Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
Electronic Signatures are New Again
Electronic signatures have become commonplace without most of us thinking much about their legality. However, the social distancing caused by the COVID-19 crisis has resulted in a dramatic increase in the use of electronic signatures in all types of transactions. Clients wishing to consummate binding transactions with e-signatures must understand the limitations on their use, which vary by state, especially for documents that require notarization or recording. Below, we summarize the basic principles and address some new developments regarding notarization and recording. This area of law is developing rapidly as jurisdictions attempt to facilitate commerce in this new age of social distance.
Basic Framework
Federal and State Laws on Electronic Signatures
Legislative Framework:
The Uniform Electronic Transactions Act (Model Act), promulgated in 1999, was intended to provide states with a model to give electronic signatures the same legal effect as traditional ink (sometimes called "wet") signatures. Forty-seven states, plus the District of Columbia, Puerto Rico, and Guam, have adopted the Model Act. The remaining three states – New York, Illinois and Washington - while declining to adopt the Model Act, enacted comparable legislation. The federal government sought to further speed the adoption and growth of ecommerce by adopting the United States Electronic Signatures in Global and National Commerce Act (US Electronic Signatures Act) in 2000.
Requirements:
Both the US Electronic Signatures Act and the Model Act define an "electronic signature" as an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.
Before accepting or using an electronic signature, one must determine the express requirements state and local law establish for such signatures. While local requirements are sometimes overlooked in smaller transactions, they are essential to the validity of electronic signatures.
As a general matter, the following requirements must be met for an electronic signature to be binding.
1. Consent: Electronic signature laws are opt-in statutes; an electronic transaction is only authorized if the parties have agreed to use electronic signatures. In business-to-business transactions, this agreement can be expressly stated in the agreement or implied from circumstances. Most jurisdictions, however, require the express consent of the consumer in consumer transactions. Standard clauses in corporate and real estate agreements often permit electronic signatures only for the agreement itself. Consideration should be given to expanding those clauses to permit electronic signatures in all documents related to the transaction.
2. Authentication & Attribution: For an electronic signature to be enforceable, it must (a) establish the identity of the signor as a party authorized to act as the business representative (authentication) and (b) provide evidence that the signature is attributable to the signor (attribution). Attribution is determined by the circumstances at the time of execution. It can be evidenced by tracing each signature to the signor's verified profile on a secure portal or by a less formal method, such as matching an email affirmation sent by the signor to the signor's email address. In corporate deals, a secretary's certificate will suffice.
3. Record Retention: If other law requires a person to provide, send, or deliver information in writing to another person, the electronic signature must be provided in a form capable of retention by the recipient such that the record is "retrievable in perceivable form" (Model Act) or "capable of being retained and accurately reproduced for later reference" (US Electronic Signatures Act). The recipient does not need to retain the record, but the sender cannot impede the recipient's ability to store it. If other law requires that a record be retained by the sender, the record must remain accessible for later reference.
Exceptions:
There are limitations on electronic signatures, primarily in the personal sphere. The federal and state statutes apply only to business, commercial, and government transactions. The statutes exclude certain documents that generally require hand-written signatures, including, but not limited to, certain governmental filings, wills, codicils, and testamentary trusts and notices of default, acceleration, repossession, foreclosure, or eviction from a primary residence.
Entity Filings:
One must check with the relevant governmental agency as to the kinds of signatures it will accept and for what purposes. States differ on acceptable filings, and forms of signature for the creation, maintenance, and dissolution of entities. However, states will accept DocuSign signatures for most entity filings.
Forms of Signature
Common methods of electronic signature include:
- A PDF image of an inked signature (by far the most widely used form of signature).
- JPEG signatures, which involve applying a JPEG image of a digitally created signature to an electronic document, such as those provided by Adobe.
- Signatures provided through a cloud-based e-signing platform, such as DocuSign, that involve email verification and login to a secure website: DocuSign and other comparable e-signing platforms distribute a link to each signor's email address. Next, each signor opens the link, verifies their identity by logging into the platform's secure portal, signs the document using a digitally created signature and then submits their finalized signature.
DocuSign signatures are the most widely accepted, but also the least used outside of large corporate transactions. Other types of electronic signature include a party typing his or her name at the end of an email acknowledging agreement or clicking a checkbox that says "I agree" or equivalent language demonstrating an intent to enter into an agreement.
State Laws Authorizing Remote Online Notarization (RON)
Notaries are state officials; legislation authorizing remote online notarization is state-by-state. Prior to the crisis, 22 states permitted remote notarization. The crisis has caused New York and Illinois to join this group, at least on a temporary basis.
The remote notarization process requires the following steps: (1) the signatory must present identification via live video and must possess a social security number; (2) the signatory must affirmatively state they are located in the applicable jurisdiction; and then (3) the signed document may be transmitted electronically. Although the appropriate format varies depending on the purpose of the acknowledgement, the states involved, and whether the document is intended to be recorded, parties are advised to use the remote notarizations adopted by statute, rather than the ones put into place by emergency order in response to the crisis.
While the absence of RON legislation in a state prevents local notaries from performing remote online notarization, all states, except Iowa, accept out-of-state notarizations that were remotely notarized by a notary located in and commissioned by a state with RON legislation.
Emergency RON Measures
On March 19, New York Governor Cuomo issued Executive Order No. 202.7, which authorized RON through April 18, 2020. Commentators have observed that the executive order raises many questions, such as where the notarization is "taken" in the form and whether the acknowledgement should recite the location of the notary or the signatory.
Illinois authorized remote notarization on March 26 by Executive Order 2020-14. Like New York order, the Illinois one is temporary; it will remain in effect until the March 9 Illinois Gubernatorial Disaster Proclamation is rescinded.
Both the New York and Illinois emergency measures have the same core requirements:
- Two-way, live audio-videoconference with direct interaction between notary and signatory.
- Presentation by the signatory of a valid government-issued photo ID.
- The signatory must be in the state when the notarization is performed.
New York requires that signed document be transmitted to the notary on the same date it was signed and the notary must transmit a copy of the document back to the customer for the notarization to be complete. The Illinois executive order is vague with respect to the transmission process, but leaves open the ability to follow New York's process. Some practitioners are adopting the use of a certification by the notary, and attached to the document, attesting to the steps the notary followed to comply with a given state’s executive order, to smooth acceptance of the documents by recording offices and others.
Illinois requires the notary to be in the state while performing notarial services. While New York law is vague on this point, best practice dictates that a notary should only perform notarial services while located in the state of authorization.
State-by-State Overview of Electronic Signature and Electronic Notarization Laws
Below is a summary of the law in certain jurisdictions:
Electronic Recording of Documents in Real Estate Transactions
While federal and state statutes permit sales contracts, mortgage instruments, and promissory notes to be executed electronically, those laws do not address the fact that real estate documents must be physically recorded and stored with land records offices. Validly executed documents may bind the parties, but if not recorded, may not fully bind third parties, who are in many cases bound only upon recordation. The Uniform Real Property Electronic Recording Act (URPERA), promulgated by the Uniform Law Commission in 2004, provides a model for state legislation permitting public records officials to electronically record documents received by electronic transmission. URPERA equates documents that are electronically signed and/or electronically notarized with documents that are manually signed and/or notarized. Thirty-one states, plus the District of Columbia and the US Virgin Islands, have adopted some version of URPERA. However, even in a state that has adopted URPERA, each recording office separately determines acceptance of electronic recording. Title insurance companies often are the parties best able to confirm the precise form of signature that is acceptable in a given transaction.
Summary
Before using electronic signatures for a transaction, practitioners must ensure that the transaction is not within an exception to validity in the governing statutes (e.g., wills). Where electronic signatures are permitted, all parties to the transaction must consent to the use of electronic signatures. The form of electronic signature, or the associated documentation, must provide for effective authentication of the authority of the signatory and attribution of the signature to the signatory. Lastly, the parties must confirm the proper way, if at all, to use remote online notarization in a given circumstance. While about half the states currently do not permit remote notarization, almost all of those states do recognize a remote notarization from a state that permits it. Jurisdictions also are increasingly permitting electronic recording of real estate documents, but it is critical to determine if the recorded signatures will be acceptable to the title insurer and any lender involved.
The current state of electronic signatures, acknowledgements, and recording is changing rapidly in response to the COVID-19 crisis. We are glad to assist our clients in determining if these innovations can facilitate their needs.
