United States: Electronic Transactions In Kentucky - A New Way Of Doing Business? Maybe . . . Maybe Not.

At the end of the 20th century, the international legal community attempted to address increasingly common issues with the use of electronic signatures.  At the federal level, Congress enacted the Electronic Signatures in Global and National Commerce Act ("E-SIGN"), to ensure the legal validity of electronic contracts and signatures in interstate and foreign commerce.  Meanwhile, states began to pass their own laws pertaining to electronic signatures.  In an attempt to harmonize and unify these e-signature laws, the National Conference of Commissioners on Uniform State Laws ("NCCUSL") proposed the Uniform Electronic Transactions Act ("UETA") for adoption by states.  As of today, only Illinois, New York, and Washington state have not adopted the UETA.  In Kentucky, the UETA is codified under KRS Chapter 369. 

KRS Chapter 369 governs electronic records and signatures that relate to a transaction.¹  This includes conducting business, commercial, or government affairs.²  KRS Chapter 369 does not create new substantive law, but rather, gives the same legal validity to electronic transactions as if they had been conducted face-to-face with physical documents and a manual, or "wet," signature.  With the growth of electronic commerce, this law protects electronic transactions from being encumbered by legal requirements that the agreement be memorialized in writing, or that a physical record of the agreement be kept.  Simply, KRS 369 is intended to allow electronic methods to satisfy laws that require a writing or signature to better ensure authenticity of an agreement.

KRS Chapter 369 only operates if both parties to the transaction have agreed to the use of electronic means.³  This agreement can be established by the context of the transaction or the conduct of the parties.⁴  If agreed, the use of electronic record or signing will satisfy laws that require a writing.⁵  The UETA does not require the use of electronic means but instead allows parties to a transaction to negotiate the use of electronic means to authenticate and retain documents. 

"Whether an electronic record or electronic signature has legal consequences is determined by KRS 369.101 to 369.120 and other applicable law."  KRS 369.105(5).  An electronic signature is defined as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.  KRS 369.102(8).  In Kentucky, if the law requires a writing, an electronic signature satisfies the requirement.  KRS 369.107(4). Furthermore, section 369.107 provides that "[a] contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation."

As statutorily prescribed, "[a]n electronic record or electronic signature is attributable to a person if it was the act of the person . . . [which] may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable."  KRS 369.109(1).  The effect of such "is determined from the context and surrounding circumstances at the time of its creation . . . ."  Id. at 369.109(2).

KRS Chapter 369 does not govern all transactions.  Specifically, KRS Chapter 369 does not apply to transactions governed by the Uniform Commercial Code (Except Articles 2 and 2A governing the sale of goods and leases); laws for the creation of wills, codicils, or testamentary trusts; laws governing the conveyance of any interest in real property; or laws governing the creation or transfer of any negotiable instrument or any instrument establishing title or an interest in title.⁶  These exceptions include promissory notes, secured transactions, and mortgages. Instead of being covered by KRS Chapter 369, they are governed by applicable Kentucky Statutes.⁷  Notably, this real estate transaction exemption does not exist in the NCCUSL's uniform act.  While certain interest groups have made efforts to pass legislation that would remove the real property exclusion and further expand the use of e-signatures in Kentucky⁸, those efforts have proven unsuccessful so far.

Promissory notes cannot be electronically signed because they are negotiable instruments.  Negotiable instruments require a signature on a tangible writing to impose liability.⁹  Also, a mortgage cannot be signed electronically; Kentucky's County Clerk offices require an original signature in order to record a mortgage and, therefore, a physical signature must be obtained.

Credit applications including those for credit cards and security agreements can, however, be electronically signed.  Where secured transactions require authentication of a security agreement that provides a description of the collateral¹⁰, an electronic signature can authenticate the agreement.¹¹  But other aspects of the secured transaction may require a physical signature.¹²

KRS Chapter 369 and UETA's efforts to address the legal issues surrounding electronic signature are not perfect.  But they are a step in the right direction.  This allows parties to authenticate remote transactions as if they had been conducted in person.  In the age of electronic commerce, parties may now cut through the legal red tape of writing requirements with an agreement to use electronic means in their transactions.

Footnotes

1 KRS 369.103(1).
2 See KRS 369.102(16).
3 KRS 369.105(2).
4 Id. 
5 KRS 369.107.
6 KRS 369.103(2).
7 Article 3 of the Kentucky UCC governs promissory notes. Article 9 of the Kentucky UCC governs secured transactions.  
8 See, e.g., SB 135, available at http://www.lrc.ky.gov/record/18RS/SB135.htm. 
9 KRS 355.3-401.
10 KRS 355.9-203(2)(c)(1).
11 KRS 355.9-102(1)(g).
12 E.g. promissory note or mortgage.

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