Utilizing and Enforcing Electronic Signatures

By Joseph M. Sweeney, Esq., Scott A. Mangum, Esq., William M. Kaufman, Esq., William F. Stanger, Esq.

As contractors grow comfortable using technology to run their businesses, the use of electronic documents in the construction industry has increased. We regularly receive inquiries from our contractor clients regarding the enforceability of electronic signatures in construction contracts, and the language that should be inserted into contracts to address those concerns.
All contractors using electronic signatures should be aware of California Civil Code Section 1633.1, et seq. (commonly referred to the Uniform Electronic Transactions Act). The Uniform Electronic Transactions Act (“UETA”) was enacted to enhance Californians’ ability to conduct business through electronic means. Contractors should establish a procedure within their business that meets UETA requirements. Contractors should also be mindful that while electronic signatures are absolutely enforceable in California, (Civ. Code Section 1633.7), your company must have the proper procedures in place to PROVE the signatures are valid. For clients doing business out-of-state, or involving the Federal Government, other state laws may also apply.

First, an electronic signature is valid only if the party whose signature is on the documents intended to execute the document. This can generally be proven through testimony of the person who signed the agreement. Although an explicit agreement to conduct the transaction by electronic means is not required, it is recommended. In J.B.B. Investment Partners, Ltd. v. Fair, (2014) 232 Cal.App.4th 974, the Court of Appeal ruled that typing your name on an email accepting a settlement was not an electronic signature under the UETA, due to the requirement that it be executed by a person with the “intent to sign the electronic record.” The court ruled one party had not intended its signature to formalize an electronic transaction, and that Plaintiffs had not proven that the parties agreed to conduct the transaction electronically as required by Civ. Code Section 1633.5(b) of the UETA. As such, an explicit agreement to conduct the transaction electronically is the better approach to avoid a situation like the one in the J.B.B. v. Fair case.

Second, the parties to the transaction must consent to do business electronically. Usually, this can be shown by the particular circumstances surrounding the transaction, and can be assisted by language in the contract.

Third, the electronic document must be in a form that can be retained and accurately reproduced for later reference. The most common format utilized today is to exchange electronic documents in Portable Document Format, or .pdf). A .pdf is sufficient to reproduce the document accurately, and can shelter the document from being tampered with through encryption, i.e. it can be secured against unauthorized access.

Finally, the electronic signature must be shown to have been the “act of the person” who signed the document. This can be demonstrated by your company showing it has adequate procedures in place to ensure the person signing the document meant to do so, and that the signature is genuine. Based on the California case law to date, this factor has proven problematic for companies trying to enforce electronic signatures on written agreements. One court denied a corporation’s petition to compel arbitration because the company failed to properly authenticate its employee’s signature on its arbitration agreement. In Ruiz v. Moss Brothers Auto Group, (2014) 232 Cal.App.4th 836, a California Court of Appeal refused to enforce an arbitration agreement because the employer failed to submit sufficient evidence that the employee was the person who electronically signed the agreement. The employee testified that he did not recall signing the agreement, and that he would not have signed the agreement if it had been presented to him. Although, the employer required that each employee log into the HR system with a unique username and password in order to review and electronically sign, the court ruled that was not sufficient.

In contrast, another California court decision in Espejo v. Southern California Permanente Medical Group (2016) 246 Cal. App. 4th 1047, upheld the authentication of an electronic signature because the employer’s declaration adequately described the electronic review and signature process for employee agreements, explained security precautions regarding transmission and use of an applicant’s unique username and password, and also outlined the steps an applicant would have to take to place his or her name on the signature line of the agreement.

Most of these problems can be avoided by using a third party electronic document vendor with proper software and sound procedures, such as DocuSign or Adobe Sign. These services are specifically designed to enhance the reliability and security of electronic signatures. In addition, certain language in contracts can be helpful in enforcing electronic signatures in agreements, although the specific provisions depend on the circumstances and it’s not a case of “one size fits all.” A sample provision might read:

Both parties expressly agree to conduct this transaction electronically and that electronic signatures shall be utilized for this agreement (including any modifications or amendments thereto). Regardless of the electronic signature software system employed for use in this agreement, which may permit the parties to skip from one signature line to the next, both parties expressly acknowledge that they have read each document thoroughly, have full knowledge of the terms and conditions set forth therein, and by applying their electronic signatures they consent to the same. The parties intend to use and rely on electronic signatures and acknowledge and agree that this document is in conformance with the requirements of Civil Code Section 1633.1, et seq. (“Uniform Electronic Transactions Act”), and the electronic signatures shall be considered “the act of” each party (Civ. Code Section 1633.5). The electronic signatures shall be given the same enforceability and effect as an original ink signature, and neither party shall challenge the enforceability of the agreement on these grounds. Each party acknowledges they have been afforded the ability to download their own electronic copy(ies) of the signed documents if they desire.

You should be aware that there are numerous exceptions to the UETA, including but not limited to, transactions subject to the laws governing the execution of wills, codicils, or testamentary trusts, UCC transactions regarding negotiable instruments, bank deposits and collections, letters of credit, investment securities, fund transfers, among other specific types of transactions. The UETA exceptions do not apply to real estate arbitration provisions, but this area of law is developing so it is unclear how construction contracts specifically may be impacted in the future. If you have any specific questions or would like more details, please do not hesitate to call our office and one of our experienced construction attorneys will be happy to assist you.