Editor’s Note: Adam Beaudoin is a member of the Business Section of Ward and Smith, P.A.

Requiem for the Signing Ceremony?

What would John Hancock think? For as long as people have conducted official business, they have relied on signed paper documents. Whether it’s the Declaration of Independence or your first car loan, documents always have had at least two things in common: (1) they were reduced to writing on paper, and (2) they were signed in ink. The signatures at the bottom of the page were evidence that the parties agreed to be bound by the contents of the document. The bigger the transaction, the more elaborate the signing ceremony.

Although the basic nature of business and commerce has not changed, advances in technology provide you, whether you are a company or an individual, with the ability to execute paperless transactions. The age of electronic commerce has long been upon us, and it is not a passing fad. Through the Internet, businesses now contract with parties across the globe, in most cases never meeting face-to-face. The contract has gone paperless, and signing a contract now can be accomplished with a few key strokes instead of a ballpoint pen.

The E-Sign Act: Digital is as Valid as Paper and Ink.

In order to capitalize on the efficiency, convenience, and money-saving advantages of electronic contracts, businesses needed confidence that electronic contracts would be considered as valid as if they had been executed on paper and that the courts would enforce them. In 2000, to encourage and facilitate the use of electronic records and signatures in interstate and foreign commerce, Congress passed the Electronic Signatures in Global and National Commerce Act (the "E-Sign Act"). Shortly thereafter, North Carolina passed its own version of the E-Sign Act for intrastate commerce, known as the Uniform Electronic Transaction Act ("UETA"). The fundamental principles of both pieces of legislation are: (1) an electronic record or signature may not be denied legal effect or enforceability solely because it is in electronic form, and (2) a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Simply put, electronic signatures and records are just as good as their paper equivalent. However, they also are subject to the same legal scrutiny of authenticity that applies to paper documents. Thus, the E-Sign Act and UETA gave businesses the necessary confidence to know that if they followed the statutory requirements, their electronic contracts would be enforced.

Where Do I Sign: How Digital Signatures Work.

Just as with a hand-written signature on a paper contract, the most important component of a digital signature is its authenticity. You want to ensure that the person signing your contract is who he or she claims to be. A forgery is a forgery, whether it’s on paper or in digital format. So, the digital signature must be verifiable to guarantee its authenticity. Additionally, the electronic contract itself must be secure. When parties sign a contract, they do so based on what is contained within the "four corners" of the document. Just as one party may not modify, alter, or re-write a paper contract after execution, the same holds true for electronic contracts. When the electronic document cannot be proven as having a valid signature, or when document integrity has been compromised due to inadequate security measures, the contract can be denied legal effect.

So, how does an electronic signature work? Digital signatures are created and verified by cryptography, using what is known as "public key cryptography," which employs an algorithm using two different, but mathematically related, "keys" – one for creating a digital signature or transforming data into a seemingly unintelligible form, and a second for verifying the digital signature or returning the message to its original form. First, a user obtains a digital certificate that identifies the user (either a person or business) in an electronic transaction. The certificate holder then uses the cryptographic process mentioned above to create an electronic signature. The digital certificate must be unique to the person or entity using it, capable of certification, under sole control of the person using it, and linked to data in such a manner that if the data is changed, the electronic signature is rendered invalid. When the message, which includes the digital signature, is sent or "signed" and then successfully decrypted and the recipient verifies the digital certificate, the recipient gains assurance that the sender is who he or she claims to be and the message received is identical to that sent. This process enables the legal enforceability of electronically-signed documents.

But We’ve Always Used Paper and Ink: The Benefits of Going Digital.

What are the benefits of digital signatures and contracts to you? The primary benefit of going digital is that it allows you to transact business without the costs and inefficiencies associated with bringing every customer into a physical office to sign a contract. Your company website becomes your office, and "signing ceremonies" can be conducted around the clock with key strokes and mouse clicks. Instead of sending contracts by mail to customers, where you have no way to independently verify the authenticity of their signatures (other than the long-revered, but fallible, practice of having the signature acknowledged by a "government official," commonly a Notary Public), you make the contract available over the Internet and require execution by digital signature.

When properly implemented and utilized, digital signatures:

● Minimize your risk of dealing with imposters or persons who attempt to escape responsibility by claiming to have been impersonated;

● Minimize your risk of undetected document tampering and forgery, and of false claims that a document was altered after it was sent;

● Give you a high degree of information security, even for information sent over open, insecure, but inexpensive and widely-used channels; and,

● Allow you to benefit the environment by reducing, and in some cases eliminating, the need for paper transactions (unless, of course, out of habit, you print copies of these electronic documents for "safety’s sake").

In addition to providing speed and efficiency in a transaction, the principal advantage of electronic signatures is more reliable authentication. By the nature of public key cryptography, if a document is signed electronically, any change in the document will invalidate the signature.

Microsoft versus Mont Blanc: The Costs of Going Digital.

Since passage of the E-Sign Act and UETA, many vendors have developed reliable, and competitively-priced, digital signature software and applications. Your business need not have its own IT department or develop its own software from scratch, but may purchase a product tailored to its specific needs. The software package can be as basic or elaborate as your business dictates, with the price corresponding accordingly. If your business is engaged in electronic commerce, or desires to do so in the future, then it behooves you to investigate the software most appropriate for your company.

© 2008, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Adam M. Beaudoin practices in the Business Section and represents clients in a broad range of business transactions. Comments or questions may be sent to amb@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.