the parties have agreed to their use, although courts will consider context course of dealing when determining the intent of the parties discussions. Accordingly, parties wishing to enter into binding agreements electronically should make their intent to do so clear by adding language to that effect to their contracts. On the other hand, a party who does not wish to be bound by an electronic signature should add appropriate disclaimers to emails or other transmissions to reduce the risk of inadvertently entering into a contract.

General principles of contract law and evidence still apply in the electronic context, and many of the issues are the same whether dealing with electronic or manual signatures. Assent can be indicated by putting pen to paper or by clicking, "Send." The authenticity and origin of an electronic signature can be challenged (perhaps more easily than a signature that is manually applied in a conference room full of witnesses), but document forgery is not precluded by manual signatures. Electronic files can be deleted or corrupted, but paper documents are also subject to mishandling, loss, or damage.

The speed and convenience of conducting business using electronic signatures, the ease of electronic document storage, and the general trends toward improved technology and greater reliance on technology all point to greater reliance on electronic signatures in the future.