Chapter 2: Competitive Government
Update Texas Law to
Facilitate Electronic Contracts
Summary
The use of electronic procurement systems in state government is growing, and its use to form contracts may create risks and uncertainties for the parties who participate. If these risks and uncertainties are not reduced, state agencies may be reluctant to enter into electronic contracts. In its reforms of the state procurement process, the Legislature should update Texas law by enacting a Uniform Electronic Transactions Act.
Background
Texas law has not kept pace with the rapid growth of electronic commerce. As with any contract, electronic sales and other electronic transactions depend on the law and the courts for their interpretation and enforcement. They are conducted through contracts that depend on the foundations provided by the applicable law for their enforcement and interpretation. Indeed, it is a function of the law to determine what promises are important enough to enforce.[1]
The Internet economy grew 62 percent in 1999 to reach $523.9 billion and is expected to reach about $850 billion in 2000. In 2000, Internet revenues are expected to exceed those of the automobile industry ($728 billion) and the life insurance industry ($724 billion). E-commerce is that portion of the Internet sector that consists of sales of goods and services over the Internet, such as the business of “e-tailers,” manufacturers selling online, fee-based companies, and online entertainment and professional services. Some examples include amazon.com, drugstore.com, toysrus.com, and Texas-based American Airlines. Between 1998 and 1999, the sales volume in e-commerce increased 72 percent, from $99.8 billion to $171.5 billion. E-commerce employed 726,700 workers in 1999, a 26 percent increase over 1998. Revenues for companies participating in the Internet economy, even though diluted by their old economy components, are growing at an annual rate of 11 percent, almost three times the rate of growth of the economy as a whole.[2]
Great economic, social, and technological changes have always had an impact on the law, including the law of contracts. The law of contracts operates in a way that differs fundamentally from other areas of law, such as criminal law. In contract law, the parties themselves determine the obligations and rules by which their relationship will be governed, and the courts will enforce this set of rules subject only to certain conditions and limitations. When issues not addressed by the parties emerge, the law often supplies answers—terms or conditions by default, some rules for interpreting the contract, or other solutions for the problems that put the parties into a dispute.
In a common law system, the steady accumulation of numerous precedents—the rules emerging from the court’s previous decisions on relatively narrow legal issues—and the periodic enactment of statutes together create the legal underpinnings for individuals, business firms, government agencies, and other entities to make binding agreements. The law enables these parties to make and rely upon agreements that help create dependable and clear business relationships and ease the rapid flow of commerce. Until recently, the physical instruments of contract formation were the human voice, ink, paper, and telephone. Today, those instruments can just as easily be computers, wires, and electronic impulses.
The State of Texas and its agencies use the same law of contracts as other parties, although other statutes apply to the contract process for state agencies. The State has been moving toward an electronic procurement system using electronic contracts and has an interest in ensuring that the legal underpinnings of the contracts into which it enters are sound. The State, as a buyer or seller of goods and services, has an interest in reducing the legal uncertainties and risks that result from being a party to contracts formed electronically. If those risks and uncertainties are not reduced, state agencies will be reluctant to enter into electronic contracts.
In 1997, the Legislature enacted HB 984, which authorized the Department of Information Resources to promulgate rules for the use of digital signatures in communications to state agencies and added Section 2.108 to the Texas Uniform Commercial Code (UCC), Art. 2 (Sales), to provide for digital signatures for contracts involving the sale of goods (whether or not the State is a party to the contract).[3] A digital signature is an electronic identifier intended by the user to have the same force and effect as a signature made by hand. HB 984 was enacted at least partially in response to a proposal from the Texas Performance Review.[4]
The 1997 amendment to the UCC has three major limitations. First, it applied only to contracts for the sale of goods, thus leaving out a variety of other contracts that either the parties might desire to put in writing or be required to do so by the Statute of Frauds. For example, the Texas Statute of Frauds requires the following promises or agreements to be written and signed: agreements on consideration of marriage or conjugal cohabitation, contracts for the sale of real estate, leases of real estate with a term longer than one year, and agreements not to be performed within one year of the making of the agreement.[5] Secondly, the amendment only authorized the use of digital signatures; it did not address a host of other issues that arise from the growth of electronic commerce. Finally, the amendment made the Texas UCC less completely uniform despite the lack of any substantive policy reason that would support such a departure from the general goal of uniformity.
The elimination of unnecessary state variations in commercial law makes it easier to do business in the internal market area of the entire United States. The movement toward uniform commercial laws among the states has helped to create a united American economy, ease the flow of commerce across state boundaries, reduce the risks and uncertainties of doing business, and contribute to American growth and prosperity. While the state-adopted versions of the UCC include a few significant departures from perfect uniformity, minimizing these variations is in the best interests of a sound economy.
The legal scholars who craft new uniform acts for legislative consideration have made considerable progress in addressing the problems of electronic contracts. The National Conference of Commissioners on Uniform State Laws has completed a draft revision of Article 2 of the UCC that addresses electronic commerce issues and has separately promulgated a Uniform Electronic Transactions Act (UETA).[6] Completed in 1999, the UETA has been approved by the American Bar Association and endorsed by the American Council of Life Insurance and the Equipment Leasing Association of America. This new uniform law applies to electronic contracts governed by the laws of the states that adopt it.
The UETA is based in part on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce approved by the United Nations General Assembly in late 1996.[7] Legislation molded after the model law has been adopted in the Australia, Bermuda, Columbia, France, Hong Kong, Ireland, the Republic of Korea, the Philippines, Singapore, and the State of Illinois.[8] The UETA has now been adopted in 23 states and was considered by the legislatures of at least five additional states in the year 2000.[9] Like other uniform state laws, the text of the UETA is provided to the states, and the legislatures of the enacting states adopt the exact words of the uniform act except where those states decide, for substantial policy reasons, to depart from the intended uniformity.
As stated by the National Conference of Commissioners, the purpose of the UETA is “to support the use of electronic commerce. The primary objective of this act is to establish the legal equivalence of electronic records and signatures with paper writings and manually-signed signatures, removing barriers to electronic commerce.”[10] In its chief substantive provisions, the UETA provides that a record or signature may not be denied legal effect or enforceability “solely because it is in electronic form.”[11] More specifically, a contract may not be denied legal effect or enforceability “solely because an electronic record was used in its formation.”[12] If a law requires a record to be in writing, then the UETA stipulates that an electronic record satisfies the law.[13] If a law requires a signature, an electronic signature satisfies the law.[14] However, UETA does not require any record or signature to be “created, generated, sent, communicated, received, stored, or otherwise processed or used by electronic means or in electronic form.”[15] UETA also makes it clear that the Act will apply only to transactions between parties “each of which has agreed to conduct transactions by electronic means.”[16]
Under the UETA, a contract may be entered into by machines functioning as electronic agents of the parties to the contract or by the interaction of an electronic agent and an individual.[17] UETA also has provisions concerning the attribution of electronic signatures to persons, the effects of changes or errors, the attachment of acknowledgments and notarizations, the retention of electronic records, the abolition of any requirement to retain “hard copies” of records retained electronically, and the admissibility of electronic records into evidence in the courts of law and other proceedings.[18]
Special optional provisions in the UETA address the use of electronic records by governmental agencies. The model act permits a state agency or a designated single official of the state to determine whether, and the extent to which, state agencies will send and accept electronic records and electronic signatures in transactions and otherwise use electronic records and electronic signatures.[19] The act authorizes each agency or the single official to specify the attributes of electronic records and electronic signatures for the state’s use.[20] It also provides for the encouragement of standards for consistency with other states and the federal government.[21]
Provisions in UETA carefully define the scope of its application. It applies to any electronic record or electronic signature created, generated, sent, communicated, received, or stored on or after the effective date determined by the Act’s text or the law applying to legislation provided in the adopting jurisdiction.[22] However, those records and signatures must be related to a transaction.[23] A “transaction” is defined as “an action or set of actions occurring between two or more persons relating to the conduct of business, commercial, or governmental affairs.”[24] The Act does not apply to transactions to the extent to which they are governed by laws governing the execution and creation of wills and other testamentary documents, the articles and sections of the Uniform Commercial Code other than those related to sales and leases, and the Uniform Computer Information Transactions Act, as well as any other laws the adopting state chooses to state.[25] Other provisions define the time and place of sending and receipt of electronic records, address transferable records, and provide definitions for terms used in the act.[26]
Recent congressional action lends greater urgency to the implementation of this proposal. On June 30, 2000, President Clinton signed into law the “Electronic Signatures in Global and National Commerce Act.”[27] The act provides that a contract, record, or signature in “any transaction in or affecting interstate commerce” is not to be denied effect, validity, or enforcement solely because it is in electronic form or because an electronic signature was used in its formation.[28] However, the act specifies that a state may supersede this provision by enacting or adopting the Uniform Electronic Transactions Act.[29] The Senate Committee Report made it clear that this federal law was structured so that the states would be encouraged to adopt the uniform act.[30] In so doing, Congress recognized that the issue of electronic forms of the records and signatures on contracts is most appropriately handled by the states, in keeping with the structure and traditions of the American federal system.
The State’s interest in having solid and enforceable contracts may require changes in the laws that apply to contracts formed entirely by private parties. Texas can make its version of the Uniform Commercial Code more uniform and join the growing number of states who have embraced the age of electronic commerce with no cost to its interests. It will remove an impediment to the state’s progress toward electronic procurement. Because of the important State interests involved, as well as the great advantages to persons in the private sector, the Legislature should update the laws forming the legal infrastructure for contracts by adopting the Uniform Electronic Transactions Act.
Recommendations
A. The state should enact the Uniform Electronic Transactions Act (UETA) with appropriate provisions in the optional or variable portions of that model act.
B. The state should repeal Business and Commerce Code, Sec. 2.108.
This provision, which applies only to contracts for the sale of goods, provides that digital signatures are valid for communications in connection with such transactions. Appropriate adoption of the UETA would make it redundant.
Fiscal Impact
Implementation of these recommendations is not expected to have any direct fiscal impact on the state. Any indirect impact through greater state revenues attributable to an increased volume of private sector transactions, from cost savings attributable to reduced damages in contract actions to which the state is a party, or from improved efficiency in state contracting cannot be estimated.
[1 ] Arthur Linton Corbin, Corbin on Contracts: One Volume Edition (St. Paul: West Publishing Co., 1952), secs. 3, 109-110, pp. 4-6, 161-167; and American Law Institute, Restatement of the Law Second, Contracts 2d St. Paul: American Law Institute Publishers, 1981) sec. 1, p. 5.
[2] Cisco Systems and the University of Texas Center for Research in the Internet Economy, “Measuring the Internet Economy” (Austin, Texas, June 6, 2000), pp. 1-3, 17-18 (http://www.internetindicators.com). (Internet document.)
[3] Vernon’s Texas Codes Annotated, Business and Commerce Code, §2.108 (St. Paul: West, 1997) (http://www.capitol.state.tx.us/statutes/bc/bc000200toc.html). (Internet document.)
[4 ] Texas Comptroller of Public Accounts, Disturbing the Peace, “Use Digital ‘Signatures’ in Electronic Transactions” (Austin, Texas, 1996), pp. 685-686; also at (http://www.window.state.tx.us/tpr/tpr4/c8.cg/c811.html). (Internet document.)
[5 ] Texas Business and Commerce Code, Sec. 26.01(b) (1999) (http://www.capitol.state.tx.us/statutes/bc/bc002600.html#bc001.26.01). (Internet document.)
[6 ] National Conference of Commissioners on Uniform State Laws, Revision of Uniform Commercial Code, Article 2-Sales (Chicago, Illinois, July 2000) (http://www.law.upenn.edu/bll/ulc/ucc2/ucc20600.htm). (Internet document); and National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act (1999) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[7 ] United Nations Commission on International Trade Law, Uncitral Model Law on Electronic Commerce with Guide to Enactment (New York, New York, 1998) (http://www.uncitral.org/english/texts/electcom/ml-ec.htm). (Internet document.)
[8] United Nations Commission on International Trade Law, “Status of Conventions and Model Laws” (http://www.uncitral.org/english/status/index.htm). (Internet document.)
[9 ] As of November 2, 2000. The National Conference of Commissioners on Uniform State Laws, “A Few Facts About the Uniform Electronic Transactions Act” (http://www.nccusl.org/uniformact_factsheets/uniformacts-fs-ueta.htm). (Internet document.)
[10] The National Conference of Commissioners on Uniform State Laws, “A Few Facts About the Uniform Electronic Transactions Act.”
[11 ] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 7 (a) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[12 ] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 7 (b) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[13 ] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 7 (c) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[14] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 7 (d) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[15] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 5(a) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[16] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 5(b) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[17] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 14 and comment (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[18 ] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, secs. 9, 10, 11,12, 13 (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[19] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 18(a) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[20 ] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 18(b) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[21] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 19 (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[22 ] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 4 (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[23] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 3(a) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[24 ] The National Conference of Commissioners on Uniform State Laws Uniform Electronic Transactions Act, sec. 2(16) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[25] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, sec. 3(b) (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[26 ] The National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act, secs.1, 15, 16 (http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta99.htm). (Internet document.)
[27 ] P. L. No. 106-229 (2000) 114 Stat. 464, codified at 15 USC 7001 et seq. (http://thomas.loc.gov/cgi-bin/bdquery/z?d106:SN00761:|TOM:/bss/d106query.html). (Internet document.)
[28] “Electronic Signatures in Global and National Commerce Act,” P.L. No. 106-229 (2000), Sec. 101 (a).
[29 ] “Electronic Signatures in Global and National Commerce Act," P.L. No. 106-229 (2000), Sec. 102 (a).
[30] US Senate Report 106-131, Report of the Committee on Commerce, Science, and Transportation on S. 761 (June 30, 1999), p. 6 (http://thomas.loc.gov/cgi-bin/cpquery/R?cp106:FLD010:@1(sr131). (Internet document.)
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