By David Schumacher

The United States has started to address the legal issues raised by trading in electricity, gas and other products over the Internet.

Two states — California and Pennsylvania — have adopted a “Uniform Electronic Transactions Act,” and another nine are on the verge of doing so. Others are expected to follow suit.

European countries are grappling with the same issues.

The main problems with trading over the Internet are the law is unclear about when contracts will be enforced if not on paper, what qualifies as evidence in legal proceedings, what constitutes acceptance of an offer to enter into a contract, and the form of electronic signature required in order to have a binding agreement. Existing state laws vary on these issues. The “Uniform Electronic Transactions Act” is an effort to bring uniformity in dealings at least within the United States.

The main purpose of the uniform act is to ensure that electronic records and electronic signatures are treated the same as paper records and manual signatures under relevant substantive laws.

Four Basic Rules

The act establishes four basic rules. First, a record or signature may not be denied legal effect or enforceability solely because it is in electronic form. Second, a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. Third, if a law requires a record to be in writing, an electronic record satisfies the law. Finally, if a law requires a signature, an electronic signature satisfies the law.

The basic premise of these rules is that where a law requires that there must be a signed writing between the parties in order for there to be an enforceable contract, an electronic record that is signed with an electronic signature will suffice. This means, for example, that if a gas supplier sent an e-mail to a potential customer stating “I offer to sell you 10,000 MMBtu of gas @ $2.50 per MMBtu. /s/Supplier” and the customer responded in an e-mail message “I accept your offer to purchase 10,000 MMBtu of gas @ $2.50 per MMBtu. /s/Customer,” the transaction, which would meet the requirements of the Uniform Commercial Code — a separate set of state laws governing sales of goods — as to the content of a required writing for the sale of goods, could not be denied effectiveness merely because the transaction was embodied in an e-mail and included an electronic signature.

The uniform act also provides rules for determining when an electronic record has been delivered and received in cases where timing is important.

An electronic record is delivered when it is addressed properly to the information system designated by the recipient of the electronic record and from which the recipient can retrieve the record, the electronic record is sent in a form that can be processed by the recipient’s system, and it enters a system that is out of the control of the sender or under the control of the recipient.

An electronic record is received when it enters the recipient’s designated system and from which the recipient is able to retrieve the electronic record, and the electronic record is in a form capable of being processed by that system. These rules may be relevant, for example, to determine whether an offer has been properly sent and received.

While the uniform act validates electronic records as a matter of law, it does not eliminate requirements imposed by other substantive law to make a writing enforceable. For example, like a sale of goods embodied in paper, an electronic record will be an enforceable contract for the sale of goods under the Uniform Commercial Code only if it expressly states the quantity of goods that are being sold.

Valid Signature?

Many things can qualify as an “electronic signature.” The uniform act defines the term 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.” What this means is that most any mark or process intended to sign an electronic record will constitute an electronic signature. For example, a typed name at the bottom of an e-mail message, a faxed signature or even a “click-through” process on a webpage, whereby a person clicks “I agree” on a vendor’s webpage, could constitute an electronic signature. The important elements for determining whether an electronic signature exists are that the person providing the mark or executing the process intended it to act as a signature and the act can be attributed to that person. While some states have enacted statutes that require a formal “digital signature” process to indicate that an electronic record has been signed, the uniform act does not take this approach; under uniform act, formal digital signatures may simply provide evidence of a party’s intent to have signed an electronic record.

The act also makes clear that transactions can be completed through the use of electronic agents. This means that human activity is not necessary to validate a transaction. Thus, a computer program that automatically lists the terms of a transaction and to which another party assents cannot be invalidated merely because a computer process produced the terms to which the other party indicated its assent.

Valid Credit Documents?

The uniform act is mainly a set of procedural rules to ensure that trading conducted over the Internet will be given legal effect. However, it also forges new substantive law in the area of “transferable records.” These are such things as promissory notes and certain title documents, like bills of lading. Under the uniform act, a transferable record can be created only if the issuer of the transferable record agrees that the electronic record creates a transferable record. If a person has “control” of a transferable record, which serves as a substitute for delivery, endorsement and possession of a note or document of title embodied in paper, that person will be entitled to rights and defenses available to a holder and, perhaps, a holder in due course.

The significance of the provisions on transferable records is that they form the basis for the development of systems for the creation, enforceability and transfer of these important commercial documents through electronic means.

Other Jurisdictions

The uniform act is not the only effort to create a standard body of rules governing electronic transactions. Both houses of the US Congress have passed bills recently on the enforceability of electronic transactions. Ultimately, any federal law that is passed on electronic contracts is likely to act as a gap filler, effectively imposing on the individual states rules that are very similar to those found in the uniform act until they enact their own version of the act.

Internationally, the United Nations Commission on International Trade Law, or UNCITRAL, has come out with a “Model Law on Electronic Commerce.” A number of the provisions found in the uniform act that is the focus of this article are based on provisions found in the UN model law.

The European Union also issued a directive recently that sets guidelines for legal recognition of electronic signatures, defines the responsibilities of entities that act to certify digital signatures, and outlines the requirement of devices that create secure digital signatures. Other countries, including Argentina, Canada, Germany, Ireland, Japan and the United Kingdom, also have taken steps to create a legal regime in which electronic records and signatures are given legal effect.

Studies indicate that business-to-business e-commerce transactions will grow from $43 billion in 1998 to $1 trillion by 2003. In the energy industry alone, e-commerce transactions are predicted to be worth $266 billion by 2004. The likely growth of e-commerce in the energy industry was signified recently by announcements from Chevron, Royal Dutch/Shell and Statoil that each of these major oil companies is undertaking significant investments in Internet-based platforms for the procurement and sale of oil and other goods and services.