Electronic Contracting in Delaware: The E-Sign Act and the Uniform Electronic Transactions Act
The explosion of electronic commerce over the past decade has made clear that the law must adapt to business transactions that use modern means of communication. Unfortunately, many of our laws were formed during a period in which the primary means of communication were either paper-based or face-to-face. Consequently, the law contained many requirements (such as the writing requirement of the statute of frauds) that, if strictly construed, created barriers to the enforcement of electronic transactions, resulting in great uncertainty in the marketplace. The turn of the millennium has brought with it a surge in the adoption of electronic contracting and electronic signature legislation throughout the world. The goal of this legislation is to eliminate writing and signature requirements from the law and to establish uniform laws that will foster the worldwide development of secure, reliable electronic commerce.
This article will present a brief history of the development of legislation validating electronic contracts and signatures. It will then discuss the principles of the competing federal and state legislation in this area: the federal Electronic Signatures in Global and National Commerce Act ("E-Sign"), enacted on June 30, 2000, and the Uniform Electronic Transactions Act ("UETA"), enacted in approximately twenty-two states, including in Delaware, which adopted it on July 14, 2000. This article next discusses the extent to which E-Sign preempts UETA and potentially other laws in Delaware. Finally, it recommends actions that the Delaware General Assembly should take in light of E-Sign.
I. ELECTRONIC CONTRACTING BASICS UNDER UETA AND E-SIGN
A. History of Electronic Contracting Legislation
Historically, electronic contracting only took place between large companies using electronic data interchange ("EDI"). EDI is the exchange of business data between different computer systems in a structured format. EDI allowed one company to receive information from another company in electronic form, thus reducing the time and cost associated with preparing written documents to communicate such information, as well as reducing the chance of errors being introduced into the process through re-keying the data. Only large companies could afford to use EDI because of the high transaction costs involved in negotiating paper agreements governing the relationship and establishing proprietary networks. With the advent of the Internet, it became technologically possible for many more companies, and even individuals, to engage in electronic contracting. With the increase in numbers of participants came a decrease in the size of the typical transaction. This in turn made the costs of executing signed trading partner agreements prohibitive.
In an effort to facilitate inexpensive, open-system e-commerce among strangers, the American Bar Association promulgated the ABA Digital Signature Guidelines on August 1, 1996. In the same year, the United Nations Commission on International Trade Law (UNCITRAL) approved its Model Law on Electronic Commerce, which was intended to serve as a model law for enactment by member states. A law-drafting advisory body within United States, the National Conference of Commissioners on Uniform State Laws (NCCUSL), followed the United Nation’s lead by drafting UETA, beginning in 1997. UETA derived directly from the UNCITRAL Model Law. In July of 1999, NCCUSL adopted UETA and sent it to the states for consideration and possible adoption. As of November 1, 2000, twenty-two states had adopted UETA, with many variations between the state enactments. UETA is pending in six more states and in the District of Columbia. On July 14, 2000, Governor Carper signed UETA into law in Delaware.
Despite the progress of uniform electronic contracting legislation, certain industry groups and consumer advocates in the United States were concerned that UETA, in the modified versions adopted by the states, would not provide enough uniformity or enough protection to consumers. In response, the United States Congress adopted E-Sign, which is modeled closely on UETA. President Clinton signed E-Sign into law on June 30, 2000 (using an electronic smart card to sign the document digitally after first signing it on paper), only two weeks before UETA was enacted in Delaware.
B. Guiding Themes of UETA and E-Sign
Following the UNCITRAL model, both UETA and E-Sign focus on the perceived need to remove technical barriers to electronic commerce. They aim generally to prevent conflicting and burdensome local regulation and to confirm that electronic technology satisfies traditional requirements associated with paper writings. The following themes guided the drafters of these two acts.
1. Procedural, not Substantive
The laws were not intended to restate the substantive legal rules that applied to electronic transactions. Rather, the laws were intended to be primarily procedural, to assure that, to the extent possible, there were no barriers raised because of the form in which messages or records were communicated or stored in transactions.
The laws were not intended to impose a detailed set of rules or regulations applicable to electronic commerce. Minimalism was viewed as necessary to accommodate newly emerging technologies and new business implementations and to assure uniformity with developing international and national principles. The laws were not intended to impose greater restrictions on electronic communications than the law imposed on paper-based communications.
3. Freedom of Contract
The laws were intended to promote freedom of contract. Thus, to the extent possible, participants in electronic commerce would be given the freedom to structure their transactions and relations among themselves contractually, with a minimum of interference from the law.
4. Technology Neutrality
The laws were not intended to favor one technology or business implementation model over another, nor to inhibit development of new technologies or models (either by direct prohibitions or restrictions, or indirectly through a structure of disincentives to new technology over older forms).
C. The Principle of Technology Adequacy
The core provisions of UETA and E-Sign are substantially the same. Section 101(a) of E-Sign provides:
Notwithstanding any statute, regulation, or other rule of law . . . with respect to any transaction in or affecting interstate or foreign commerce:
(1) a signature, contract or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and
(2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.
This language, which derives from UETA, states the basic principle of technology adequacy. Subsection (1) focuses on the adequacy of an electronic signature or record per se, while subsection (2) deals with the adequacy of electronic signatures and records in contract formation and resolves statute-of-frauds issues. The rule is quite simple: Laws controlled by E-Sign generally cannot deny legal effect to a signature, record, or contract solely because it is in electronic form or was formed by electronic means.
D. Consent to Engage in Electronic Transactions
Except in the consumer context, E-Sign does not limit its application to parties who agree to transact business by electronic means. Thus, in business-to-business transactions, there is no threshold requirement that the parties have agreed to use electronic media. E-Sign simply states the basic rule that electronic records and signatures are equivalent to paper and ink. Questions of whether the parties intended to sign or engage in a transaction are left to other law.
UETA, in contrast, only applies between parties that have agreed to conduct business electronically. Thus, in the absence of an agreement to use electronics, under UETA the requirements for a writing or a written signature remain unchanged. Agreement to conduct a transaction by electronic means may be determined from the context and surrounding circumstances, including the parties’ conduct. Thus, no formal contract is required to conduct business electronically. A party that agrees to conduct one transaction by electronic means may refuse to conduct other transactions electronically. While the UETA rule was devised to ease apprehension among consumer advocates that individuals would become subject to electronic transactions either unwittingly or against their will, it has also been criticized as creating a troublesome standard that may create doubts as to the validity of electronic-based transactions under UETA.
Thus, the UETA rule neither generally validates electronics nor generally precludes discrimination against electronic records and signatures. Rather, UETA enforces a decision of the parties to use electronics instead of otherwise-required writings or written signatures. In determining the validity of an electronic record or signature under UETA, the initial question will always be whether the parties have agreed to use electronics. The UETA official comments argue that the requirement of an agreement is de minimis, illustrating with an example that seems not to be an agreement at all:
Joe gives out his business card with his business e-mail address. It may be reasonable, under the circumstances, for a recipient of the card to infer that Joe has agreed to communicate electronically for business purposes.
UETA has a broad definition of "agreement," but it still requires a "bargain in fact" between the parties. It is difficult to see how handing a business card to a person establishes a bargain in fact to use electronics to form or sign a contract.
E-Sign states the freedom-of-contract principle in the negative in order to avoid the problem of proving intent to engage in electronic transactions. It provides that E-Sign does not "require any person to agree to use or accept electronic records or electronic signatures . . . ." Thus, presumably, under E-Sign a person may affirmatively refuse to conduct business electronically. The freedom-of-contract principle, embraced by both UETA and E-Sign, is the basic theme of an open economy.
E. Special Rules for Consumer Transactions under E-Sign
Both UETA and E-Sign assure the applicability of existing consumer protection statutes to online transactions. Thus, if a statute of frauds requires a writing, UETA provides that there must be a record of the information and that it may be signed electronically. If consumer law requires that specific information be furnished, or calls for certain provisions to be signed or initialed, under UETA and E-Sign the information must be provided and the signatures obtained. The key difference is that while UETA allows information to be presented and signed electronically, assuming the parties have at least impliedly agreed to conduct business electronically, E-Sign requires more rigorous and extensive notice and consent procedures before companies can enforce electronic business arrangements with customers.
Unlike UETA, E-Sign requires affirmative consent before electronic media may be used to satisfy legal requirements of providing information to consumers in writing. E-Sign’s consumer consent provisions impose many new obligations on anyone required to provide written disclosures when dealing with customers. These are imposed to insure that customers not only can make fully informed decisions about receiving electronic records, but also that they will be protected from some possible adverse consequences of doing so.
These requirements may be summarized as follows: The consumer must have affirmatively consented to the provision of required information in electronic form. Prior to consenting, the consumer must receive a "clear and conspicuous" statement informing the consumer of various matters, including (a) any right or option the consumer has to obtain the record on paper or in other nonelectronic form; (b) that the consumer has the right to withdraw his or her consent, together with any conditions, consequences, or fees that would result from such a withdrawal; (c) the procedures the consumer must use to withdraw consent or to update his or her electronic address; (d) whether the consent is for information relating to a single transaction or for identified categories of records that may be provided over the course of a relationship; and (e) how the consumer may request and obtain a paper copy of any electronic record that is sent, even while the consumer’s consent to receive electronic media is still in effect, and whether any fee will be charged for such a copy. These statements may inform the consumer that the business is not willing to conduct a transaction in a nonelectronic form and the consequences of non-consent may include the termination of the business relationship. Prior to consenting, the consumer also must be provided with a statement of the hardware and software requirements for accessing and retaining the electronic records the consumer is consenting to receive. If the original consent was not electronic, the consumer must confirm electronically, and the electronic consent or confirmation must "reasonably demonstrate" that the consumer can access information in the electronic form in which records will be provided pursuant to the consent.
Thus, the consumer must not only provide informed consent, but must do so electronically and must demonstrate that he or she is able to access the records that will be provided. However, E-Sign does not invalidate a consumer contract solely because a business failed to comply with E-Sign’s stringent consent requirement. Thus, after adding this significant overlay onto state consumer protection law, E-Sign looks to other law for any remedy for noncompliance.
If a provider changes the hardware or software requirements for accessing the electronic records that the provider will be sending to the consumer, so that there is a "material risk" that the consumer will no longer be able to access or retain subsequent electronic records, then the provider must comply with an entirely new set of requirements, including providing a new statement of requirements to the consumer, notifying the consumer that the consumer may withdraw his or her consent without the imposition of any fees (whether or not early withdrawal fees had been earlier disclosed) and without any conditions or consequences that were not earlier disclosed, and obtaining electronic consent that again "reasonably demonstrates" the consumer’s ability to access information in the new electronic form.
F. Retention of Electronic Records
E-Sign allows a state to deny enforceability of an electronic record if it is not in a form capable of being retained:
- [I]f a statute, regulation, or other rule of law requires that a contract or other record relating to a transaction . . . be in writing, the legal effect, validity, or enforceability of an electronic record of such contract or other record may be denied if such electronic record is not in a form that is capable of being retained and accurately reproduced for later reference by all parties or persons who are entitled to retain the contract or other record.
This is an exception to the general rule that places no restrictions on when electronic records and signatures satisfy writing requirements. To the extent an applicable state law requires that a transaction be in writing, an electronic record substituting for that writing must be in a form capable of being retained and reproduced accurately by all persons entitled to retain it, or it may be denied legal effect by state law. While this section permits a state law to deny enforceability if the record does not meet the retention requirement, it does not require this result, thus leaving open the possibility that a state’s interpretation of its own requirement of writings may include electronic records either with or without a retainability requirement. Likewise, UETA leaves to other state law the effect of failure to meet the retention requirement. Thus, for electronic records, the rule allows states to create a standard not present in other law for other types of records. The resulting effect on electronic commerce depends on how states interpret this rule.
One interpretation would allow states to invalidate an electronic record if it is not capable of being retained and reproduced at all times by all parties, meaning that the record must in fact be retained. This would be inappropriate, because rules applicable to contract law, such as statutes of frauds, have never required that a writing be retained for a contract to be valid. Creating a different rule for electronic records creates a barrier to electronic commerce. The better interpretation is that the states may require the record to have been capable of being retained and reproduced when the relevant transaction occurred. Whether either party in fact retained the record should be irrelevant. This interpretation conforms with UETA’s provision that the electronic record must be "capable of retention by the recipient at the time of receipt." Both laws specify that they do not modify laws other than requirements that contracts or other records be written, signed, or in nonelectronic form.
UETA contains a rule, rejected by E-Sign, that "[a]n electronic record is not capable of retention by the recipient if the sender or its information processing system inhibits the ability of the recipient to print or store the electronic record." This per se rule can render a record inadequate to meet a writing requirement even though the parties agreed to use electronics. UETA further states, "If a sender inhibits the ability of a recipient to store or print an electronic record, the electronic record is not enforceable against the recipient." This latter rule is not restricted to cases in which the law requires a writing, and thus begs the question of whether it affects the validity of an electronic record where the underlying law does not require a writing. The answer should be no. These sections were written to deal with cases of intentional abuse; for example, when an online site requires a potential viewer to agree to an access contract in order to view the site, but then takes affirmative steps to prevent the user from copying the contract. On the other hand, they should not apply to situations in which a sender sends a file in a standard format that, unknown to the sender, the recipient cannot process.
G. Electronic Signatures
Any form of electronic signature is sufficient. "Electronic signature" is defined 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." The technology of a digital signature, with its use of public-key encryption and third-party certifying authorities, is only one form of acceptable electronic signature. Others could be e-mail text or digitized images, smart cards, passwords, personal identification numbers, or biometrics, such as thumbprints, voiceprints, or retinal scans. The critical element that makes any of these technologies a signature is the intent of the person to sign the record, and the logical association of the signature with the record.
H. Applicability of the Laws to Transactions
UETA and E-Sign do not apply to all writings and signatures, but only to electronic records and signatures relating to a transaction. E-Sign defines "transaction" as "an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons . . . ." UETA defines "transaction" as "an action or set of actions occurring between two or more persons relating to the conduct of business or commercial affairs." Delaware’s definition of "transaction" differs from the uniform version of UETA by omitting "governmental" from the final formulation, which in the official text reads "business, commercial or governmental affairs." This change was recommended by the Delaware State Bar Association task force studying the draft legislation. The task force felt that the change would give Delaware’s state government a greater opportunity to consider the manner and extent it wished to engage in electronic transactions. For the same reason, the Delaware UETA omitted the optional sections at the end of the uniform version dealing specifically with governmental transactions.
Although Delaware’s nonuniform definition of "transaction" is actually closer to E-Sign than is the uniform version of UETA, this variation may have unfortunate consequences with respect to E-Sign’s preemptive effect. E-Sign’s final version, released after Delaware’s UETA legislation had passed the General Assembly, makes clear that only a pure enactment of UETA will not be preempted by E-Sign. The effect of E-Sign on a modified version of UETA is not so clear (see Section III, below).
I. Exclusions from the Scope of UETA and E-Sign
Certain types of transactions are specifically excluded from UETA and E-Sign. These include the creation and execution of wills, codicils, or testamentary trusts; and the provisions of the Uniform Commercial Code other than sections 1-107 and 1-206 and articles 2 and 2A. In addition, the Delaware UETA excludes transactions governed by the General Corporation Law of the State of Delaware, the Delaware Professional Service Corporation Act, the Delaware Revised Uniform Partnership Act, the Delaware Revised Uniform Limited Partnership Act, the Delaware Limited Liability Company Act, the Delaware Uniform Partnership Law, the Delaware Business Trust Act, the Corporation Law for State Banks and Trust Companies and Credit Card Institutions, and the Corporation Law for State Savings Banks. Without question, however, these Delaware-specific exclusions are preempted by E-Sign to the extent that they are inconsistent with E-Sign: "[A]ny exception to the scope of [UETA] enacted by a State under section 3(b)(4) of such Act shall be preempted to the extent such exception is inconsistent with [E-Sign]." What is not clear, however, is whether, to the extent the Delaware exclusion is preempted, either UETA or E-Sign governs transactions under those statutes. Because preemption implies that federal law governs, it is at least arguable that E-Sign controls with respect to transactions under the enumerated laws, even if UETA were not otherwise preempted.
E-Sign has additional exclusions from its scope not included in UETA. These include rules governing adoption, divorce, or other matters of family law; court orders, notices, or official court documents (such as briefs, pleadings, and other writings) required to be executed; any notice of the cancellation of utility services, foreclosure, or eviction under a credit agreement or rental agreement for a primary residence; the cancellation of health insurance or life insurance benefits, or the recall of a product that risks endangering health or safety; and any document required to accompany the transportation or handling of hazardous materials. A question arises regarding which law applies to the transaction areas excluded from E-Sign and yet not excluded from UETA. If the intent of E-Sign was that state or federal writing requirements would apply to these transactions, and if inconsistent provisions of UETA are preempted, then presumably neither UETA nor E-Sign would apply to the transactions that otherwise would have been governed by UETA.
II. BROADER COVERAGE OF UETA
While both statutes validate electronic contracts, records, and signatures, UETA is more comprehensive than E-Sign. The broader statute, UETA (1) creates rules for the attribution of electronic signatures to parties; (2) establishes that electronic signatures and records are admissible in evidence; (3) provides for a broad range of electronic promissory notes and negotiable instruments, whether or not secured by real property; (4) provides means to allocate responsibility for errors in electronic communications; (5) provides more detail for complying with state law regarding the provision of information in writing; and (6) creates rules for determining the time when messages are deemed sent or received.
A. Attribution of an Electronic Signature
Attribution addresses not whether a record has been signed, but whose signature appears on the record. UETA states that an electronic record or signature is attributable to a person if it was in fact the act of that person. This may be proven by any means, including surrounding circumstances, the fact that some technology or password was used to establish who attached the signature, or the efficacy of agreed-upon security procedures. The effect of a record or signature on the person to whom it is attributed is determined from the context and surrounding circumstances at the time of the creation, execution, or adoption of the record. E-Sign does not address attribution.
Consistent with the principle of nondiscrimination, UETA specifies that an electronic record or signature may not be excluded from evidence solely because it is in electronic form. The weight to be given to that evidence is in the discretion of the trial court. There is no parallel provision in E-Sign.
C. Electronic Negotiable Instruments
There is an electronic negotiable instrument provision in E-Sign, but it applies only to promissory notes secured by real property that are expressly governed by the new law. This provision sets forth the technological and business process standards that must be met before an electronic version of a promissory note may be treated as equivalent to a paper promissory note.
The provisions of UETA are broader in scope, applying to all documents that would, if on paper, be either promissory notes under UCC Article 3 or a document of title under UCC Article 7.
D. Errors in Electronic Communication
UETA contains two provisions on errors or changes in electronic records. The first applies if the parties have agreed to follow a security procedure that, if properly applied, would have revealed the change or error in the message. If one party conforms to the procedure and the other does not, the party who fails to conform to the procedure bears the risk of any errors or changes.
The second provision applies in automated transactions between individuals and electronic agents in the absence of any procedures for the prevention or correction of errors. In those situations, an individual who makes a mistake in communication has a right, upon promptly notifying the other party of the error and taking steps to return to the status quo, to avoid the transaction. E-Sign has no provisions dealing with mistakes or errors in electronic communications.
E. Provision of Information in Writing
Although UETA allows an electronic record to fulfill a writing requirement, the act recognizes that at times a law might require more than simply a writing (or even a signed writing). For example, it might require that one party provide the information to the other party (in writing); it might require that the writing be sent by first class mail or by the most expeditious means. It might require that terms in the writing be conspicuous or that certain provisions in the writing be separately signed. UETA makes clear that if such additional requirements exist, they must be satisfied.
E-Sign does not address the requirement of satisfying existing state law regarding delivery requirements in writing. E-Sign does, however, in its preemption provision, provide that states may not circumvent E-Sign through the imposition of nonelectronic delivery methods under section 8(b)(2) of UETA. This provision could be read either to preempt all state laws requiring physical delivery of notices or conspicuous writings, or only to preempt those state laws that were passed specifically for the purpose of circumventing E-Sign.
F. Rules for When Messages are Sent or Received
UETA contains a detailed provision on when and where an electronic record is deemed sent or received. These rules are important in the application of other rules of substantive law that turn on receipt or dispatch (e.g., contract formation rules). The rules tie the determination of whether something has been sent or received to the communication systems used by the parties. For example, an electronic record is deemed sent when (1) it is addressed properly to an information-processing system designated or used by the recipient for the purpose of receiving electronic records of the type sent; (2) it is in a form capable of being processed by that system; and (3) it enters an information processing system outside the control of the sender, or enters a region of the information-processing system designated or used by the recipient that is under the recipient’s control. Records are deemed to be sent from the sender’s place of business or residence and received at the recipient’s place of business or residence. E-Sign does not deal with the question of when or where an electronic record is sent or received.
III. E-SIGN’S PREEMPTION OF UETA AND OTHER STATE LAWS
Prior to E-Sign, a number of states enacted UETA, many with significant modifications to the statute and some with minor adjustments. Congress wanted to create a uniform national law minimizing obstacles to electronic commerce, while also minimizing preemption by validating the official version of UETA. Congress was comfortable that UETA did not undermine the central purposes of E-Sign and so was agreeable to its adoption by the states. It did not want to evaluate the myriad variations of UETA adopted by the states. Therefore it required any statute not identical to the official version to be subject to the consistency standards set forth in section 102(a)(2).
E-Sign is a federal statute, targeting an area of law that traditionally has been the subject of state law. Because of the risk of preemption, businesses and government should evaluate the differences between E-Sign and UETA to determine which is more conducive to promoting electronic commerce in the state. Also, since E-Sign has the potential to preempt all inconsistent state regulation of the same subject matter, businesses and government should consider how the laws interrelate and what rules survive. The potentially preemptive effect of E-Sign should guide state lawmakers in deciding how to structure state legislation so as not to conflict with E-Sign.
A properly enacted federal statute does not preempt state law unless (1) it does so expressly, (2) the state law conflicts with, or will frustrate, a clear policy of the federal law, or (3) the federal law covers the whole field. In the absence of preemption, a federal statute may coexist with state laws on the same subject. Congress adopted E-Sign with the intention of preempting inconsistent state rules and standardizing the rules governing electronic records and signatures. Therefore, the relevant issues are, first, what is the scope of E-Sign’s preemption, and second, what is the meaning of the rule in section 102 of E-Sign allowing certain state laws to modify or supersede section 101 rules?
Section 101 of E-Sign contains five mandatory rules, which by definition must supersede inconsistent state law absent an express consent to the contrary in the federal statute. Section 102 of E-Sign specifies that a state may "modify, limit or supersede" the provisions of section 101 under certain limited circumstances, but only with respect to its own state laws. The mandatory rules of section 101 are summarized as follows:
Section 101(a) states the primary rule that the law may not deny legal validity to any signature, contract, or other record solely because it is in electronic form. Section 101(c) regarding consumer disclosures is in derogation of that rule.
Section 101(d) states that a law requiring retention of a record or production of an original is met by certain electronic records.
Section 101(e) requires that any record required by state law to be in writing may not be enforceable unless it is in a form capable of being retained and reproduced.
Section 101(g) contains regulations regarding use of electronic signatures in notarization and acknowledgment.
Section 101(h) states that the law may not deny legal effect to a transaction solely because its formation, creation, or delivery involved the action of an electronic agent.
Section 101(j) limits the liability risk for insurance agents from use of electronic procedures.
Federal writing and signature requirements will thus always be governed by E-Sign. Only certain state laws may "modify, limit or supersede" E-Sign. These are spelled out in section 102 as either the official version of UETA, without any state-specific variations and exclusive of individual state exceptions, or any other law that specifies "alternative procedures or requirements for the use or acceptance" of electronic records or signatures, but only if those alternative procedures or requirements are: (1) "consistent" with the substantive provisions of E-Sign, (2) neither require nor accord preferred status to the use of a specific technology or technical specification for electronic records or signatures, and (3) for laws adopted after June 30, 2000, make specific reference to E-Sign.
Thus, unless a state enactment meets the conditions in section 102, it may not alter the effect of those mandatory section 101 rules. The "exemptions to preemption" rule is curious, in that it seems to permit a state law to modify federal law. It also overlooks that many of the rules of section 101 permit state law to control.
Under subpart 1 of section 102, if the state has enacted UETA as approved and recommended by NCCUSL in 1999, the state law will govern regardless of its inconsistencies with E-Sign, with one caveat. If, pursuant to section 3(b)(4), a state has opted to exclude bodies of state laws other than those listed by the drafters, those exclusions are preempted to the extent they are inconsistent with E-Sign. As noted above, Delaware’s UETA excludes from its application, among other laws, the Delaware General Corporation Law, the Uniform Partnership Act, and the Limited Liability Company Act, which require certain paper formalities concerning the formation of Delaware entities. To the extent that these exceptions are inconsistent with the provisions of E-Sign that equalize handwritten and electronic signatures, the exclusion of these laws from UETA is preempted. Then, either the transactions otherwise excluded are governed by UETA, or the transactions are subject to the consistency and technical neutrality tests of E-Sign.
The first "exemptions to preemption" provision regarding a state’s enactment of UETA can be read in two ways. Read literally, it seems to say that if UETA is enacted with any variations, no matter how minor, the entire UETA is preempted except to the extent it falls within the "exemption to preemption" provisions of subpart 2. Alternatively, the first provision could be read to say that only nonuniform provisions of a state’s enactment of UETA would be subject to evaluation under subpart 2. Under the latter interpretation, any provision taken from the official version of UETA would be allowed to supersede an inconsistent provision of E-Sign. This approach makes sense when a state has adopted only small nonsubstantive changes, and seems consistent with an implicit congressional deference to the official version of UETA. Given the explicit reference to the uniform version of UETA in section 102(a)(1), it seems inappropriate to require judicial review of identical provisions when a state legislature has chosen to include some nonuniform language. Rendering an enactment of UETA ineffective due to relatively inconsequential changes, such as conforming UETA to state drafting requirements, does nothing to further the goals of E-sign.
This approach, however, is less logical when applied to states, such as California, that have made significant changes to the official UETA. Moreover, it is at odds with the literal language of section 102(a), which allows state law to supersede section 101 "only if such statute . . . constitutes an enactment or adoption of [UETA] as approved and recommended for enactment . . . by [NCCUSL] in 1999 . . . ." Applying the E-Sign consistency standard to each provision of a state’s nonconforming version of UETA fits more closely with the literal language of section 102(a) and with the principles of federal preemption that, ordinarily, would not allow inconsistent provisions of state law to override federal law. Accordingly, under this strict interpretation, it appears that in any state, such as Delaware, that adopts a modified version of UETA, the state’s version of UETA is subject to the E-Sign consistency standards both with respect to the nonconforming provisions and with respect to those provisions that do conform to the official UETA.
Delaware’s enactment of UETA contains nonuniform provisions that, under a strict reading of E-Sign, would cause E-Sign to preempt UETA except to the extent it meets the conformity requirements of section 102(a)(2). The Delaware nonuniform provisions are as follows:
Section 12A-102(16), the definition of "transaction,", omits "or governmental," having the effect of limiting the scope of UETA to nongovernmental transactions.
Section 12A-117, "Choice of Forum," is a non-uniform section allowing parties to an electronic contract to choose an exclusive judicial forum to resolve disputes arising out of the transaction. This provision was borrowed from the Uniform Computer Information Transactions Act, to assure that businesses located or incorporated in Delaware could assure that disputes would be heard in Delaware, subject only to the Constitutional standard that such a choice would not be enforceable if it was "unreasonable and unjust."
Sections 20 and 21 of the official UETA were redesignated as Section 2 and Section 3 (Severability and Effective Date), an entirely nonsubstantive amendment to conform the statute to Delaware drafting practice.
Delaware could assure that its enactment of UETA would avoid preemption by E-Sign if it amended the above provisions to correspond exactly to the official UETA. Also, because Delaware enacted UETA after the effective date of E-Sign, a new section should be added, making a specific reference to E-Sign in conformance with section 102(a)(2)(B).
Applying the consistency and technical neutrality standards of E-Sign to existing state law is a daunting challenge due to the ambiguity of the federal statute. It provides that a state law:
may modify, limit or supersede the provisions of section 101 with respect to State law only if such statute . . . specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records if (i) such alternative procedures or requirements are consistent with [E-Sign]; and (ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing he functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures . . . .
The first question is, what is consistent with E-Sign? Presumably, a state enactment of E-Sign would be consistent, but little else is clear. Second, while it is clear that a digital signature statute making one type of technology mandatory would be invalid, it is not as clear whether a law giving advantages to one particular technology should be invalidated. An example would be a law granting a presumption of validity to a secure authentication procedure using a state-approved vendor. This type of law does not require the application of a specific technology. On the other hand, it does accord greater legal status to the use of that technology. Section 101 of E-Sign, however, simply states the principle of nondiscrimination against a particular technology; it does not state that a law cannot grant advantages to one type of technology in order to facilitate transactions.
E-Sign has other preemptive effects. It prohibits states from using UETA section 8(b)(2) as a loophole for effectively reimposing paper document requirements. That section provides that parties using electronic records must nevertheless comply with any legal requirement that notices or other information be sent in a particular manner, such as by first class mail or certified mail. E-Sign provides that a state may not circumvent the federal law’s mandate to facilitate electronic communications in lieu of paper by imposing nonelectronic delivery requirements.
Thus, E-Sign calls into question the continued validity of all state statutes requiring a writing, including Delaware’s alternative entity laws specifically excluded from Delaware’s UETA. Courts will need to decide, for example, whether section 211(e) of the Delaware General Corporation Law, requiring that "all elections of directors shall be by written ballot," is preempted by E-Sign due to its requirement of the application of a specific technology, namely, "writing," and whether section 103 of the same law, requiring a certificate of incorporation to be "signed," now under E-Sign must permit electronic signatures. These examples demonstrate the importance of examining each instance of a writing or signature requirement in light of the relevant electronic commerce legislation.
IV. DELAWARE SHOULD HELP BUSINESSES PREPARE FOR UETA AND E-SIGN
Delaware can take specific steps to help businesses succeed in the new economy. It should create a competitive edge for itself in national and international commerce by reaching out to businesses and the public to help them understand their rights and responsibilities in using and creating electronic signatures and records. The benefits of electronic transactions will only come if people feel secure in their use. Furthermore, Delaware should provide guidance to the business community regarding the extent to which E-Sign may preempt state laws. Finally, it should demonstrate leadership by using appropriately secured electronic signatures and records in state transactions. When businesses see that the government uses technology reliably and with confidence, they will be more willing to depend on it in their own transactions.
* William R. Denny is a partner in the law firm of Potter Anderson & Corroon LLP, Wilmington, Delaware, practicing in the areas of electronic commerce and commercial litigation.
1 Pub. L. 106-229, 114 Stat 464 (codified as 15 U.S.C. §§ 7001 et seq.).
2 Del. Code Ann. tit. 6, §§ 12A-101 et seq.
3 Information Security Committee, Electronic Commerce Division, Digital Signature Guidelines, 1996 ABA Sec. Sci. & Tech., http://www.abanet.org/scitech/ec/isc/dsgfree.html.
4 United Nations, UNCITRAL Model Law on Electronic Commerce with Guide to Enactment 1996,http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/1996Model.html
5 National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, http://www.law.upenn.edu/bll/ulc/ulc_frame.htm.
6 Del. Code Ann. tit. 6, §§ 12A-101 et seq.
7 Pub. L. 106-229, 114 Stat 464 (codified as 15 U.S.C. §§ 7001 et seq.).
8 E-Sign § 101(a); Del. Code Ann. tit. 6, § 12A-107.
9 Del. Code Ann. tit. 6, § 12A-105(b).
10 Del. Code Ann. tit. 6, § 12A-105(c).
11 See, e.g., Report on UETA, Washington State Bar Association, Business Law Section (1999).
12 UETA Section 5, Comment 4.
13 Del. Code Ann. tit. 6, § 12A-102(1).
14 E-Sign § 101(b).
15 Del. Code Ann. tit. 6, § 12A-105(a).
16 E-Sign § 101(c).
17 E-Sign § 101(c).
18 E-Sign § 101(e) (emphasis added).
19 E-Sign § 101(e). UETA limits the retention and reproduction requirement to the recipient of the electronic record only. See Del. Code Ann. tit. 6, § 12A-108(a) and (c). It is not clear what E-Sign means by broadening the requirement to include "all persons entitled to retain" the electronic record.
20 UETA § 12A-108(a) (emphasis added).
21 E-Sign § 101(b).
22 Del. Code Ann. tit. 6, § 12A-108(a).
23 Del. Code Ann. tit. 6, § 12A-108(c).
24 E-Sign § 106(5); see also Del. Code Ann. tit. 6, § 12A-102(8).
25 E-Sign § 106(13).
26 Del. Code Ann. tit. 6, § 12A-102(16).
27 See UETA § 2(16).
28 E-Sign § 102(a)(1).
29 See Section II, infra.
30 E-Sign § 103(a)(1) and (3); Del. Code Ann tit. 6, § 12A-103(b)(1) and (2).
31 Del. Code Ann. tit. 6, § 12A-103(b)(4) and (5).
32 E-Sign § 102(a)(1) (emphasis added).
33 E-Sign § 103(a)(2) and (b).
35 Del. Code Ann. tit. 6, § 12A-109.
36 Del. Code Ann. tit. 6, § 12A-116.
37 Del. Code Ann. tit. 6, § 12A-113.
38 Del. Code Ann. tit. 6, § 12A-110(1).
39 Del. Code Ann. tit. 6, § 12A-110(2).
40 Del. Code Ann. tit. 6, § 12A-108(b).
41 Del. Code Ann. tit. 6, § 12A-115(a).
42 Del. Code Ann. tit. 6, § 12A-115(a).
43 Del. Code Ann. tit. 6, § 12A-115(d).
44 E-Sign § 102(a)(1).
45 E-Sign § 102(a)(2)(A)(i).
46 E-Sign § 102(a)(2)(A)(ii).
47 E-Sign § 102(a)(2)(B).
48 E-Sign § 102(a)(1).
49 E-Sign § 102(a)(2)(A) (emphasis added).
50 E-Sign § 102(c).
51 Certain amendments to the Delaware General Corporation Law were enacted in June 2000 to allow grantor use of technology in matters such as the submission of proxies. See 72 Del. Laws 343 (2003). Whether these amendments will satisfy E-Sign remains to be seen.