ESign and Their Impact on Small Businesses

October 1, 2000, marked a great step forward for online businesses. That’s the date that the new Electronic Signatures in Global and National Commerce Act (ESIGN) took effect. The ESIGN law allows businesses to enter into legally enforceable transactions and contracts over the internet and prevents a contract from being declared void simply because it is in an electronic format.

Prior to the ESIGN law, vendors like mortgage brokers could do many things online—find customers, provide information, and even take applications. However, in order to enter into an enforceable contract, vendors had to mail a customer paper copies of promissory notes and mortgage papers to obtain an original signature. Not only did this greatly slow down transactions, it added huge costs to vendors who sought to sell their services online. However, ESIGN made this last hurdle almost entirely vanish.

ESIGN’s significance is rooted in contract law—specifically state laws, which generally govern contracts. When dealing with interstate commerce, the federal government can pass laws that overrule otherwise applicable state laws, however, this preemptive power is generally used very sparingly in contract law.

Even though states have increasingly passed uniform commercial laws, there are still substantial differences between various states. In 1991, the federal government attempted to encourage consistency between the states with the Uniform Electronic Transactions Act (UETA), which was a model act to govern e-commerce transactions. While two of the leading commercial states, Pennsylvania and Ohio, adopted versions of UETA, most other states were only beginning to discuss the issue. Rather than uniformity, the result of the UETA act was uncertainty about if and when an electronic contract could be enforced.

The ESIGN act establishes a basic framework which states must operate within if they want to enact laws to govern electronic contracts, eliminating that uncertainty. If a state chooses not to adopt UETA or another law, ESIGN’s provisions will govern the e-contracts of that state. ESIGN also prohibits states from refusing to enforce electronic contracts simply because of the electronic format, or due to the use of an electronic signature. It also prevents states from requiring vendors to use any specific technology to create electronic signatures.

ESIGN also gives consumers important protections. For example, it ensures that consumer protection laws, such as those specifying content and timing of legal notices, and full disclosure, must be identical for e-contracts as for paper contracts. Online vendors are to be held to the same antifraud and deception provisions as vendors who operate offline. However, the most important consumer protection is that online vendors must give consumers a choice of electronic or paper contracts. No customer can be forced to use electronic contracts if they do not wish it.

And finally, before an electronic contract is enforceable, vendors must give consumers at least the same level of consumer protections—such as privacy and documentation—as a consumer using paper methods would receive. That means that vendors must maintain secure systems that are capable of preserving electronic records, so they may be accurately reproduced at a later date for reference by relevant parties.

ESIGN and UETA have important qualifications. For example, the laws are applicable for sale or leasing of goods, but do not apply to the creation of security interests or the sale of chattel paper or secured leasing transactions. Article 9 of the Uniform Commercial Code, which came into effect on July 1, 2001, addressed these issues. However, states may still take time to adopt all the provisions. Dealers in chattel paper may still be forced to rely on paper-based transactions. UETA and ESIGN also facilitate the transfer of electronic records. While ESIGN mostly limits its definition of electronic records to the making of mortgage-backed promissory notes, UETA’s much broader definition of electronic records includes other title documents. One other quirk is that ESIGN’s provisions regarding mortgage-backed securities specifically pre-empts any state law which may conflict with it—including UETA.

For more information on legally enforcable contracts for ESign please visit
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