Nearly every large business in North America has implemented some form of "work-from-home" procedure in response to the COVID-19 health crisis. Under current circumstances, where large swaths of the business world are adapting to a remote work environment, people negotiating deals from their home offices are faced with the question of how to make sure the contracts they sign electronically are legally binding.
Determining whether a contract can be signed and delivered electronically
Whether a contract in electronic form is considered enforceable depends on a number of factors, including:
1. The law of the contract
The threshold question is whether the law governing the contract supports electronic contracts. The law of both the US and Canada do; statutes have been enacted in both countries at the federal and state or provincial/territorial levels that (a) allow electronic signatures (or e-signatures) and electronic records to have the same legal effect as physical (or wet ink) signatures and physical records, and (b) ensure that a contract is not invalid solely because it is in electronic form.
For more information on the legislation in the US and Canada, please see our article on "The Law of E-Signatures in the United States and Canada."i
(a) Electronic signatures
In practical terms, the following e-signatures are generally accepted in the US and Canada:
- The "sign and scan" approach, where parties sign, scan, and email a signature page to be affixed to a soft copy version of a final contract
- DocuSign, Adobe Sign, or other third party applications, which collect and store signatures, and affix signatures to documents electronically. These services are designed to meet the requirements of electronic commerce statutes by requiring signatories to input identifying information and indicate their consent to be bound to a document, providing evidence of intent if the document is later challenged.ii When using these tools, it is important to disable the dating and timestamping auto-populate function to ensure the documents are not improperly dated or timestampe
- Simply typing an intention to be bound to a contract over email or other electronic communication platform (e.g. "I agree" or "I consent"). This approach should be accompanied by some other means to authenticate the identity of the sender, such as a concurrent phone call
(b) Electronic records
In addition to e-signatures, the laws in effect in North America provide that a contract or record will not be denied legal effect or enforceability solely because it is in electronic form. For this reason, exchanging soft copies of documents electronically will not affect the validity of a contract under these laws. In addition, if a law stipulates that a record is required to be in writing, an electronic copy of such record complies with the law.
In practical terms, the types of electronic records generally complying with each law include: compiled PDF documents, duplicated or printed versions of such documents, records retained on a USB or disk, and emails that have been downloaded and retained.
2. Agreement to use electronic signatures, delivery and retention
Notwithstanding applicable law, parties are generally free to negotiate terms to permit or prohibit concluding a contract electronically. Before exchanging signatures by email, the specific terms and conditions of a contract should be reviewed to confirm whether parties have consented to the use of e-signatures and records.
As a practical matter, parties can obtain consent by including language in their agreements to the effect that an electronic or digital signature or record has the same effect as a wet ink signature or physical record. The following is a common term in a commercial contract:
Counterparts; electronic execution. This Agreement may be signed in any number of counterparts and each counterpart shall represent a fully executed original as if signed by both Parties. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or in electronic format (e.g., ".pdf" or ".tif") shall be effective as delivery of a manually executed counterpart of this Agreement.
Additionally, parties can include certain contractual language agreeing that an electronic version of a contract (or other document), or the electronic digital storage of such document, is valid. The following example provision can be included in a commercial contract:
Reproduction of documents. This Agreement, and all certificates and documents relating hereto and thereto, including, without limitation, (i) consents, waivers and modifications that may hereafter be executed, (ii) documents received by each party pursuant hereto, and (iii) financial statements and other information previously or hereafter furnished to each party, may be reproduced by each party by electronic digital storage, computer tapes, photographic, photostatic, optical character recognition, microfilm, microcard, miniature photographic or other similar process, and each party may destroy any original document so reproduced. All parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial, arbitration or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by each party in the regular course of business) and that any enlargement, fascimile or further reproduction of such reproduction shall likewise be admissible in evidence.
When it comes to providing notices and other communication under a contract, parties should consider including language in the notice provision that permits communication by email. The following is an example notice provision that expressly permits email communication (with the language relevant to email communication in bold):
Notice. Unless otherwise expressly required or permitted by this Agreement, any notice required or permitted to be given hereunder shall be in writing and shall be addressed as follows:
If to [insert party's name]: [insert notice address, including email]
With a copy to (which shall not constitute notice) to: [if applicable, insert copy information, including email]
Unless otherwise expressly required or permitted by this Agreement, all notices and other communications hereunder shall be delivered (a) in person to the Party below mentioned, (b) via certified mail with a return receipt requested in a securely sealed envelope, (c) by overnight courier with proof of delivery by a reputable internationally recognized delivery service, (d) by confirmed fascimile, or (e) by electronic communications. Notices sent by hand, certified mail, or overnight courier service, shall be deemed to have been given when received. Notices sent by facsimile shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement).
3. The subject matter of the contract
Certain types of agreements and other documents require a wet ink signature and hard copy record, and so are excluded from being in electronic form. In most US and Canadian common law jurisdictions, these include:iii
- Negotiable instruments and some types of instruments of title
- Certificated investment securities (such as stock certificates)
- Wills, codicils, and testamentary trusts
- Health care proxies and some types of powers of attorney
- Documents relating to adoption, divorce, and other family law matters
- Some types of real estate transfer documents and other real estate agreements
- Court orders, notices, and other court documents like pleadings and motions
- Product recall notices affecting health or safety
4. Other Considerations
Some other considerations for determining whether a contract can be signed and delivered electronically include:
- If a contract is being signed on behalf of an entity, whether the articles and by-laws governing the internal affairs of that entity restrict the entity from entering into an agreement by e-signature. Most governing documents do not expressly prohibit the use of e-signatures; however, it is important to verify that the chosen signature approach does not run afoul of the entity's governing documents
- If a document needs to be filed with a government office, whether there are rules requiring hard copies, wet ink signatures or notarizationiv of a document
- Whether there are any tax reasons for a document to be signed in a specific location, in order to avoid negative tax consequences
Don't despair working remotely: How to close your deal from home
For those attempting to conclude commercial transactions from their home office, ensuring that transactions run smoothly while using electronic contracts involves:
- Confirming that exchanging signatures electronically and maintaining an electronic record is permitted under the law governing the contract
- Confirming that the parties have agreed to exchanging signatures electronically and maintaining an electronic record which may be by including language to that effect in the contract
- Confirming that the type of document is not one that requires a wet ink or physical signature (like a power of attorney, a negotiable instrument, or a document that needs to be filed with a governmental office that does not permit electronic filing)
- Confirming that the constituent documents of the signing organizations do not restrict the use of e-signatures, or what may be required (e.g. a board resolution) to authorize such use
- Finally, choosing a desired method for exchanging signatures
i For more detail and an overview of the complex international legal landscape of electronic signature laws and form requirements, see Lothar Determann, eSignature Laws Need Upgrades (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3436327), in 72 Hastings Law Journal 2020; and Lothar Determann, Learning the E-Signature Essentials (https://www.law.com/therecorder/2020/03/26/learning-the-e-signature-essentials/) published by The Recorder.
ii It is good practice for parties to indicate their agreement to the use of DocuSign (or any equivalent), which may be done by authenticated email.
iii This is not an exhaustive list of exclusions. The specific governing law of a contract should be consulted to confirm whether or not a physical record or wet ink signature is required in a particular context.
iv A number of US states permit e-notarization of certain documents. See, e.g., Illinois Uniform Real Property Electronic Recording Act, 765 ILCS 33/3(c) (real estate documents). On March 7, 2020, Governor Cuomo of New York State issued an executive order permitting notarization by videoconference in response to the COVID-19 crisis. See Executive Order No. 202.7.