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November
18, 1999
Thelen Reid Brown Raysman & Steiner LLP
The
explosion of Internet commerce is staggering. The U.S. Department
of Commerce estimates that Internet retailing exceeded $7
billion in 1998 and online sales will range between $40
billion and $80 billion by 2002. Many forecasters now estimate
that business-to-business e-commerce will reach $1.3 trillion
by 2003. In contrast, our legal infrastructure to support
online commerce has been slow to develop. This has led to
uncertainty as to the enforceability of electronically created
contracts and the admissibility into evidence of electronic
records and documents. Until recently, California had no
statutes or regulations governing electronic transactions,
other than regulations relating to digital signatures in
communications with public entities (Government Code section
16.5).
On September 16, 1999, California Governor Gray Davis signed
Senate Bill 820 (the "Act"), making California
the first state in the nation to adopt the Uniform Electronic
Transaction Act ("UETA"). The underlying purpose
of the Act is to ensure that electronic contracts (records
and signatures) have the same legal effect as their hard
copy counterparts. The Act further provides that if a law
requires a record to be in writing, or if a law requires
a signature, an electronic record satisfies those requirements.
The Act will take effect on January 1, 2000.
The Act is designed to facilitate rather than mandate the
use of electronic contracting; indeed, it only applies to
transactions where the parties have agreed to conduct their
transaction electronically. Except where an agreement's
primary purpose is to authorize electronic transactions,
an agreement to conduct a transaction by electronic means
may not be contained in a standard form contract that is
not itself an electronic record. Nor may standard form agreements
be conditioned on an agreement to conduct transactions electronically.
Under the Act, if the sender of an electronic record inhibits
the printing or storing of that record, the electronic record
is not enforceable against the recipient.
Certain transactions are excluded from the Act, including:
(1) those involving wills, codicils, or testamentary trusts;
(2) transactions under California Commercial Code sections
that specifically deal with electronic records; (3) certain
transactions that by law must be signed or initialed separately
from the record; (4) certain transactions governed by various
consumer protection laws (e.g., notice of mortgage late
fees, non-judicial foreclosure notices, statements of finance
charges); (5) any transaction under the Automobile Sales
Finance Act or the Vehicle Licensing Act; (6) certain transactions
in which notice to prospective purchasers must be given
by telephonic sellers; and (7) retail installment sales
contracts under the Unruh Act.
Regarding the admissibility of evidence, the Act provides
that in a judicial proceeding, a record or signature may
not be excluded solely because it is in an electronic format.
The Act also provides that if parties agree to use a security
procedure to detect changes or errors, and one party fails
to use the procedure (and the other party does not detect
the error or change), the other party may avoid the effect
of the changed or erroneous electronic record. Finally,
the Act contains rules governing the retention of electronic
records and provides that under certain circumstances, an
electronic signature may satisfy requirements that a signature
be notarized or signed under penalty of perjury.
On September 28, 1999, New York Governor George Pataki signed
the Electronic Records and Signature Act. The law, which
is intended to put electronic signatures and records on
an equal footing with manual signatures and records for
all but a few types of documents (mainly wills and deeds),
goes into effect on March 27, 2000. The New York State Office
for Technology will issue regulations implementing the Act.
The United States House of Representatives recently approved
electronic signature legislation (H.R. 1714). The measure
now goes to the Senate where similar legislation has been
pending to remove legal barriers to electronic commerce.
Potential Legal Impact of the Act. Although Governor Davis
has predicted that "California's high-tech community
and consumers will benefit greatly" from the Act, transactions
conducted and memorialized electronically should be examined
by legal counsel for a number of reasons. For example, procedures
should be implemented and forms of agreement revised, if
necessary, to ensure that all electronic contracts comply
with the statutory requirements regarding the confirmation
of errors or changes to the record, and the printing and
storing of electronic records. In light of some critics'
claims that the provision governing the admissibility of
evidence of an electronic record or signature may be unconstitutional,
contracting parties should consider adding clauses expressly
providing for the admissibility of the constituent electronic
records. For the same reason, severability clauses may be
advisable. Finally, companies that do business in California
should also consider including a choice of law provision
to take advantage of this new law.
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For more information about the issues covered in this report, please contact Ron Lopez in our San Francisco office at 415-369-7339 or at rflopez@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©1999 Thelen Reid Brown Raysman & Steiner LLP
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