Jul 20

Risks and Rewards of Electronic Signatures

Download original article from Real Estate Weekly.

Our brokerage clients are familiar with our mantra to paper every transaction with an email trail. This is necessary to establish, when a dispute arises, the intent of the parties. An addendum to that rule is to be aware of the risks and rewards of electronic signatures. Generally, brokers are looking to lock in commissions. Electronic signatures can go a long way to reaching that goal where the other party is reticent or delinquent in acknowledging a commission agreement in writing.

This area of the law has evolved with such velocity that professionals’ expectations as to what constitutes a contract may already be outdated. Any contractual relationship can now be created simply by replying to an email. You risk inadvertently entering into a contract unless your email contains an unambiguous statement such as “The sender of this email disclaims any intent to be bound hereby, except where the sender clearly and explicitly provides otherwise.”

Cases interpreting the federal E-SIGN Act and the Uniform Electronic Transactions Act, which has been enacted by 47 states and the District of Columbia, affirm that electronic communications can form the basis for a valid and enforceable contract. And while New York State’s legislature is one of the three not to have passed the UETA, a state appellate court recently concluded that electronically executed agreements have the same effect as those signed on paper.

The law defines “electronic signature” far more broadly than the term implies. We’re not talking about a scan of your paper signature that you consciously paste into a computer document. Instead, you can be bound by any “electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” This language is intentionally broad and permits email to constitute an acceptable record of a deal.

What constitutes offer and acceptance over email? Courts will analyze the same principles that apply to any other contract.

The recent New York case that declared email contracts enforceable concerned an alleged breach of contract to purchase two buildings in Manhattan. The prospective purchaser’s broker emailed a $50 million offer. The seller’s broker responded by email with a counteroffer for $52 million and a 30-day diligence period during which the prospective purchaser would have a right of first refusal on any higher offer.

While the prospective purchaser was conducting diligence, the owner sold the properties to another buyer without giving effect to the right of first refusal, and a lawsuit ensued. The seller moved to dismiss the action based on several theories, including that no contract existed because the deal was only set forth in an email.

New York’s appellate court agreed that the case should be thrown out, but not because the agreement was memorialized electronically. In fact, the court explained at length that pursuant to New York’s Electronic Records and Signatures Act, electronic communications can bind parties to a contract. Instead, the court found that the parties had never agreed in the first place.

Like any other real estate negotiation, a counteroffer is not just a request for different terms. It also serves as a rejection of the original offer. So when the building’s owner responded to the prospective purchaser’s email offer for $50 million with an email counteroffer for $52 million and a right of first refusal, the onus was on the prospective purchaser to reply that he accepted the counteroffer. Because he failed to do so, there was never the “meeting of the minds” necessary for the parties to be bound.

Essentially, then, parties wishing to contract over email should be sure that the acceptance complies with the terms of the offer. An email that specifies the precise terms of the offer that one is accepting is the best bet to ensure a meeting of the minds.

Many real estate professionals eschew contracts, whether executed on paper or over email. These brokers rely on the exemption from the Statue of Frauds that allows oral brokerage agreements to be enforced. Even if one is not a Realtor – whose organizational code of ethics requires written agreements – signing a formal contract for commissions is the best practice.

This is because brokers who agree to represent a party without entering into an agreement do so at their peril. Not only have these brokers agreed to take on fiduciary responsibilities, but the potential for the client to renege on the commitment places the receipt of compensation in jeopardy. Oral agreements of any kind are difficult to prove. Without witnesses to the discussion giving rise to the contract, or a prior course of dealing between the parties, brokers may be unable to prove what they believe to be a firm contract.

But brokers need not insist that their clients execute lengthy agreements or have a notary witness a contract’s execution: Email is a perfectly legitimate way to memorialize a real estate deal.

Of course, deeds and mortgages still require handwritten and notarized signature pages to be enforceable. Moreover, the law does not require parties to use electronic signatures. Companies can set up outgoing email message footers with a statement disclaiming any intent to be contractually bound by electronic signatures.

In light of these developments, companies should ensure that they have an email policy and that policy is designed to facilitate the company’s goals as to e-signatures. It is good practice to have a real estate attorney review those practices to ensure compliance with current law.

Howard Rubin, Esq.

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