Electronic security providers increasingly ask me to help them transition their subscriber contracting process from using original, wet-ink signed NCR type paper contracts to some sort of full-fledged e-contracts — everything from click-through terms and conditions on a website to signing a subscriber contract on a tablet or smartphone.
Before you make the leap into electronic contracting, make sure you understand the rules of the road:
1. Comply with Federal Law. State and federal law governs the creation and enforcement of electronic contracts. The federal law is known as the “E-Sign Act.” It applies in all states and basically makes electronic contracting legal, with a number of other substantive provisions. Essentially, the act changed the law of evidence, providing that electronic contracts that complied with the act’s requirements would be enforceable in court. Among other things, the law requires parties to use some form of electronic signature to enter into a contract. The act also includes a number of specific requirements governing consumer transactions, including how to deal with the FTC required three-day right of rescission and copies of the operative agreements. If you do not comply with the act, you contract may not be enforceable.
2. Comply with State Law. Every state with the exception of three has adopted a uniform model act called the “Uniform Electronic Transaction Act (UETA).” New York, Illinois and Washington have adopted other laws governing electronic contracts. Just like federal law, if you do not comply with state law, your contract may not be enforceable. To comply with UETA, each party to a contract must agree to conduct their transaction electronically. That means you need two agreements with your subscriber — an agreement to contract electronically and an agreement on the equipment and services provided. Before switching to electronic, make sure you know how UETA applies in your state and other states in which you do business.
3. Get Lender Approval. If you transition to electronic contracting, make sure your new electronic contract is good collateral. We are a cash-intensive industry. and our lifeblood is RMR. Security companies make an upfront cash investment to create RMR — the number of dollars spent to create one dollar of RMR is called a “creation multiple” and is an extraordinarily important internal company statistic to know and understand. If you can borrow and use the debt to create RMR efficiently, you are on your way to creating value. Industry lenders lend on contracts. Electronic contracts can qualify as good collateral — but only if the lender is confident the electronic contract is an “authenticated original.” That is a requirement imposed by the commercial law of each state and you must satisfy certain requirements when creating the contract (not down the road) if you want your contract to be good collateral. Make sure your process qualifies.
4. Get Insurer Approval. Insurance companies underwrite the risk and premium for industry insurance policies premised on the security provider having enforceable risk allocation clauses limiting the security provider’s liability. Insurers know that those clauses tend to be enforceable. In turn, this permits insurers to offer liability coverage at lower rates. Most industry insurers conduct a contract review when they initially underwrite and price a liability policy. Some industry insurance policies require that there be an enforceable limitation of liability clause as a condition of providing coverage in the event of a loss. Not having coverage is the last thing you want. It’s likely to bankrupt all but the most financially stable companies. If you move to electronic contracts, make sure you get your insurer’s approval.
5. Email May Create a Binding Contract. Think about it — your email is an electronic signature. If you send an email indicating assent to an agreement, you may have just entered into an enforceable legal agreement. Courts have considered these sorts of claims in numerous contexts and sometimes find contracts. I suggest you add a disclaimer to your signature block to avoid these sorts of claims.
Eric Pritchard is a Philadelphia Lawyer who spends his workday making the world safe for electronic security providers. He can be reached at [email protected]. This column does not constitute legal advice; please contact an attorney with questions.
