Are Your Contracts Set Up for Electronic Signatures?

By Manuel Fishman, Real Estate Attorney, Buchalter Nemer

There are statutes authorizing the use of electronic signatures in almost all states in the U.S., as well as by the federal government (see the applicable Uniform Electronic Transactions Act adopted in your State as well as the Federal Electronic Signatures in Global and National Commerce Act (ESIGN)).   Both UETA and ESIGN are technology-neutral statutes that operate as an “overlay” over existing laws (meaning that the statutes amend thousands of state and federal laws that require signatures).  However, most importantly, neither statute changes the substance of laws governing what is required to form a contract.

Some national shopping center chains have begun to adopt the use of electronic signatures as a part of their ordinary business.  The residential real estate sector now uses DocuSign in most transactions, thereby eliminating the need for the hand delivery of the massive paperwork required to comply with applicable federal and states laws relating to residential home purchases and sales.  So, why not commercial real estate?  Some commentators have estimated that the use of electronic signatures can save roughly 1.5 to almost 4 hours per lease transaction.  In addition, the use of electronic signatures reduces the need to print and copy long leases and other documents.

But, it is important to remember that the definition of “signature” for purposes of electronic signature legislation contains two elements.  It is an “electronic sound, symbol or process that is attached to or logically associated with an electronic record” and it must be adopted by the person using it “with the intent to sign the electronic record.”

A recent decision from December 2014, by an appellate court in California, focuses on the second prong.  The case involved an investment of $250,000 by two persons in two limited liability companies that owned apartment buildings in Arizona.  The investors sued the general partner for fraud and misrepresentation.   Negotiations ensued to resolve the dispute and a lawyer for the investors sent an email demanding that the general partner give a “yes or no” answer to their proposal for settlement.  Although the e-mail message contained general terms that would support a final contract, there was no signature block for the general partner to sign, and the email did not contain the signatures of the investors.  The general partner responded by saying “I agree.”  The general partner’s typed name appeared after that.   Needless to say, a dispute subsequently erupted over the terms of the settlement, and the general partner refused to sign the formal settlement agreement prepared by the investors’ counsel.  The court case that ensued was about enforcing the so-called exchange of emails as an enforceable settlement agreement.

The conclusion of the court was that “a typed name at the end of an email is not, by itself, a signature under case law.”  A typed name can be sufficient under certain circumstances as a signature, but the basic laws of contract formation require that the person who places his signature on a document do so “with the intention of authenticating the writing” – meaning intending to be bound by his signature to the contact.   In this case, the appellate court concluded that the evidence did not show that the general partner printed his name at the end of his email with any intent to formalize an electronic transaction.  Therefore, the general partner never signed the settlement agreement under the California UETA and the investors’ motion to enforce the settlement agreement – enforced by the trial court, was thrown out by the appellate court.  Just as disappointing, since the settlement agreement was thrown out, the investors were not a prevailing party and had to bear their own legal fees.

The lesson from this case, as emphasized by the court: when intending to have an exchange of emails serve as a binding electronic record that can be signed, add a signature block, and add a sentence to the contract that the agreement can be signed through the use of “commercially available electronic software which results in confirmed signatures delivered electronically to each of the parties.”

Which brings us back to the beginning – while it is important to incorporate the use of electronic signatures into our leases and other contracts, make sure that you do it in a comprehensive manner, with policies and procedures.  There are numerous tech companies that can set up processes and security steps to confirm the authenticity and intent of a signature.  The proper incorporation of these processes will ensure that an e-signature will be legally binding and will not fail to comply with your State’s UETA and the Federal ESIGN legislation.