|P R O B A T E & P R O P E R T Y|
Other articles from this issue
|Articles from other issues of Probate and Property|
- ABA Groups
- Resources for Lawyers
- About Us
|P R O B A T E & P R O P E R T Y|
Other articles from this issue
|Articles from other issues of Probate and Property|
Has E-sign Murdered the Statute of Frauds?
By Patrick A. Randolph Jr.
For millennia the law has required special procedures in the transfer of ownership of land. Although this was done partly to maintain clear records of such transfers, there is little doubt that many of the procedures were designed to signify the importance of such transfers to the social fabric.
Traditional Standards of Formality
The common law tradition significantly raised the bar when it came to ceremonial celebration of land transfer. The old books tell us of church ceremonies with clods of earth on the altar, processions around the entire boundary of the property joined by the entire village and little vignettes in which the grantor literally leaped over a hedge and off the property to demonstrate his abandonment of any claim to it. At one point, allegedly, it was the custom to seize a local village boy to witness the ceremony at the edge of the property and then to flog the unfortunate young man severely, so that he would always remember what he had seen (and felt) that day.
These ancient ceremonies found a more modern expression in the Statute of Frauds requirement in every state that transfers of real estate be made by a writing signed by the party to be bound. Of course, courts have trimmed the edges of this requirement by finding, in exceptional cases, that sketches on cocktail napkins and brown paper bags have met the standard. Ceremony has its limits. Nevertheless, the basic requirement that transfers of land be in writing has given rise to an elaborate documentation practice observed in most instances of land transfer by professionals as a fundamental basis for preservation of security of title.
The Era of E-sign
Now, in what can be described as a Congressional “click of a mouse,” the long tradition of ceremonial land transfers may have been relegated to the trash file. In the brave new era of electronic commerce, nonwritten electronic transmissions, no matter how informal or sketchy, can conceivably result in a formal transfer of ownership of land. What is more, this was not accidental. It is what Congress wants, and any local disagreement is preempted. The era of E-sign is upon us. Get ready!
One of the primary purposes of the Electronic Records in Global and National Commerce Act, 15 U.S.C. §§ 7001 et seq. (2000), popularly referred to as “E-sign,” is the repeal of state law requirements for written instruments as they apply to electronic agreements. The operative language is quite clear and succinct:
Notwithstanding any statute, regulation, or other rule of law [other than subsequent parts of this same statute], with respect to any transactions 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.
Id. § 7001(a).
The operative term, obviously, is “transaction.” E-sign provides a very broad definition:
The term “transaction” means an action or set of actions relating to the conduct of business, consumer or commercial affairs between two or more persons, including any of the following types of conduct—
(A) the sale, lease, exchange, or other disposition of [personal property and intangibles]; and
(B) the sale, lease, exchange or other disposition of any interest in real property, or any combination thereof.
Id. § 7006(13).
People familiar with developments in electronic transactions do not find any of this surprising. They expect a new world of encrypted signatures managed through elaborate codes, eyeball or DNA recognition, or other sophisticated security devices to ensure the certainty of agreement that once might have been provided by personal witnesses, signatures, seals and notaries. In other words, one type of formality is to be replaced with another type. But, in its infinite wisdom, Congress has moved far beyond this narrow view of transactions. Congress has provided that almost anything can be an electronic signature binding a party to an agreement. Here is the statutory language: “The term ‘electronic signature’ means 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.” Id. § 7006(5).
That’s it. So, for instance, if you sent me an e-mail that said: “I’ll buy your property at 450 W. Meyer in Chicago for $50,000,” and I typed at the top of this message “OK” and hit “return,” it is quite likely that we would have a binding real estate contract. All you would have to show is that the typing of the word “OK” indicated my intent to express agreement. The fact that I did not type out my name would not matter, because I “attached” an “electronic symbol” (i.e., the word “OK”) to a contract. The contract would still have to meet standards of clarity and certainty, and perhaps an exchange this informal would not meet those standards in some jurisdictions. But the point is that a relatively simple and perhaps thoughtless act might result in the formation of a serious contractual obligation.
Voice Mail and Telephone Assent
Perhaps you are wondering whether a voice transmission over a telephone line is also an “electronic sound, symbol or process,” taking telephone agreements out of the Statute of Frauds. E-sign appears to exempt, at least in consumer agreements, telephone conversations from the effect of its preemptive approval of electronic agreements, but the exemption is not at all clear. Here is the language, which applies only to consumer agreements: “An oral communication or a recording of an oral communication shall not qualify as an electronic record for purposes of this subsection except as otherwise provided under applicable law.” Id. § 7001(c)(6).
First, we would have to conclude that a telephonic communication is an “oral communication.” We have a fighting chance there. Note, however, that the exemption language applies to “electronic records,” which is a different concept from “electronic signature.”
What about agreements other than consumer agreements? Another E-sign provision, of broader application, states that if an existing local law requires that an agreement be in writing, the enforceability of an electronic record of that agreement may be denied if the record is in a form that cannot be retained and accurately reproduced. Id. § 7001(e). Thus, it would seem we could not negotiate a real estate agreement over the telephone that would be exempt from the Statute of Frauds unless that conversation was recorded in some way and could be reproduced. But does this provision mean that my telephonic assent to an agreement sent to me by e-mail or even in writing would be valid if it could be preserved in a reproducible fashion, such as on an answering machine? Probably so.
Note that while the Act applies only to transactions in or affecting “interstate commerce,” Id. § 7001(a), that e-mail message, when it left my computer, conceivably bounced to Irkutsk, then to Geneva, then to Mexico City all on its way to your computer, even if your computer is in the building next door to mine. Further, it was carried on a variety of communications media commonly associated with interstate transactions. The likelihood is quite strong that even the current Supreme Court, with its reputed desire for narrowing the reach of the Interstate Commerce Clause, will have difficulty finding that e-mail transactions are not in interstate commerce. With respect to local telephone conversations, prior federal court cases have held that telephone conversations are per se within interstate commerce. See, e.g., United States v. Gilbert, 181 F. 3d 152, 158-9 (1st Cir. 1999).
Is the “Think Twice” Protection Eliminated?
It is not hard to argue that the E-sign era is exactly what Congress intended, but is it good policy? Traditionally, the Statute of Frauds requires formality in the “typical” real estate transaction (and, of course, other important transactions as well). We all know that the requirements of the statute can often be avoided through the “part performance doctrine” or through the somewhat related concept of “estoppel.” Further, in some cases parties relying upon the statute to avoid obligations have been held liable for fraud, even though they are not bound in the transaction itself. But even with the many exceptions to which lawyers might resort in a pinch, the requirements of the Statute of Frauds have resulted in standard practices by real estate transactions professionals to comply with the requirements and to avoid problems. The result, many would argue, is that parties engaged in real estate transactions get the chance to “think twice” and to study the instruments before they are finally bound to making a serious commitment. It is that opportunity to “think twice” that the E-sign legislation may take away.
Well-advised parties have always been able to protect themselves from thoughtless acts by their agents or employees by setting up restrictions on the way in which they are bound to important contracts. There is nothing in E-sign that prevents implementing or continuing such practices, and it is a good idea to start to do so right away. A company could, for instance, simply prohibit its employees from assenting to anything through e-mail messages. It could provide notice in advance to its business associates that electronic transmissions cannot result in binding agreements. Such a notice, one hopes, would be binding upon any parties that do business with knowledge of it, because an electronic assent would not then be regarded as expressing an “intent to be bound.” A court, however, could find that the party supplying the warning had waived the restriction by the granting of oral assent, notwithstanding the warning.
Many real estate owners, however, are not “well-advised” when they are in the throes of negotiating real estate deals. Lawyers know that all too often there is something on the table before the client shows up for legal advice. Frequently, the presence of the Statute of Frauds has protected such clients from themselves. If it is not in writing, it can always be changed to make a more acceptable agreement. These situations often arise when there has been no part performance or estoppel, and the parties can work out an agreement in a more formal negotiating environment.
Obviously, if E-sign makes every voice mail or other recorded telephone exchange a binding agreement, notwithstanding the Statute of Frauds, this “second chance,” generally available today, will be gone. Even if E-sign does not apply to telephonic acceptances, its application to Internet agreements may raise many of the same problems. The fundamental policy question is whether an e-mail exchange ought to be viewed as the equivalent of an exchange of written documents or as the equivalent of a telephone conversation. In my view, the Internet exchange falls in between but in many cases fits closer to the telephone conversation. Remember that Internet exchanges now are carried out through hand-held transmitters that “road warriors” bang on while walking through airports.
An even bigger problem that E-sign creates, also related to the informal procedures it authorizes, is the danger of forgery. One reason that we require affixation of signatures to documents is that they provide some protection against fraud. Signatures can still be forged, but at least there is a first line of protection against potential crooks who do not know the signatures of the persons they are impersonating. Under E-sign, such criminals can pretend to be you electronically, for instance, by sitting at your office computer when you are at lunch, and commit you to a wide range of actions just by sending e-mail messages. Crooks can even “sit” at your computer electronically while you are there!
Congress has decided that society can stand the risk of electronic forgery. Maybe in general this risk is tolerable, but is such risk warranted if millions of dollars of investment and loan proceeds can be committed based on fraudulent electronic signatures? Is such risk warranted if the stability of land records is jeopardized?
To the extent that local law requires notarization, E-sign preserves that requirement but permits the notarization to be electronic as well. 15 U.S.C. § 7001(g). This is not a big hurdle for someone already committed to forging your signature.
The best result we can hope for under E-sign is that the affixation of a digitized signature or other formal identifier becomes the modern equivalent of the executed, notarized instrument. Many who have observed the Internet in operation expect that this will come to pass. Encrypted signatures or other equivalent high security identification devices probably work better than current signature and notarization requirements. The real question is whether E-sign permits or even creates a legal context with that level of formality. Because of a concern about holding back technological developments by committing to a certain encryption standard, E-sign’s authors elected not to require any particular formality in electronic signatures.
Preservation of Formality Requirements Under E-sign
What actions or arguments might preserve under E-sign the requirement of “electronic formality” that is the equivalent of the Statute of Frauds?
To address the problem of “accidental agreement “—the loss of the Statute of Frauds’ “chance to think twice”—probably the best legal argument is to claim that an assent expressed on an Internet message that is not a formal digitized signature does not embody an “intent to sign,” even if it embodies an expression of agreement. Remember that an electronic signature is something that is attached “with the intent to sign the record.” There is no legal authority on this point yet, and I hope that I am not the first to make history by raising this argument. But it might work, particularly if prior electronic commitments made by the signing party have been made through digitized signatures or other secure devices. The emphasis in E-sign appears to be on the intent of the executing party, not on the apparent agreement as observed by the receiving party.
Another approach, which deals both with formality and forgery concerns, is to “re-preempt” E-sign by new state legislation. Section 102 of E-sign states that a new state “statute, regulation or other rule of law” may alter the impact of E-sign, if it consists of the adoption of the Uniform Electronic Transactions Act or if it is a subsequent enactment that makes specific reference to E-sign. Id. § 7002(a)(1). So, although any existing formality requirements in state law are preempted to the extent they are inconsistent with E-sign, new requirements could be established. But the adoption of the Uniform Electronic Transactions Act would not help much because the operative provisions of that statute, such as the definition of “electronic record” and “electronic signature,” are basically identical to the E-sign language. See Unif. Elec. Transactions Act § 2(7),(8) 1999. The Uniform Act was in fact the model for E-sign in this regard. Unlike E-sign, the Uniform Act applies expressly only to situations in which the parties have agreed to transact electronically. Unfortunately, the parties can implicitly consent by their conduct. Id. § 5(b) cmt. 4.
What about a new state law or regulation implementing the concept of the Statute of Frauds or some other formal requirement for binding real estate agreements? Section 102 does permit that, but it requires that any such new law be consistent with the provisions of E-sign. 15 U.S.C. § 7002(a)(2)(A). Consequently, electronic signatures or electronic contracts cannot be denied enforceability completely.
State Law Modifications of E-sign
Can a state impose a greater requirement of “electronic formality,” such as a requirement that electronic real estate contracts not be binding in the absence of a digitized secure signature? Answer: Maybe, but only very carefully. The problem is that Section 102 also requires that any “readoption” of state standards must not “require or accord greater legal status or effect to . . . a specific technology or technical specification.” Id. § 7002(A)(ii). The concern here was to prevent local law from inhibiting electronic transaction developments by creating monopolies for given technologies or even for given proprietary systems. The target was legislation similar to Utah legislation that had adopted standards for electronic transactions incorporating ABA-recommended guidelines for electronic signatures. Utah Code Ann. §§ 46-4-101 et seq. (2000).
So a statute requiring specific technology is out. But what about the creation of a state administrative agency charged with the approval of systems that meet certain guidelines for formality, regardless of their technology? Will this work? Is such approval the imposition of a specific “technical specification” or simply the imposition of supervised “performance standards”? If a state moves in this direction, watch for the lawsuit.
The ABA Section of Real Property, Probate & Trust Law has created a Joint Committee on Digital Signatures and E-Commerce, which is evaluating these and other issues and may propose state legislation before too long.
Conversation with Pat Fry
Pat Fry, the Reporter for the Uniform Electronic Transactions Act, is quite familiar with the origins of the language in E-sign. In an interview with her in the fall of 2000, I raised some of the questions discussed here. When asked whether an electronic expression of agreement is different from an electronic signature, Ms. Fry responded that the drafters of the definition of “electronic signature” did not intend a difference. No special formality was envisioned. Ms. Fry pointed out that E-sign retains the general notion that there be a preservable and reproducible record, as required by the Statute of Frauds. In her view the preservable and reproducible record would have to include the signature as well.
As to the general requirement of formality imposed by the Statute of Frauds, Ms. Fry’s view is that it never existed. After all, she points out, the Statute of Frauds would have upheld the proverbial cocktail napkin agreement so long as it was initialed. Is this really any different from writing “OK” in a response to an e-mail message? My answer, as indicated, is that few such agreements involving real estate ever closed.
E-sign could erode the protections afforded by the formality requirements of the Statute of Frauds, such as the ability to “think twice” before being bound. The risks to the integrity of the process by which real estate transactions are made could outweigh the benefits of electronic transfers. The provisions of E-sign as they affect real estate transactions have yet to be tested in court. Stay tuned.
Patrick A. Randolph Jr. is a professor of law at the University of Missouri-Kansas City.