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THE ROLE OF ELECTRONIC SIGNATURES IN CONTRACT LAW: LEGAL AND PRACTICAL CONSIDERATIONS

INTRODUCTION 

In the modern generation, technology is running like a marathon. The contract is not an exception to this facet. With the growth in the globe of corporate, e-contracts are gaining significantly. All contracts get executed after the signatures of the parties. In this regard, electronic signature plays a vital role in the execution of electronic contracts. Time and cost management is specious to every business. Electronic signatures are the epitome of serving this purpose. In modern business, more companies seek to streamline their contract process by switching to this mode as it reduces their transaction cost and as well as less time-consuming.

But, numerous questions arise concerning the use of electronic signatures regarding its bindingness, legality, enforceability, and even about how the user can ensure security and validity by using these signatures, especially companies having lucrative business agreements. Since there are national and international legal frameworks governing these electronic signatures including, Information Technology Act, Electronic Signature in Global and National Commerce Act, Uniform Electronic Transaction Act, and European Union’s Regulation.  On the other hand, different types of electronic signatures must be recognized properly and integrated according to the practical need of the contract.

However, Electronic signature has pros and cons of its own. Many benefits can be reaped from using electronic signatures in contracts. But there are some challenges and risks that arise while using electronic signatures such as authentication issues, verification issues, and some issues regarding the legality of electronic signatures because not every e-contract is having legal recognition in the eye of the law. Therefore there is a need for the best method of practice, and proper implementation of e- signatures to overcome these barriers.

COMPARISON WITH TRADITIONAL SIGNATURE

In modern business, there is a lot of scope for the use of e-signatures as business is demanding more and more paperless transactions. Electronic signatures are quite distinct from traditional signatures and are used for paperless transactions.  E-signatures are formed through electronic devices such as computers, smartphones, tablets, and so on. There is no use of pen and paper as followed in traditional wet signatures. Hence e-signatures are not affixed to any physical document instead they are stored electronically in digital code,  image form, or any other form other than physical form.

TYPES OF ELECTRONIC SIGNATURES

Based on the EU Regulation (eIDAI),

  1. Simple Electronic Signatures- These are the easiest type of e- signatures anyone can create and use it. But said signatures can be forged by cyber hackers. As it only contains the name as a signature. Therefore it is considered the lowest secured e-signatures as the chance of forging is more compared to other types.
  2. Advanced electronic signatures- Advanced electronic signatures are preferable to use as it meets certain legal requirements for integrity and authenticity. To considered under this category signatures are must under the control of the creator or signer, be able to identify the signer, and be created by using secured devices.
  3. Qualified electronic signatures- As the name says these are highly recommended signatures especially if the business is dealing with high-value transactions. In this type, e-signatures are approved by the proper or government authority by issuing the certificate to the user. Thus these types are more recommended. As they are cultivated with more security, authentication, and integrity.

NATIONAL AND INTERNATIONAL LEGAL FRAMEWORKS

E-signatures are legally recognised under various laws and differ with jurisdiction. Before knowing about what are the laws governing e-signatures, it is required to know about the need for legal recognition of e-signatures. In the earlier days, in comparison with traditional signatures, e-signatures were less secure, because of security and authenticity issues.  For that reason, e-signatures are legally recognised would allow the business to collect electronic signatures that are legally valid and will hold up in court.

Some of the major laws on this behalf –

Information Technology Act – The Act came into force in 2000. According to Section 2(1)(ta) in the Information Technology Act 2000,  “electronic signature” means authentication of any electronic record by a subscriber by means of the electronic technique specified in the Second Schedule and includes a digital signature. It is evident from the said definition that electronic signatures are legally recognised in India.

Electronic Signatures in Global and National Commerce Act (ESIGN) – The Act came into force in the year 2020 June 30 by the United States Congress. The Act has given legal effect to e-signatures. ESIGN is not only applicable to terms of local contracts but also to interstate and global commerce relationships. All agreements delivered digitally before October 1, 2000, stipulated that agreements created after this date must comply with the guidelines outlined in the Act.

Uniform Electronic Transaction Act (UETA) – This Act came into force in1999 by Uniform Law Commission by giving similar effect as given to traditional handwritten signatures and paper documents. The application of UETA is only confined to electronic records. The UETA has been adopted in 49 states, the District of Columbia, Puerto Rico, and the US Virgin Islands. New York has not adopted the UETA but has adopted similar laws making electronic signatures legally enforceable.

EU Regulation (eIDAS) – The regulation was established in EU Regulation 910/2014 on 23 July 2014. It is a European Regulation. According to this Regulation, Article 3 (10) defines that ‘electronic signature’ means data in electronic form which is attached to or logically associated with other data in electronic form and which is used by the signatory to sign. This regulation is based on electronic identification, authentication, and trust services. It plays a very important role in cross-border transactions as it provides the legal framework for such transactions.

Thus these international laws provide legal recognition to electronic signatures. These laws provide validity as well as legal recognition and ensure the security of the signatory.

BENEFITS OF ELECTRONIC SIGNATURES

According to the International Associations for Contract and Commercial Management (IACCM), 83% of legal departments face pressure to improve efficiency and lower costs. Using e-signatures will not only reduce the cost of business but also saves time for the business. Especially in lucrative agreements, it plays a very beneficial role. Some of the benefits of the e-signature are as follows:

  • Reduce the cost & user convenience – Every business tends to complete the project by adopting cost-saving methods. In that regard, e-signatures can be easily created without any delay. It also saves the transportation cost which is a big issue in international agreements.
  • Increase efficiency & time saving – As traditional methods are paper-based works where it requires lots of time and a lot of signatures as signed by multiple persons it will take more time to complete the procedures. But now business is opting for this method as it saves the time of the business.

SOME OF THE DRAWBACKS OF E-SIGNATURES

E-signature has its own drawbacks as every technology has its demerits. In that regard, some of the major drawbacks are –

  • Security issues- Today cyber hacking is becoming a huge problem. As technology is growing since hackers are emerging. There may be the chance of identity theft or hacking because these signatures are vulnerable. It may lead to dispute or conflict as signatures can be forged and there is a chance for misuse of these signatures.
  • Uncertainty – E-signatures are governed by different jurisdictional laws. It has not contained any unanimous rule in creating e-signatures. Hence not every e-signature is not legally binding in every country as e-signatures differ with different jurisdictional laws.

 BEST PRACTICE TO OVERCOME FROM BARRIERS

  • Although there is no unanimous law or rule for e-signatures, the user while dealing with any international contracts must ensure what are the specific legal requirements that have to be met according to different jurisdictional laws.
  • Users must monitor and update the security for e-signatures and also adhere to all the protocols.
  • It is better for the signatory to create and use a signature in the secured device only, whether it may be secured with a government authority or with any private authority such signature is called digital signatures and are part of e-signatures which is more secure than normal e-signatures. It is issued by a licensed Certifying Authority by providing certificates to the user.

E.g.- In India, the Ministry of Corporate Affairs is the government authority that issues the Digital Signature by issuing the certificate.

CONCLUSION

Thus e-signatures play a vital role in business contracts as they reduce cost, and save time along with it increase efficiency and work structure in a better way. E-signatures do not apply to documents that compulsorily require wet signatures. Users while dealing with highly valuable commercial e-contracts must ensure legal requirements, authentication, and verification of the e-signature to avoid future problems. Hence finally, with the best methods of practice and following the legal requirements of different jurisdictions, it is possible to avoid such disputes.

Author(s) Name: Pruthvi Ramakanta Hegde (Law Graduate)