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Lower the risk and maximize the reward of electronic contracting

Just as business practices react and adapt to changing technologies, so does the law (albeit at a decidedly slower pace). Nowhere is this more evident than in the area of contract law, where advances in communication allow agreements to be reached and memorialized in a fraction of the time they once were. However, new technology has also resulted in uncertainties regarding the enforceability of electronic contracts.

Regardless of the method used to negotiate or enter into contracts, businesses should remain focused on two important goals: (1) ensuring that communications intended to memorialize agreements are enforceable as contracts; and (2) ensuring that communications not intended to memorialize agreements are not enforceable as contracts.

Before delving into the specifics of electronic contracting, it is important to understand the basics of contract law. At its core, a contract is a legally binding exchange of promises between parties that the law will enforce. To form a valid contract there must be an offer from one party to another, acceptance of the offer's terms by the other party, mutual assent to the terms through some objective measurement (e.g. a signature), and consideration (i.e. legal jargon meaning each party must contribute something of value). If these four elements are present, a valid and binding contract is formed.

Additionally, under the statute of frauds, many contracts are required to be written, signed and retained. These laws were created to deal specifically with tangible, usually paper, documents and not those created, transferred, and maintained solely in electronic form on a computer.

As such, in the early days of the internet, courts were unsure how to treat electronic contracts. Some courts held that complex transactions obviously intended to be binding upon the parties were not enforceable because they were not in written form or signed, while other courts would find a valid contract from a series of seemingly innocuous e-mails.

In order to remedy the uncertainty, both Illinois, through the Electronic Commerce Security Act (ECSA), and the federal government, through the Electronic Signature in Global and National Commerce Act (E-SIGN), passed laws stating that any statute requiring a contract to be in writing, signed or retained is satisfied if electronic means are used to do so. For the most part, each law addresses this problem in a technologically neutral fashion, meaning that the laws leave it up to the parties of an agreement to determine what type of technology to use when entering into an electronic contract.

Additionally, both ECSA and E-SIGN contain numerous exceptions and caveats. Most notably, they contain special rules to protect consumers. Before entering into any electronic contracts with consumers, special attention should be paid to these rules, or the resulting contract may be ruled invalid. Additionally, various other state and federal agencies and departments have enacted electronic contracting rules for the areas under their jurisdiction.

The technologically neutral approach of most of the laws benefits the parties by allowing them to choose the technology used, but does not provide as much certainty as would a law mandating a particular technology. Therefore, when deciding the appropriate type to use, a business should weigh the costs and benefits of particular technologies. To show the breadth of possibilities, the following would all create a valid contract: signing the bottom of an e-mail with your name; signing a document with a personal PIN number; or signing a document using Public Key Infrastructure (PKI) technology.

For instance, if a business wanted to contract for the purchase of a ream of paper worth $10.00, simply using e-mail would probably be sufficient. What it lacks in reliability, it makes up in its low cost. However, if a business wanted to contract for an expensive piece of equipment, it would likely want to take steps to ensure that the contract was valid, such as by employing a very secure PKI method of authentication and security. Because of the nature of the purchase, the increased reliability of PKI technology would justify its added cost.

In addition to ensuring that electronic contracts are enforceable, a business should take precautions to make certain that it is not inadvertently bound to a contract it had no intention of making. This is frequently an issue in electronic communications, as individuals often treat media such as e-mail less formally than traditional ones. However, most business already have protocols in place addressing this issue, such as specifying certain individuals who may sign contracts on behalf of the company and marking documents during negotiations as "DRAFTS." Rather than overhauling systems already in place, a business should just make sure that these practices are extended to electronic communications.

New technologies have drastically reduced the time needed for companies to negotiate and form contracts. Businesses should be aware of the legal consequences of contracting using electronic means and take steps to ensure that any agreements it enters into are valid, and that communications not intended to be contracts are not interpreted as such.

- Alan Singleton, of Singleton Law Firm, P.C., is a Champaign corporate and intellectual property attorney. He may be reached at singleton@singleton.law.pro.

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