You can learn most of what you need to know about contract law by visiting McDonald’s.
A contract law analysis of a visit to McDonald’s goes like this: The menu board is an offer to deal. When you order a Big Mac, fries and a soda, you have made an offer. When the clerk rings up your order and tells you how much you owe, that is an acceptance, as a result of which you and McDonald’s have a contract. McDonald’s, through its agent the cashier, discharges its obligation to you by handing you the food, saturated fat and all, and you perform your obligation to McDonald’s by tendering the money.
Are you perhaps surprised to learn that, starting with your first Kids Meal at McDonald’s, you have spent your entire life entering into contracts? In “The Misanthrope,” a 17th-century French play, the main character expresses surprise at learning that he has been speaking “prose” all his life. While there were no McDonald’s in 17th century France, that character no doubt would have expressed equal astonishment at learning that he also had spent a lifetime making contracts.
With the advent of electronic mail and one-click purchases on Amazon.com, the medium has changed, but the rules are the same. A contract is an enforceable promise, nothing less — and nothing more. An enforceable promise need not be in writing, unless a statute provides otherwise. A contract may be formed by two people speaking prose to each other (unless you do not consider words such as Big Mac or Quarter Pounder to be prose). It can be formed by a nod or any other gesture of assent, such as handing someone money, and it can be formed by sending an e-mail. (The principle, if it had a name, might be called the McDonald’s Principle.)
If all of that is true, then what is the significance of the enactment by Congress of the Electronic Signatures in Global and National Commerce Act? (For those offended by the quality of Congress’ prose, it is also known as “E-Sign.”) If clicking a button labeled “I accept” on CDNOW.com’s Web site already suffices, then what is the need for E-Sign, and for the companion statutes in the process of being adopted in the states?
Despite all the self-congratulation among lawmakers over how E-Sign marks a great leap forward into an e-commerce future, its importance to the business and consumer public is indirect and lies primarily in two areas.
The first has to do with a principle known as the statute of frauds, which is found in all 50 states and the District of Columbia. The statute of frauds requires that certain contracts — most importantly contracts for the conveyance of real estate and sometimes contracts for the sale of corporate stock and the like — be in writing.
The McDonald’s Principle applies to a contract to sell a hamburger, to sell a car or to sell most anything else — on or off-line — but not to a contract to sell a house because a house is real estate. With E-Sign, however, as long as all the parties agree to proceed electronically, there is no need to sign a paper to transfer title to a house. In short, if the parties elect, E-Sign invalidates the statute of frauds. That doesn’t mean that the McDonald’s Principle now applies to real estate. Rather, it means we now have a choice between the formalities of a written transaction and the formalities of an electronic one.
If E-Sign doesn’t make it easier to purchase a book on Amazon.com, and it doesn’t make it easier for General Motors to place an online order with its supplier, then whom does it benefit?
The chief beneficiary in the short run will be large financial services concerns, which can now shave pennies and hours off the cost of closing mortgages and other financial transactions that to date have required compliance with the writing requirement. E-Sign is, in that sense, special interest legislation — benign, but special interest all the same.
The second main thrust of the E-Sign Act is more profound and promises wider social benefit. Understanding this promise requires, as a threshold matter, focusing on the fact that E-Sign does not mandate a particular encryption technology. In drafting the E-Sign Act, Congress contemplated that private industry would battle it out over standards. In other words, it left it to the electrical engineers to determine whether iris scans, public key encryption or digital certificates become the norm.
It is presumed that the norm will turn out to be technology that is best at realizing each of three goals: (1) authentication, (2) data integrity and (3) availability.
Authentication means making sure that the electronic record that indicates that I signed a mortgage in fact contains my signature. There is lots of new technology that does that. Indeed, some esignature methodologies are plainly superior to live signatures, in that the electronic record can irrefutably indicate a tampering or a forgery.
Data integrity means that not only is the signature my signature, but the document that I electronically signed has not been tampered with after I delivered my e-signature. Here, too, e-signatures will be superior to paper records.
Availability has two components. First, data needs to be available across platforms, or at least on a platform in wide enough use to allow all interested parties access. It also means that it be stored — and converted, as technology changes — in a manner that insures access far into the future.
Silicon Valley has brought us breathtaking changes in recent years in technology for storing and delivering data. In light of the pace of change, it is daunting to consider the grave importance of insuring that data stored today can be accessed 50 or 100 years from now. Anyone who has happened upon a dusty floppy while cleaning behind a shelf will appreciate what a difficult challenge that is.
E-Sign sets the stage and will surely accelerate the race to arrive at standards that most reliably deliver authentication, data integrity and availability. The result is likely to be superior, overall, to today’s customs and practices. Therein lies the great promise of this law.
In a recent column on shareholder inspection rights, I recalled a New Yorker cartoon from the early days of online stock trading in which two parents are standing over their Kid’s Meal-age child, anxiously explaining to him that it is “very very important that you try very very hard to remember where you transferred Mommy and Daddy’s assets.”
In the context of E Sign, the question is: Is that nightmare more likely or less likely to occur as businesses implement the technology contemplated by E-Sign? The probability, as sophistication about esignature grows, is that it will become less likely.
© Maryland Gazette. Reprinted with permission.