Business Contracting in a Virtual World – Is There a Difference?

Business Contracting in a Virtual World—Is There a Difference? 

Traditional contracts between business partners usually include a mutual agreement and understanding of the terms and conditions of the business arrangement. Most of the time the agreements are written, printed and signed in ink.

But what about virtual agreements? With the emergence of the e-business model, companies may have a new venue to establish business relationships, but they also must deal with the risk that goes along with e-business relationships, including enforceability of electronic contracts, housing personal customer information in electronic form, and transmitting sensitive company data to third parties, as examples.

E-business has its roots back in the 1970s when technologies such as the Electronic Funds Transfer (EFT) was established. As credit cards, ATMs and electronic banking took hold, they soon formed the backbone for the e-commerce world through the Internet in the 1990s. Though the use of the Internet started in the early 90s, businesses did not offer their services online until security protocols were established at the end of 2000.

Conducting business in a virtual world thus required a new process in establishing the business relationship. In 2000 an e-signature law, the Electronic Signature in Global and International Commerce Act (ESGICA) was enacted to benefit business-to-business websites which required legally enforceable contracts. Electronic contracts and e-signatures were established as an agreement to be “signed” electronically without paper. Usually, the e-contract appears in the form of a “Click to Agree” contract. With the legislation enacted in 2000, the uncertainty of the e-business relationship was eased and yet there are important differences, as was highlighted in a recent web posting by OASIS (Organization for the Advancement of Structured Information Standards), a not-for-profit, international consortium that drives the development, convergence, and adoption of e-business standards.

Verifiable credentials, as an example, need to be presented and authenticated in a secure online environment, in stark contrast to hardcopy contracts with “wet” signatures.  During the business communication process multiple internal players are involved throughout the workflow, providing approval and acknowledgement through phone calls, internal memos, faxes and personal meetings.  In a virtual world, internal stakeholders must be cognizant of automated processes or e-mail communications that require electronic approval, potentially very different from manual processes.

Online contracting also carries significant risks through third-party business interruption of services due to data theft, hacking events, or internal computer error. Breach events and associated regulatory enforcement is increasing at an alarming rate. Lastly, according to OASIS, online dispute resolution through arbitration is a growing trend, since business partners often reside in various countries with different legal systems. 

And though electronic contracting is here to stay, according to the article, Electronic Signatures and Online Contracts, appearing on the NOLO website, there are still some contracts that must be processed through hard copy including: wills and trusts, adoption, divorce and other family matter documents, notices of default, foreclosure or eviction, among others.

To date, forty-seven states have adopted the Uniform Electronic Transactions Act (UETA) which defines what constitutes an electronic record and signature as proposed by the National Conference of Commissioners on Uniform State Laws (NCCUSL). If the state has enacted UETA, then federal laws will generally not supersede the state law. However, if the state law is vastly different than UETA, then the federal signature law could trump the state law, assuring the consistent application of electronic signature laws.