SIGNATURES ON THE WEBÕS DOTTED LINE: ELECTRONIC SIGNATURES ON CREDIT APPLICATIONS AND GUARANTEES SOON VALID IN ALL STATES.

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1 THE ELECTRONIC CREDIT DEPARTMENT SIGNATURES ON THE WEBÕS DOTTED LINE: ELECTRONIC SIGNATURES ON CREDIT APPLICATIONS AND GUARANTEES SOON VALID IN ALL STATES Scott Blakeley 1 The Internet is revolutionizing how the credit professional handles credit transactions. Credit professionals are using the Internet for a myriad of credit and financial functions, from credit research and scoring, to automatic invoicing customers through their Web site, to automatic payment posting. Credit departments are loading their web pages with a variety of credit forms including credit applications and guarantees for the customer to retrieve. The electronic credit department has arrived. But does documenting your electronic credit sale allow an electronic or digital signature (e-signature) to have the same legal effect as a handwritten signature from your customer on your credit application? What is the legal status of e-signatures documenting your personal and corporate guarantees over the Internet? Do credit files stored electronically by the credit professional have the same legal force as paper credit files? Has legislation caught-up with Internet technology? On June 30, 2000, President Clinton signed into law the The Electronic Signatures in Global and National Commerce Act (The E-Sign Act), after much negotiations and addressing concerns raised by consumer groups. The E-Sign Act makes e-signatures as legally binding as ink-and-paper signatures. The E-Sign Act also eliminates legal barriers to storing documents and sending notices electronically. A credit 1

2 professional may now engage in e-credit transactions across state lines and the credit sale contract is valid in all states. What Is An Electronic, Or Digital, Signature? An e-signature is a form of technology, including fingerprint readers, stylus pads and encrypted Asmart cards@, used to verify a party=s identity so as to certify contracts that are agreed to over the Internet. This means that a credit professional documenting a commercial e-sale has many technological methods to verify a customer=s representativeõs signature. The E-Signature Act The E-Sign Act makes digital, or online, signatures as legally binding as ink-and-paper signatures, and can be used as evidence in legal proceeding. The E-Sign Act is effective October 1, The E-Sign Act provides: Òa signature, contract or other record relating to [any transaction in interstate commerce] may not be denied legal effect, validity or enforcement solely because it is in electronic form.ó The purpose of the federal legislation is to boost Internet credit transactions, both as to commercial and retail transactions and B2B markets, by eliminating paperwork arising out of these contracts. The effect of the E-Sign Act is a uniform and nationwide legal recognition that a vendor may engage in e-credit transactions across state lines and the e-contract is valid with all states. Some of the relevant provisions of The E-Sign Act for the credit professional are: 1. Technology neutral: Parties to the contract decide on the form of digital signature technology to validate the contract. Technologies from a scanned handwritten signature, to Òsmart cardsó to biometrics may be agreed to by the parties. 2

3 2. E-signatures on checks: Businesses may use e-signatures on checks. 3. Two clicks to close a contract: Businesses using digital signatures must require parties to the contract to make at least two clicks of a computer must to complete a deal: (1) the first mouse click tests the electronic link between the businesses to ensure that the digital signature technology works; and (2) at least one other mouse click to close the deal. 4. Special issues with consumer internet transactions: The legislation will not allow companies to sidestep longstanding consumer notification laws. The E-Signature Act provides (1) the consumer decides whether to use an e-signature or handwritten signature; the consumer has to give consent before receiving bills and other documents only in electronic form; (2) cancellation and foreclosure notices must be sent on paper; (3) the vendor must conduct test e- mailings before sending out subsequent notifications; (4) does not allow e-signatures on adoptions, wills, and product safety recalls. The speed in which e-credit transactions proceed may result in the elimination of buyerõs remorse with consumer transactions as the consumer no longer waits for paperwork to close the transaction. 5. Electronic record keeping: Records of e-contracts may be stored electronically, effective March 1, Government enforcement: government agencies have the authority to enforce The E-Sign Act and protect the public interest. Over the past several months, most states passed laws recognizing e- signatures as legally binding to certify Internet contracts. The problem with the state laws is that no two sets of laws are the same. The federal E-Sign Act supersedes these state laws. The E-Sign Act And The Electronic Credit Department: What It May Mean To The Credit Professional The credit department is going ÒelectronicÓ for a variety of reasons, including faster payments, reducing discrepancies with the customer, lower administrative costs, and the competition and customer requires. 3

4 An increasing number of credit departments are posting on their web pages various credit forms, including credit applications, guarantees, invoices and proofs of delivery, for retrieval by their customers. How may the E-Sign Act affect the credit professional? Article 2 of the Uniform Commercial Code provides that with the sale of goods over $500, there must be a signed writing. A signature is to certify the writing for the sale of goods. With the traditional sale of goods over $500, the credit professional memorializes the sale agreement with a signed credit application and signed invoices. With the E-Sign Act, a credit professional may accept a completed credit application electronically, with e-signature, to form a binding contract, as opposed to the customer downloading the application from the vendorõs web page, filling it out and signing it and faxing or mailing the completed credit application with handwritten signature. The credit professional may also receive completed guarantees in the same manner and form a binding contract. Likewise, the E-Sign Act aids e-checks and e-payments as businesses may sign checks electronically. The long-standing debtorõs excuse for late payment that the Òcheck is in the mailó may soon be over. 1. Verifying the E-Signature A key question for the credit professional considering using e- signatures on contracts and checks, however, is having a reliable way to certify an e-contract, or authenticate an e-signature, to reduce the risk of fraud, or claims of unauthorized use of an e-signature. In other words, suppose the credit professional receives a purchase order from a buyer electronically, with an e-signature, how does the credit professional know the e-signature is still valid and the person has the authority to purchase? Technology to verify a personõs identity, so-called digital identification devices, may solve these concerns. An e-signature may be verified through a variety of technologies. The most common is a Òsmart cardó which looks like a credit card and stores digital information about the signer. The smart card allows the person to take the card and use it on other computers. Biometrics is another verification technology that uses digital fingerprint scans or retina scans. A number of security companies now offer services to verify an e- 4

5 signature, such as VeriSign Inc., Entrust Technologies, Inc., and Ilumin, Inc. By using the digital verification, the credit professional may confirm the e-signature prior to authorizing release of goods. For credit professionals considering complying with The Equal Credit Opportunity Act by giving electronic notification denying commercial credit, the credit professional should consider obtaining the customerõs express consent to give notice electronically. European View The European Union (EU), which comprises 15 European countries, recently passed the Electronic Signature Directive. The European law provides that an electronic signature is presumed valid as a handwritten one in EU countries. 1. Scott Blakeley is a principal of Blakeley & Rallis LLP, Southern California, where he practices creditorsõ rights and bankruptcy law. His e- mail is sblakeley@brllp.com. 5