The coronavirus (COVID-19) pandemic has forced most New Jersey businesses to conduct their operations via a “remote” workforce. So what happens when documents need to be signed in order to become legally binding?
For businesses that are accustomed to dealing exclusively with paper documents, conducting contract negotiation and execution electronically can be daunting. Some concern is justified, as there are mistakes that can be made along the way that may threaten the enforceability of the agreement.
To start, both electronic contracts and digital signatures are valid, provided certain conditions are satisfied. Under the Electronic Signatures in Global and National Commerce Act (ESIGN Act), which went into effect in 2000, digital and electronic signatures are just as legal as their paper and ink counterparts for transactions in or affecting interstate or foreign commerce. The ESIGN Act specifically provides that a contract or signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form.”
The federal e-sign law defines an e-signature as “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” Examples include typing your name, uploading a written signature, and clicking a button that says, “I agree.”
Most business contracts can be signed electronically. However, there are still a few types of contracts that must be on paper to be valid and enforceable, although many of these do not frequently arise in the business context. They include:
- Wills, codicils, and testamentary trusts
- Documents relating to adoption, divorce, and other family law matters
- Court orders, notices, and other court documents such as pleadings or motions
- Notices of cancellation or termination of utility services
- Notices of default, repossession, foreclosure, or eviction
- Notices of cancellation or termination of health or life insurance benefits
- Product recall notices affecting health or safety, and
- Documents required by law to accompany the transportation of hazardous materials.
Forming Contracts Electronically
Under the Uniform Electronic Transactions Act of 1999, which is now in force in all 50 states, a contract “may not be denied legal effect solely because an electronic record was used in its formation.” Nonetheless, the basic principles of contract law still apply. In order for a contract to be enforceable, there must be a valid offer and acceptance, supported by consideration. If one party sends an email (or other electronic message) proposing different terms, the offer is considered rejected, and the contract formation process starts fresh. The parties must also intend to be contractually bound. While intent need not be explicitly expressed in email correspondence, it just must be clear that the parties were planning to agree on a contract.
To avoid unintentionally being legally bound during the course of negotiations, it is imperative to make it clear to the other party that your electronic correspondence should be considered non-binding. More importantly, your correspondence should expressly state that any agreement is contingent upon the execution of a formal written contract.
Tips for Smooth Contract Execution
Through the use of e-signatures, businesses can legally execute contracts from “home.” To make the process run more smoothly, below are a few tips to keep in mind:
- Verify that the subject matter of the contract is not excluded from using an electronic contract or digital signature;
- Verify that an electronic contract may be filed with any applicable regulator/government agency;
- Determine whether any additional actions are required to legally execute the agreement electronically, i.e. authorization from the board of directors;
- Confirm with the other parties that you plan to use electronic signatures and retain an electronic record;
- Include a provision in the contract memorializing the agreement to execute the contract electronically; and
- Determine the method that will be used to execute the contract, i.e. signing and scanning the contract or using an online service like DocuSign.
Given that employees are largely working remotely and often with less supervision, businesses should make sure that all employees who are authorized to execute contracts understand how to properly negotiate and execute agreements electronically. In many cases, the development of online training or a best practices manual may be warranted.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dennis Linken, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.