Tips For Executing Contracts Electronically Amid Pandemic

By Nicolas Grabar, Richard Lincer, Meme Peponis and Amy Shapiro
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Law360 (April 2, 2020, 4:49 PM EDT) --
Nicolas Grabar
Nicolas Grabar
Richard Lincer
Richard Lincer
Meme Peponis
Meme Peponis
Amy Shapiro
Amy Shapiro
One of the many impacts of the COVID-19 crisis has been the need to execute contracts in remote working environments. While virtual closings were not uncommon pre-COVID-19, generally through manually signing, scanning and emailing PDFs of signature pages, many people working remotely today may not have easy access to a printer or a scanner to print and send PDFs of signed documents. This situation has caused a heightened focus on the laws and regulations regarding electronic execution and notarization of documents and opinion practice regarding electronically executed agreements.[1]

This article discusses practical considerations regarding electronic signatures and remote notarization and includes sample language that practitioners may consider including in contracts that are to be executed electronically.

Electronic signatures include signatures in emails, PDFs and faxes, and signatures processed by commercial software such as DocuSign and Adobe Sign. The enforceability of an electronic signature depends on several factors, including governing law, whether the signer is executing on behalf of herself or an entity, the subject matter of the contract, and where the contract is to be filed.

The process used to develop or deliver the electronic signature will generally be left to the discretion of the parties; however, practitioners should consider the security of the technology to produce or deliver electronic signatures, such as processes that encode the electronic record or include a means to verify the identity of the party electronically signing the document.

Governing Law

Last week, the TriBar Opinion Committee issued a comment providing some guidance on the subject.[2] The comment notes that, in the United States, the Uniform Electronic Transactions Act, or UETA, at the state level and the Electronic Signatures in Global and National Commerce Act, or E-SIGN, at the federal level generally provide that a signature may not be denied legal effect solely because it is in electronic form. Thus, as long as the parties to the contract agree to the use of electronic signatures — either through express consent[3] or by implied consent through the conduct of the parties — properly implemented electronic signatures that are within the scope of UETA or E-SIGN, as applicable, are enforceable.

UETA

First, it is important for practitioners to identify the scope of the transaction involving the electronic signature to understand whether state or federal electronic signature laws apply. UETA has been adopted by most states as a uniform response to effectuating electronic signatures, but UETA has not been adopted by New York, Illinois or Washington — each of which has enacted its own legislation governing electronic signatures.

Additionally, certain states that have enacted UETA have nonuniform exceptions in their enactments. California, for example, has several nonuniform exceptions primarily with respect to consumers. Thus, in addition to determining whether federal or state electronic signature law is implicated, if state electronic signature law is implicated, parties should review the specific implementing laws and regulations for each state even if the state has adopted UETA.

E-SIGN

Although, execution of a contract is typically a question of state law, the federal E-SIGN law governs records involving interstate commerce and preempts state law that is inconsistent with E-SIGN. In cases where a state has either enacted UETA or enacted laws governing electronic records or electronic signatures that are consistent with E-SIGN, E-SIGN defers to the state law.

Given this framework, practitioners should be aware that it is possible for federal and state laws to differ to some degree, and practitioners should thus check the relevant electronic signature statute and any applicable implementing regulations to ensure the electronic signature complies with all the requirements for a particular transaction.

New York, for instance, enacted the Electronic Signatures and Records Act State Technology Law  §§ 301-309, or ERSA. ERSA is not an adoption of UETA and one court in New York, reviewing the history of ERSA and related amendments, noted that lawmakers "appear to have chosen to incorporate the substantive terms of E-SIGN into [ERSA]."[4] If a court determines ERSA is inconsistent with E-SIGN, then E-SIGN will preempt ERSA, and if a court determines ERSA is consistent with E-SIGN, then ERSA will not be preempted by E-SIGN.

Signing on Behalf of an Entity

In addition to relevant governing law, the validity of a signature executed on behalf of a legal entity may also depend on the statute under which the entity was formed, the entity's constituent documents and relevant contract law. For example, Delaware's General Corporation Law provides its own set of rules for the use of electronic signatures.[5]

Subject Matter of the Agreement: Exceptions for UCC-Governed Agreements

E-SIGN and UETA do not apply to transactions governed by the Uniform Commercial Code, except for agreements governed by UCC Articles 2 (sales) and 2A (leases). However, the UCC governs only certain aspects of transactions within its scope, so for other parts of the transaction outside the scope of the UCC, execution by electronic signature pursuant to UETA, E-SIGN or relevant state law may still be applicable.

Filing the Agreement: Court Documents and Documents Filed With Governmental Entities

For court documents such as briefs, pleadings and documents for testamentary matters, family law matters and certain notices relating to utilities and insurance, wet signatures are generally needed as E-SIGN does not apply. Additionally, for documents required to be filed or recorded with a governmental authority such as mortgages and copyright security agreements, wet signatures may be needed as the UETA gives governmental authorities control over deciding if and when to use electronic records and signatures.

Remote Notarization

In addition to causing difficulties for parties executing documents, the COVID-19 pandemic has also made it difficult to have documents notarized. Before the pandemic, states had two forms of electronic notarization.

The first, remote notarization, refers to notarizing documents in electronic form using online audio-video technology (such as a webcam) to connect the notary and the party executing the document. The second, e-notarization, provides for the electronic execution and notarization of a document but requires that the party executing the document physically appear before the notary. Approximately 20 states have laws permitting remote notarization and more states, such as New York, are enacting temporary measures to allow remote notarization while the social distancing mandated by the current pandemic is in force.

On March 20, New York Gov. Andrew Cuomo issued Executive Order No. 202.7 stating that "any notarial act that is required under New York State law is authorized to be performed utilizing audio-video technology" provided that certain conditions are met. The executive order is effective through April 18.[6]

Like physical notarization, remote notarization involves the notary confirming the identity of the party executing the document. Confirmation of an individual's identity in connection with remote notarization may be accomplished through a two-part verification process involving both a challenge question that only the individual should be able to answer and an examination of the individual's government-issued identification (for example, though uploading images of the ID).

In New York, pursuant to Executive Order No. 202.7, the requirements for remote notarization include:

1. The person seeking the notary's services, if not personally known to the notary, must present valid photo ID to the notary during the videoconference, not merely transmit it prior to or after;

2. The videoconference must allow for direct interaction between the person and the notary (e.g. no prerecorded videos of the person signing);

3. The person must affirmatively represent that he or she is physically situated in the state of New York;

4. The person must transmit by fax or electronic means a legible copy of the signed document directly to the notary on the same date it was signed;

5. The notary may notarize the transmitted copy of the document and transmit the same back to the person; and

6. The notary may repeat the notarization of the original signed document as of the date of execution provided the notary receives such original signed document together with the electronically notarized copy within 30 days after the date of execution.

Contract Drafting Tips — Electronic Signatures

To avoid any ambiguity as to whether the parties intend to allow for the execution of a document electronically, it will be prudent for parties to specify in their agreements whether electronic signatures constitute due execution (including through the exchange of emails). Practitioners should confirm that their contracts contain counterpart provisions and verify the requirements set forth for executing the contract.

While these are often standard provisions that may already permit the use of electronically scanned and transmitted versions of manually signed signature pages, they can be further modified to include language that electronic signatures have the same legal effect as manual signatures. Following is one sample of such language for electronic signatures:

Delivery of an executed counterpart of a signature page of this Agreement by telecopy or other electronic imaging means, or confirmation of the execution of this agreement on behalf of a party by an email from an authorized signatory of such party, shall be effective as delivery of a manually executed counterpart of this Agreement.

Conclusion

While the COVID-19 pandemic has created unprecedented global disruption and challenges for even commonplace tasks like contract execution, the legal framework for electronic signatures and records offers practical alternatives to overcome some of the unique challenges presented by today's environment.



Nicolas Grabar, Richard Lincer, Margaret (Meme) Peponis and Amy Shapiro are partners at Cleary Gottlieb Steen & Hamilton LLP.

John Veraja, an associate at the firm, contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Comment Concerning the Use of Electronic Signatures and Third-Party Opinion Letters (March 24, 2020) https://www.americanbar.org/content/dam/aba/administrative/business_law/buslaw/tribar/materials/esignatures.pdf.

[2] UETA §7; E-SIGN, 15 USCA § 7001(a).

[3] Please see below for sample contract language providing consent for the use of electronic signatures.

[4] Naldi v Grunberg, 80 A.D.3d 1, 12 (1st Dep't 2010).

[5] See, e.g., Delaware General Corporation Law § 116.

[6] Additionally, there are bills pending in both the New York State Senate (S4352B) and New York State Assembly (A4076B) that would permit remote electronic notarization with the use of video conference technology.

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