Got questions about the ESIGN Act and how it impacts businesses, consumers, and what is legally permissible? We broke things down.
Without it, signing documents online might not be possible. At least not the way we think about it. We’re talking about the ESIGN Act, also known as the Electronic Signatures in Global and National Commerce Act. More than any other legislation, that one act (passed in 2000) is responsible for defining and codifying the laws relating to electronic signatures.
But unless you like reading long, Congressional-level PDFs online, it can be difficult to make sense of the ESIGN Act. What does it include? What does it mean for 2021 and beyond? To summarize, we’ve put together a brief guide to the ESIGN Act and how it affects our lives today.
The History of the ESIGN Act
Call it the “wild west.” Before the year 2000, people were still figuring out how to use this thing we call the Internet. The rise of the Internet’s popularity in the 1990s meant more people were doing business online than ever. In 1999, several bills relating to defining “electronic” commerce started popping up. By 2000, it made more sense to combine them into comprehensive legislation that became the ESIGN Act.
Also known as the E-Sign Act, this legislation set out to accomplish a few key goals:
- Define “electronic” to help establish a legal framework for this and future regulations, especially as it relates to any electronic form online
- Establish what electronic records institutions have to keep to verify e-signatures
- Set the parameters for what constitutes a valid e-signature from either party
The act became the law on the books as of October 1, 2000. If that sounds pretty streamlined for Washington, it’s because ESIGN didn’t establish a new regulatory body. Instead, it helped the courts define what constitutes a contract under existing law.
Let’s look at the major provisions of the ESIGN Act, according to the FDIC:
- Prior consent. Simply put, does a signature reflect the consent of someone agreeing to the contract? More on this below.
- Hardware and software requirements. You can’t very well sign a contract and then ghost someone else who signed it. The ESIGN Act established that the consumer has to have some reasonable access to these records, as well as viewing everything they need to view.
- Retaining records. And speaking of records, ESIGN requires financial institutions to keep valid records of these electronic signatures.
- Definitions. The ESIGN Act was also designed to tame the wild west of the Internet. Part of the way it was able to accomplish that? It set out definitions for words like “consumer,” “electronic,” “electronic agent,” “electronic record,” “information,” and more. These days, electronic records laws can refer to the ESIGN Act to build upon previously-established definitions.
Electronic Signature Validity
What happened when the ESIGN Act passed? Most importantly, it provided answers to two key questions:
- Are electronic signatures legally binding and enforceable? Yes, as long as a business keeps accurate electronic records of the signatures. When you do, it’s as if you signed the documents in person.
- Does this apply across the U.S.? Globally? The ESIGN Act applies to U.S. citizens and relates to interstate commerce, but it doesn’t have jurisdiction over other citizens. U.S. citizens can still sign documents even if they’re out of the country.
The ESIGN Act essentially established what makes an electronic signature valid under U.S. law. In doing this, it extended legally binding contracts from beyond the paper world and into the digital world. This was an essential way to keep business moving, particularly for anyone who worked remotely.
International Commerce; What Countries Are Included?
One of the reasons Congress acted to codify electronic signatures into law? E-signatures were a rising trend across the world, and Congress didn’t want Americans to fall behind.
However, that isn’t to say that American courts will recognize any old e-signature. It required that anyone signing documents like these should have access to the same authentication technology; otherwise, anyone from across the globe could sign in someone else’s stead and create a non-binding contract. For that reason, ESIGN helped codify what kind of security and authentication measures need to be in place for a valid contract.
What are the Exceptions to ESIGN Act Laws?
Not every digital signature is going to be valid. In fact, the law makes it pretty clear which contracts aren’t valid. Part of the reasoning behind ESIGN was to help codify what conditions have to be met for an electronic signature to carry the same legal weight as an in-person signature.
To comply with the ESIGN Act, a contract needs the following:
- Intent to sign. If someone puts out a digital signature and someone else lifts that signature, steals it, and applies it to a contract, then the original signer shouldn’t be liable. That’s at the core of what makes the ESIGN Act so important. Just because your digital signature might be available on the web doesn’t mean anyone can sign your name and expect it to be a valid contract.
- Consent to do business electronically. The reason you often see “I agree” forms when you sign documents online? You need to consent to do this business electronically. It seems like a formality, but it’s important to establish that you aren’t doing something just because some online form prompted you. You need to grant your consent.
- Clear signature association. This is the same rule that applies offline. Does your signature match you? Is the signature yours?
- Record retention. It’s a classic problem. “If a tree falls in a forest and no one hears it, does it make a sound?” The same is true with contracts. If no one can ever provide evidence that a contract took place because they didn’t keep it in their records, then it’s hard to prove that a contract exists. The same is true with electronic records. The ESIGN Act established that each party needs to keep records of the signed contract to prove the agreement took place.
COVID-19 and E-Signatures: What’s Changed?
For a long time, electronic signatures were much more voluntary. In the years between 2000 and 2019, the world voluntarily moved towards remote negotiations and work.
Then, in 2020, an unexpected pandemic hit. It changed the way we worked. Within months, 71% of U.S. adults said they were working from home.
Yet life—and business—had to go on. That meant digital technology, including web conferencing and E-Signatures, had to come to the forefront. There are now companies that employ an entirely remote workforce, having no physical office space to call their own.
These companies get along surprisingly well. Companies like Buffer, Hubstaff, and Ghost are renowned fully-remote companies, which means that even when they have someone sign an employment contract, that contract is probably an electronic document.
Part of the reason the economy was able to recover so quickly after the COVID-19 shutdowns? We already have the infrastructure in place to keep commerce going. People can sign contracts online knowing two things:
- The digital structure necessary to store, protect, and secure these contracts is not only here, but has been around for years.
- People have been signing documents and contracts online since before the ESIGN Act, and for the most part, it’s gone well.
COVID-19 did change things, however. It accelerated our move to a digital workplace. Even the Federal Reserve Bank of New York, for example, started accepting electronic signatures for certain documents.
The realities of social distancing might have posed a challenge to an all-paper economy. But given what we can now achieve with the ESIGN Act in place, the economy kept humming along even through a pandemic that had people staying in their homes.
Making Use of the ESIGN Act Today
The ESIGN Act is something we take for granted these days. We know that by clicking on consent forms and uploading our signature, we’re signing something just as well as if we were in person.
And that’s a good thing. During COVID-19, it meant that people could keep carrying on with their business and socially distance. It meant people could have confidence in the safety and security of their electronic records.
But are you confident with your electronic records?
The ESIGN Act does require that you have to meet certain standards to ensure that your contracts are valid. And it helps to have your ducks in a row—as automated as possible—to ensure that you’ve got everything you need to adhere to the ESIGN Act.
Fortunately, you don’t have to pay to find out how it all works. Get started with a Free Trial of Nitro today to see what it’s all about.