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The Effect of Electronic Contracting & Potential Pitfalls

On September 16, 1999, Governor Gray Davis signed Senate Bill 820 making California the first state to adopt an electronic contracting law. The law went into effect January 1, 2000. Its primary purpose is to "ensure that electronic contracts (records and signatures) have the same legal effect as their hard copy counterparts." In addition, the law legalizes electronic signatures and even extending the electronic signature, under certain circumstances, to satisfy requirements that a signature be notarized. The law, however, only applies to transactions where the contracting parties have agreed in advance to be bound by an electronic transaction.

Maybe the law's most extreme fault is that it fails to cover all transactions. The following contracts are excluded:

1. Wills, codicils, and testamentary trusts.
2. Certain transactions governed by various consumer protection laws (for example, notice of mortgage late fees, non-judicial foreclosure notices, and statements of finance charges).
3. Any transaction under the Automobile Sales Finance Act or the Vehicle Licensing Act.
4. Some retail installment sales contracts.

Even with these shortcomings, the law undoubtedly will have a significant effect on the future of contract law in California and the nation. Exactly what that effect will be, however, remains to be decided in the courtroom. In the following section, we will examine some of the issues.


1. What will be the long-term impact of electronic contracting on the nation's business?

2. What are the potential pitfalls you see with electronic contracting?

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1. What will be the long-term impact of electronic contracting on the nation's business?

Indeed, reports suggest that electronic contracting will increase within the nation's business. Really, it should come as no surprise, then, that a full 47% of Americans are dissatisfied with store-based retailing and 50% more consumers as compared to last year expect to make a purchase over the Internet as reported in the Deloitte & Touche Reviewof March 17, 1997. It is argued that the long-term impact on the nation's business will be positive such things as increases in efficiencies and lower costs for the nation's business. By using electronic contracting, for example, a business can legally process and maintain paper contracts quickly and at lower costs. Also, most universities use electronic contracting, as well, such as a student having the option to electronically sign the student handbook or print it and send it in to the university. Electronically signing a contract is also reported to be a faster and easier way for all parties involved. (1)

From a legal perspective, it is argued that the changes in contracting paradigms and presumptions wrought by purely electronic agreements are indeed unprecedented in nature and scope. "It is not simply the computer makes business more efficient. Rather, the computer transforms business and that transformation has some predictable characteristics. Those characteristics form a modern paradigm for commerce to which modern commercial law should be drawn and from which it should derive its concepts of contract law and liability risk allocation for the next century." Raymond Nimmer and Patricia Krauthouse, Electronic Commerce: New Paradigms in Information Law, 31 Idaho L. Rev. 937 (1995). (1)

For example, although Governor Davis has predicted, "California's high-tech community and consumers will benefit greatly" from the Act, transactions conducted and memorialized electronically should be examined by legal counsel for a number of reasons. For instance, procedures should be implemented and forms of agreement revised, if necessary, to ensure that all electronic contracts comply with the statutory requirements regarding the confirmation of errors or changes to the record, and the printing and storing of electronic records. In light of some critics' claims that the provision governing the admissibility of evidence of an electronic record or signature may be unconstitutional, contracting parties should consider adding clauses expressly providing for the admissibility of the constituent electronic records. For the same reason, ...

Solution Summary

Based on the scenario, this solution discusses the long-term impact of electronic contracting on the nation's business, as well as the potential pitfalls of electronic contracting.