Destination: BLJMay2005

05/28/05 Buffalo Law Journal: EMERGING METHODS OF e-CONTRACTING: Will an Electronic “John Hancock” Satisfy the Statute of Frauds?

EMERGING METHODS OF e-CONTRACTING:

Will an Electronic “John Hancock” Satisfy the Statute of Frauds?

Samuel Goldwyn once said “an oral contract isn’t worth the paper it’s written on.” As we enter a new frontier of contracting, primarily due to the proliferation of technology, could an e-contract be worth the paper it’s written on?

In 1985, in Roos v. Aloi, (487 N.Y.S.2d 637, 642-43 [Sup. Ct. 1985]), a New York court held that a tape-recorded contract was unenforceable for failing to comply with the Statute of Frauds. After celebrating, in 2005 its 329th birthday, the Statute for the Prevention of Frauds and Perjuries (29 Charles II, c. 3, 8 Stat. at Large 405) (commonly referred to as merely the “Statute of Frauds”) has exhibited a tremendous amount of staying power despite the evolution of business transactions. As we forge ahead in our electronic age, however, the Statute of Frauds, at least conceptually, seems to have undertaken a renewal as well. In 2004, for example, the New York State Insurance Department issued an opinion that a life insurance agent may have an applicant sign a life insurance application by the entry of their social security number into an interactive voice response (“IVR”) system using a telephone keypad. The opinion found that both the Electronic Signatures in Global and National Commerce Act (“E-SIGN”) and the Electronic Signature and Records Act (“ESRA”) support the “use and acceptance of electronic signatures and electronic records in commercial transactions, and [both] confirm their legal validity.” (2004 NY Insurance GC Opinion Lexis 198).
Between the 1999 promulgation of ESRA and the enactment of E-SIGN, ESRA and the New York General Obligations Law governed, in New York, the enforceability of electronic signatures or records. New York amended ESRA to conform with E-SIGN in 2003, three years after President Clinton swiped a smart card through a terminal and signed E-SIGN into law.

With the proliferation of electronic records, the main purpose of these new laws is to encourage electronic commerce by making an electronic “signature, contract, or other record relating to such transactions” as binding as a hand-made signature. Both ERSA and E-SIGN define an “electronic signature” as “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” (15 U.S.C. §7006(5) and N.Y. Gen. Oblig. Law § 5-701(b)(4)). This broad definition—which is technology neutral—is intended to encompass an individual’s manifest assent (i.e., “meeting of the minds”) to be bound by an electronic record.
When seeking to enforce electronic signatures, the New York commercial lawyer may not only look to ESRA and E-SIGN, but may also rely upon New York General Obligations Law, which bars enforcement of a contract when not performed within one year unless in writing and signed by the party to be charged. Consistently with E-SIGN and ERSA, section 5-701(b)(4) now provides that:
the tangible written text produced by telex, telefacsimile, computer retrieval or other process by which electronic signals are transmitted by telephone or otherwise shall constitute a writing and any symbol executed or adopted by a party with the present intention to authenticate a writing shall constitute a signature.

Unchallenged in court, it remains undetermined whether this section has been preempted by E-SIGN. One factor driving section 5-701’s 2003 amendments was that ESRA was not technology-neutral, as federal law requires. By identifying telex, telefacsimile, and telephone, section 5-701(b)(4) may be limited by technology and hence preempted by E-SIGN.

Unlike E-SIGN and ESRA, New York General Obligations Law also allows enforceability where there is “sufficient evidence to indicate that a contract has been made.” (N.Y. Gen. Oblig. Law § 5-701(b)(3)). Not often litigated, section 5-701(b)(3)(d) also provides that “evidence of electronic communication indicating the making therein of a contract . . . is not insufficient because it omits or incorrectly states one or more material terms agreed upon, so long as evidence provides a reasonable basis for concluding that a contract was made.” Ultimately, under section 5-701, the court needs to determine whether there is a reasonable basis for concluding that a contract was made despite the absence of certain material terms that were, it appears, never memorialized. In Tommy Rosenfeld v. Michael Zerneck, (4 Misc.3d 193, 776 N.Y.S.2d 458 [Sup. Ct. Kings Co. 2004]), the court may have missed the significance of section 5-701(b)(3)(d) by focusing too heavily on section 5-701(b)(4), with E-SIGN and ERSA lingering in the background.

As the Rosenfeld court noted initially: “A great deal can be accomplished over the internet: A few well placed key strokes can send us to exotic places, requisition goods and services, find employment and educate us. Is it possible to make a contract for the sale of real property via e-mail?” (4 Misc.3d at 194, 776 N.Y.S.2d at 459). Defendant Rosenfeld moved for summary judgment to dismiss a complaint that sought specific performance of the contract for the sale of the plaintiff’s million dollar home. After reviewing the plaintiff’s house, the defendant stated in an email that defendant “loved the house” and confirmed a firm offer of $3,500,000 cash deal for the house.

In an e-mail, the defendant stated:
Dear Michael and Liz, I am glad I had an opportunity to speak with Michael last night. Debbie, Zachary, Noah and I love your home and its warmth and wish to confirm our firm $3,500,000 all cash offer, subject to normal property inspections. Moreover, we see no problem with your desire to close about July 1, 2004. This is our best offer and, as you know, it is net of any broker fees. We look forward to hearing from you at your earliest convenience.

Best Regards, Tom & Debbie Rosenfeld (defendant’s name, address and telephone number were typed in).

After a telephone conversation that confirmed the transaction, the plaintiff responded by accepting defendant’s slightly increased offer:
Dear Tom & Debbie:

This note is to confirm yesterday’s telephone conversation in which I accepted your all cash offer of $3,525,000 for [18 Prospect Park West], with no contingencies for financing or sale of your present residence, to close no later than July 1, 2004.
As we discussed, please contact Liz early next week to schedule your inspection. My attorney will prepare a contract of sale, to be signed after your engineer’s report. (What is the contact information for your attorney? Will you be making the purchase jointly? What is your present address?)
We look forward to continuing cordial relations regarding the sale of this very special home to you and your family.

With kind regards,
Michael


Thereafter, defendant e-mailed plaintiff providing him with the information he requested.

The landmark issue before the Rosenfeld court (which was one of first impression) was “whether the typed signatures at the bottom of defendant’s e-mail satisfied the requirement that a writing be subscribed under New York State’s general Statute of Frauds.” Ultimately, the court held that the e-mails satisfied the Statute of Frauds because, pursuant to New York General Obligations Law, the parties’ e-mails “constituted a writing and any symbol executed or adopted by a party with the present intention to authenticate a writing shall constitute a signing.” The court ruled that, because there was sufficient evidence that each party undertook to type his name at the end of the e-mail, the e-mail was a writing within the Statute of Frauds. Surprisingly, the court found that the parties did not have a meeting of the minds as to the terms of the sale of the house because the emails “failed to lay out all of the essential terms of the agreement.” The court neglected, however, section 5-701(b)(3)(d) which provides that “evidence of an electronic communication indicating the making therein of a contract . . . is not insufficient because it omits or incorrectly states one or more material terms agreed upon, so long as such evidence provides a reasonable basis for concluding that a contract was made.” Others could argue the emails at issue indicated a meeting of the minds forming a contract.
This State Supreme Court did not look to ERSA or E-SIGN for guidance, however. Nevertheless, the court could have concluded that the electronic signature at issue (i.e., typing one’s name at the end of an email) satisfies both federal and state law definitions of an electronic signature because the signature was a symbol executed or adopted by the party with the present intention to authenticate the writing.

On Line Power Technologies, Inc v. Square D Company (No. 03 Civ. 4860, 03 Civ. 4865, 2004 U.S. Dist. LEXIS 9655 (S.D.N.Y. 2004), demonstrates that an email, despite its casual appearance and everyday function in business, may provide a stand-alone basis for creating a binding contract. On Line Power Technologies (the “Plaintiff”) entered into a Sales Representation Agreement (“Rep Agreement”) with Power Distribution Services (“PDS”). Defendant, Square D (the “Defendant”), thereafter acquired PDS’s assets. About three (3) years after the acquisition, Defendant wrote to Plaintiff terminating the Rep Agreement. While agreeing to provide an accounting of what past and pending commissions were owed Plaintiff as of termination, Defendant, significantly, also stated that “‘[i]n the meantime, . . . our sales people and [Plaintiff] will work out a commission arrangement on a project by project basis.’”

Even after termination, Plaintiff continued to broker sales for Defendant. Plaintiff alleged that it had entered into four (4) separate commission agreements totaling 1.3 million dollars. After Plaintiff brought suit, Defendant argued that the four (4) separate commission agreements were subject to the terms and conditions of the Rep Agreement, which required arbitration. The court ruled that “[b]ecause [Defendant] terminated the [Rep] Agreement, indicates a desire for a project by project approach to commissions and created separate written documents memorializing the terms of three of the four purchase orders, it cannot be said that [Plaintiff’s] claims arise from the initial [Rep] Agreement.” (Id. at *24). Ultimately the court held, relying upon ESRA and E-SIGN, that the email confirmations by Defendant memorializing the commissions to be paid constituted separate and discrete agreements.

Therefore, e-contracts, to answer Mr. Goldwyn, could be worth more than the paper it’s written on, much more.