California Is First State In Nation To Adopt Electronic Contracting Law: Thelen Reid Report No. 26

The explosion of Internet commerce is staggering. The U.S. Department of Commerce estimates that Internet retailing exceeded $7 billion in 1998 and online sales will range between $40 billion and $80 billion by 2002. Many forecasters now estimate that business-to-business e-commerce will reach $1.3 trillion by 2003. In contrast, our legal infrastructure to support online commerce has been slow to develop. This has led to uncertainty as to the enforceability of electronically created contracts and the admissibility into evidence of electronic records and documents. Until recently, California had no statutes or regulations governing electronic transactions, other than regulations relating to digital signatures in communications with public entities (Government Code section 16.5).

On September 16, 1999, California Governor Gray Davis signed Senate Bill 820 (the "Act"), making California the first state in the nation to adopt the Uniform Electronic Transaction Act ("UETA"). The underlying purpose of the Act is to ensure that electronic contracts (records and signatures) have the same legal effect as their hard copy counterparts. The Act further provides that if a law requires a record to be in writing, or if a law requires a signature, an electronic record satisfies those requirements. The Act will take effect on January 1, 2000.

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The Act is designed to facilitate rather than mandate the use of electronic contracting; indeed, it only applies to transactions where the parties have agreed to conduct their transaction electronically. Except where an agreement's primary purpose is to authorize electronic transactions, an agreement to conduct a transaction by electronic means may not be contained in a standard form contract that is not itself an electronic record. Nor may standard form agreements be conditioned on an agreement to conduct transactions electronically. Under the Act, if the sender of an electronic record inhibits the printing or storing of that record, the electronic record is not enforceable against the recipient.

Certain transactions are excluded from the Act, including: (1) those involving wills, codicils, or testamentary trusts; (2) transactions under California Commercial Code sections that specifically deal with electronic records; (3) certain transactions that by law must be signed or initialed separately from the record; (4) certain transactions governed by various consumer protection laws (e.g., notice of mortgage late fees, non-judicial foreclosure notices, statements of finance charges); (5) any transaction under the Automobile Sales Finance Act or the Vehicle Licensing Act; (6) certain transactions in which notice to prospective purchasers must be given by telephonic sellers; and (7) retail installment sales contracts under the Unruh Act.

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Regarding the admissibility of evidence, the Act provides that in a judicial proceeding, a record or signature may not be excluded solely because it is in an electronic format. The Act also provides that if parties agree to use a security procedure to detect changes or errors, and one party fails to use the procedure (and the other party does not detect the error or change), the other party may avoid the effect of the changed or erroneous electronic record. Finally, the Act contains rules governing the retention of electronic records and provides that under certain circumstances, an electronic signature may satisfy requirements that a signature be notarized or signed under penalty of perjury.

On September 28, 1999, New York Governor George Pataki signed the Electronic Records and Signature Act. The law, which is intended to put electronic signatures and records on an equal footing with manual signatures and records for all but a few types of documents (mainly wills and deeds), goes into effect on March 27, 2000. The New York State Office for Technology will issue regulations implementing the Act. The United States House of Representatives recently approved electronic signature legislation (H.R. 1714). The measure now goes to the Senate where similar legislation has been pending to remove legal barriers to electronic commerce.

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Potential Legal Impact of the Act. Although Governor Davis has predicted that "California's high-tech community and consumers will benefit greatly" from the Act, transactions conducted and memorialized electronically should be examined by legal counsel for a number of reasons. For example, procedures should be implemented and forms of agreement revised, if necessary, to ensure that all electronic contracts comply with the statutory requirements regarding the confirmation of errors or changes to the record, and the printing and storing of electronic records. In light of some critics' claims that the provision governing the admissibility of evidence of an electronic record or signature may be unconstitutional, contracting parties should consider adding clauses expressly providing for the admissibility of the constituent electronic records. For the same reason, severability clauses may be advisable. Finally, companies that do business in California should also consider including a choice of law provision to take advantage of this new law.

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The Thelen Reid Report is published as an information service to clients and friends. Please recognize that the information is general in nature and does not constitute legal advice. We welcome your comments and suggestions.
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