02/14/24
Electronic Signatures Refresher: Practical
Considerations for Ohio Financial Institutions
While the use and adoption of electronic signatures was already steadily trending up, the onset of the COVID-19 pandemic required many businesses, including financial institutions, to embrace these practices out of necessity. Post-pandemic, with remote and hybrid work here to stay, the use of electronic signatures has now become a widely accepted business practice.
WHAT LAWS GOVERN ELECTRONIC SIGNATURES?
Electronic signatures are valid under both Ohio and federal law. At the state level, Ohio adopted the Uniform Electronic Transactions Act (“UETA”) in 2000, as part of Chapter 1306 of the Ohio Revised Code. UETA is a uniform set of state laws that establishes baseline criteria for conducting transactions electronically and for determining what can and cannot be signed electronically.
At the federal level, the Electronic Signatures in Global and National Commerce Act (“E-SIGN”), effective in 2000, provides similar rules and guidelines as UETA. E-SIGN was designed, in part, to expand the goals and practices of UETA, preempting those state laws inconsistent with UETA and filling gaps in those states whose laws were silent, leading to more uniform treatment of electronic signatures across state lines.
As a result of these dual laws, the rules governing electronic signatures are substantially the same throughout the United States. Specifically, Ohio law provides that a “record or signature may not be denied legal effect or enforceability solely because it is in electronic form.” Therefore, electronic signatures generally have the same legal effect as traditional written, or “wet-ink” signatures.
Finally, in a related concept, several states in recent years, including Ohio, have adopted laws permitting remote online notarization (RON) under certain conditions.
WHAT IS AN ELECTRONIC SIGNATURE?
Neither UETA nor E-SIGN identifies a specific type of electronic signature, or mandates a particular technology, that should be used in order for an electronic signature to validly be affixed to a document. Under UETA, an electronic signature is broadly defined 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.” As a result, depending on the circumstances and the intent of the parties, electronic signatures can be wide-ranging, including the following examples:
· Scanned image of an individual’s manual, wet-ink signature
· Signature created on a computer/tablet using a finger, digital stylus (i.e. Apple Pencil) or mouse
· Email signature
· Typed name
· Typed initials
· Video signature
· Voice/voicemail signature
· Clicking an “I Agree” checkbox
· Digital signatures offered by providers like Adobe Sign and DocuSign
In addition, in November 2018, the Ohio legislature amended the definition of “electronic signature” to include that a “signature that is secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.” This amendment demonstrates the legislature’s attempts to keep up with new technological advances as Internet-based transactions continue to evolve. However, it also demonstrates the need to tread carefully when utilizing new technologies to engage in commercial transactions, in order to ensure that your actions don’t inadvertently indicate agreement and intent.
WHAT KINDS OF DOCUMENTS CAN BE SIGNED ELECTRONICALLY?
Electronic signatures are presumptively valid, unless the parties’ expressly prohibit their use or the transaction document to be executed falls within certain statutory exceptions.
As a threshold matter, electronic signatures can only be used if each party has affirmatively agreed to conduct the transaction by electronic means. This “agreement” can be implicit, determined by the context and circumstances surrounding the transaction, including the parties’ conduct. For example, the exchange of scanned wet-ink signature pages indicates the parties’ agreement to use those electronic signatures in connection with a transaction. However, since electronic signatures are broadly defined, parties should be aware that certain conduct, such as sending an email or leaving a voicemail, could inadvertently be construed as an electronic signature and form a binding contract under the right circumstances.
From a practical perspective, therefore, parties are encouraged to clearly convey their execution expectations to their counterparties, negotiating how, and in what manner, transaction documents can be signed. Parties additionally should consider including language expressly authorizing the use and affirming the validity of electronic signatures in their respective transaction documents, with a statutory reference where applicable.
Certain documents, however, cannot be signed electronically. Both E-SIGN and UETA specifically except certain categories of documents, including estate planning documents (such
as wills, codicils and testamentary trusts), family law documents (such as adoption agreements, separation agreements, and divorce decrees) and, notably, agreements governed by the Uniform Commercial Code (“UCC”) (except for provisions which pertain to sales and personal property leasing). Thus, banks must be wary of, and consult legal counsel before, using electronic signatures in connection with UCC-governed transactions, specifically those transactions that involve promissory notes, commercial paper, bank deposits and collections, letters of credit, documents of title, documents related to investment securities, and secured transaction documents. In effect, most transactions in which banks are involved on a day-to-day basis.
Also, of particular importance to Ohio financial institutions is the use of electronic signatures on cognovits notes or notes containing a confession-of-judgement. In this context, the use of electronic signatures is largely untested, as it has not yet been expressly addressed in statute, by Ohio courts, and other specific guidance is lacking at this time. Accordingly, banks should be cautious about straying from “wet in” signatures, as difficulties enforcing cognovits provisions may result.
REGULATORY EXPECTATIONS
Regulator expectations in this area do not stray far from the general legal requirements discussed above under UETA and E-SIGN. Regulatory guidance issued at the time UETA and E-SIGN were adopted highlight the need for financial institutions ensure electronic records are accurate, complete, accessible, and maintained for the appropriate record retention periods. Also, while not involving electronic signatures per se, financial institutions must remain cognizant of the requirements and steps that must occur for consumer disclosures and notices to be provided electronically.
BEST PRACTICES WHEN USING ELECTRONIC SIGNATURES
As electronic signatures have become more widely utilized, perhaps even the standard, it is prudent to follow the below best practices when using them in connection with commercial transactions.
· Periodically review the laws/regulations of the relevant jurisdiction. Since contracts are creatures of state law, be sure to comply with electronic signature requirements in the jurisdiction governing the document, which may vary slightly from jurisdiction to jurisdiction.
· Review documents to determine whether electronic signatures are prohibited. Institutions should review each document and confirm that (1) the document is not excepted under either UETA or E-SIGN and (2) the document does not contain language prohibiting electronic signatures.
· Include email disclaimers. When negotiating/discussing transactions, parties should consider inserting language in e-mails indicating that the e-mail does not constitute a binding agreement.
· Send documents to verified email addresses that are assigned to one account holder (as opposed to a shared family email address). An email address with multiple account holders can create issues in trying to identify who actually signed the agreement electronically.
· Include document language that expressly consents to electronic transacting and clearly acknowledges intent for electronic signatures to be binding. Including express language in documents avoids the need to determine intent to conduct the transaction by electronic means from other relevant documents or the conduct of the parties.
· Carefully document the efforts taken to confirm the signatory’s identity and associate the signature with the document to be signed. Carefully documenting each parties’ efforts and/or actions can avoid potential disputes in the future. This can often be done with confirmatory e-mails.
· All signers should receive a fully executed, compiled copy of the agreement.
· Implement safeguards to protect the document from alteration post-signature. These safeguards will help ensure the electronic signatures are not altered after the documents are signed and also will provide strong evidence that the electronic signature has not been altered if a dispute arises later.
POTENTIAL PITFALLS WHEN USING ELECTRONIC SIGNATURES
Institutions should also be aware of the following potential pitfalls associated with electronic signatures.
· Affixing electronic signatures to documents that cannot be signed electronically. As discussed earlier in the article, not all agreements can be signed electronically.
· A party to the transaction does not consent to the use of electronic signatures. If a party does not consent to the signing of the document through electronic means, then the signatures, and the agreement, can be invalid.
· Legal challenges – forgery, mistake, and duress. Electronic signatures can be challenged on the basis of forgery, mistake, and duress.
· Cybersecurity and data privacy concerns. Like all internet-based transactions, electronic signatures are vulnerable to cybersecurity and data privacy risks
CONCLUSION
With the rapid and widespread adoption of electronic signatures, it is critical that institutions, in conjunction with legal counsel, adopt internal systems and controls to determine what can and cannot be signed electronically to ensure the validity of its transactions. Before implementing an electronic signature program, however, institutions should discuss the proposed program with legal counsel and relevant agency representatives to ascertain compliance with any regulations, policies and positions of the agencies with regard to such programs.
About Vorys Financial Institutions Practice: Vorys represents more than 150 financial institutions in Ohio and across the country and provides services related to nearly all legal and regulatory matters impacting the industry. Our deep knowledge and experience in the financial services sector has allowed us to grow into a nationally-recognized team of more than 100 industry practitioners who offer pragmatic, cost-effective counsel to clients throughout the United States. Vorys’ financial institutions group comprises a diverse bench of attorneys with decades of experience in finance and corporate transactions, regulatory compliance and litigation. Learn more at vorys.com/industry-banking.
About the Authors:
Kim Schaefer is a partner in the Vorys Cincinnati office, specializing in banking and corporate matters. She provides strategic guidance and representation throughout the entire spectrum of corporate legal matters, including mergers and acquisitions, contract negotiations, and public and private securities offerings. Kim has been recognized by various publications for her exceptional skills in navigating complex transactions. She leverages her deep understanding of legal intricacies, regulatory frameworks and market dynamics to safeguard her clients' interests and facilitate successful outcomes. Contact Kim at kjschaefer@vorys.com.
Tony Weis is a partner in the Vorys Columbus office and a member of the corporate group. Tony represents and counsels financial institutions on a broad range of legal matters, including corporate governance, business formation, mergers and acquisitions, tax credit transactions, joint ventures, contract negotiations, disclosure and reporting under the Securities Exchange Act of 1934, and regulatory compliance. Contact Tony at adweis@vorys.com
Matt Walker is of counsel in the Vorys Columbus office and a member of the corporate group. He has over a decade of experience in financial institutions law. In his legal practice, Matt assists community banks and other financial institutions with a diverse variety of regulatory and corporate matters, including mergers, acquisitions, divestitures, bank formation, regulatory compliance, securities matters and corporate governance matters. Contact Matt at mkwalker@vorys.com.
Matt Gutierrez is an associate in the Vorys Columbus office and a member of the corporate group. His practice focuses on representing both public and private companies in corporate and transactional matters, including mergers and acquisitions, securities, periodic reporting and disclosure (Form 10-K, 10-Q and 8-K reporting and proxy statement disclosure), corporate governance and general corporate matters. Contact Matt at mdgutierrez@vorys.com
This article is for general information purposes and should not be regarded as legal advice. If you have questions about electronic signatures, contact one of the authors included at the end of this article.