Contracts 101: Know the Hidden Traps and Treasures in the Contracts Being Signed Without Being Read

CONTRACTS 101: KNOW THE HIDDEN TRAPS AND TREASURES IN THE CONTRACTS BEING SIGNED WITHOUT BEING READ

STANDARD TERMS AND CONDITIONS OF PURCHASE

Most companies have a standard set of terms and conditions of purchase printed on the back of their purchase orders. While most purchase transactions occur without incident, a well-drafted set of terms and conditions can be of great benefit when problems do occur. The following highlights some of the more common terms and conditions found in purchase orders.
1. Magic Language.
  
  Perhaps the most important provision in a set of purchase order terms and conditions is the “acceptance/agreement” clause, which is also referred to as the “magic language.” The purpose of this language is to allow the purchaser to impose its terms and conditions on the seller, while attempting to prevent the seller from imposing its terms and conditions on the purchaser. Under Section 2-207 of the Uniform Commercial Code, a definite and seasonable expression of acceptance or a written confirmation that is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered, unless acceptance is made conditional on assent to the additional or different terms. Additional terms are considered as proposals for addition to the contract and become part of the contract unless the offer expressly limits acceptance to the terms of the offer, the additional terms materially alter the offer, or notification of objection to the additional terms has already been given or is given within a reasonable time.
  
  As a purchaser, the first question that must be answered is: Do you want to do business only on your terms and conditions or not at all, or do you want to have a deal and then do the best you can to make your terms and conditions applicable? If you want to do business only on your terms and conditions, then your offer must be made conditional, for example “This purchase order is issued on the express condition that the seller agrees to all the terms contained herein. No other terms are acceptable.” The risk in using this type of approach is that if the seller responds to your purchase order with its own sales terms and conditions form, no contract has been formed. If the price of what you are trying to purchase suddenly goes up and you want to enforce your rights under your purchase order, you may have a difficult time, because under the terms of your purchase order there is no contract.
  
  A purchaser may not wish to take the “all or nothing” approach, preferring instead to have a legally enforceable contract and attempt to make its terms and conditions applicable instead of the seller’s terms and conditions. An example of this type of approach is the following provision: “Any proposal for additional or different terms or any attempt by seller to vary, in any degree, any of the terms of this offer in seller’s acceptance shall not operate as a rejection of this offer unless such variance is in the terms of the description, quantity, price, or delivery schedule of the goods but shall be deemed a material alteration thereof and this offer shall be deemed accepted by seller without such additional or different terms.”
  
  In order to further limit the incorporation into the contract of additional terms that may be contained in the seller’s terms and conditions, purchase order terms and conditions should limit acceptance of the purchase order to the terms contained therein and object to the seller’s terms. The following language is an example: “Any acceptance of this purchase order is limited to acceptance of the express terms of the offer contained on the front and back of this purchase order and any additional or different terms that may be contained in any documents furnished by the seller are hereby objected to and rejected.”
  
  Lastly, in order to guard against the possibility that the seller’s terms and conditions constitute the offer and the purchaser’s terms and conditions constitute the acceptance, the following may be appropriate: “If this purchase order shall be deemed an acceptance of a prior offer by seller, such acceptance is limited to acceptance of the express terms contained herein. Any additional or different terms contained in the terms reflecting seller’s prior offer shall be deemed material and are hereby objected to; provided, however, that this purchase order shall not operate as a rejection of that prior offer unless such variance is in the term of the description, quantity, price, or delivery schedule of the goods.” Alternatively, as discussed above, if the buyer wishes to have a contract only on its own terms, the following language should be used: “If this purchase order shall be deemed an acceptance of a prior offer by seller, such acceptance is expressly conditional on seller’s assent to any additional or different terms contained herein.”
  
  Combining the provisions described above results in the following “magic language”:
  “Seller’s commencement of work on the goods subject to this purchase order or shipment of such goods, whichever first occurs, shall be deemed as an effective mode of acceptance of purchaser’s offer to purchase contained in this purchase order. Any acceptance of this purchase order is limited to acceptance of the express terms of the offer contained on the front and back hereof. Any proposal for additional or different terms or any attempt by seller to vary, in any degree, any of the terms of this offer in seller’s acceptance is hereby objected to and rejected, but such proposals shall not operate as a rejection of this offer unless such variances are in the terms of the description, quantity, price, or delivery schedule of the goods but shall be deemed a material alteration thereof and this offer shall be deemed accepted by seller without such additional or different terms. If this purchase order shall be deemed an acceptance of a prior offer by seller, such acceptance is limited to acceptance of the express terms contained herein. Any additional or different terms or any attempt by seller to vary in any degree any of the terms of this purchase order shall be deemed material and are objected to and rejected; provided, however, that this purchase order shall not operate as a rejection of that prior offer unless such variance is in the term of the description, quantity, price, or delivery schedule of the goods.”
  
  Often the forms exchanged between the parties indicate that no contract has been formed, but the conduct of the parties indicates otherwise. For example each party’s form may say that it will do business only on its own terms and conditions. However, the goods are then shipped by the seller and accepted by the buyer. In such a case, the UCC provides that terms of the contract between the buyer and the seller consist of the terms on which the forms of each party agree, plus any supplementary terms incorporated under the UCC.
2. Cancellation/Termination.
  
  In addition to having the right to terminate the contract if the seller defaults, it is advisable to have purchase order language that allows the purchaser to terminate the contract even if no default has occurred. In such a situation, it is common to allow the seller receive some compensation such as a portion of the contract price for work already completed or to be reimbursed for costs incurred by the seller prior to the date of cancellation that cannot otherwise be recovered (such as by resale to another purchaser).
3. Time of Performance.
  
  In order to strictly enforce due dates and delivery dates, a statement that time is of the essence is necessary in a purchase order. This is because under the Uniform Commercial Code (“UCC”), time is not of the essence unless otherwise agreed.
4. Confidentiality.
  
  If information is to be given to the seller in order to help complete the order, such as drawings and trade secrets, the purchase order should include a clause that states that this information is proprietary and that the seller will not disclose the information to others. Consideration should also be given to whether a separate, more detailed confidentiality or non-disclosure agreement should be executed where the information provided is particularly sensitive.
5. Assignment.
  
  The UCC generally favors the ability to assign contracts. Therefore, most purchase orders contain language prohibiting the contract from being assigned or that allows assignment only upon the prior written consent of the purchaser.
6. Modification.
  
  In order to prevent the seller from excusing its late delivery by claiming that there was an oral understanding with the purchaser that the product was not really needed at the time stated, purchase order terms and conditions should allow modification of the contract only upon the written agreement of both parties.
7. Entire Agreement.
  
  This clause states that the purchase order is the entire agreement between the parties and there are no other written or oral agreements that cover the subject matter of the purchase order. The purpose is similar to the modification clause discussed above, and the two clauses are sometimes combined into the same paragraph.
8. Warranty.
  
  It is likely that a seller’s terms and conditions will disclaim any warranties. Therefore, purchase orders should contain a statement that there is a warranty of title, a warranty of merchantability, and if applicable, a warranty of fitness for a particular purpose. In order to have a warranty of fitness for a particular purpose, the seller must know, or reasonably have reason to know, the purpose for which the buyer is intending to use the goods. In addition, the purchase order should state that the products purchased will be of good quality and free from defects in workmanship and material.
9. Indemnification.
  
  In order to protect the purchaser against liability arising out of the products or services provided by the seller, purchase order terms and conditions often include an indemnification clause. This clause states that the seller will indemnify and hold the purchaser harmless against damages, liability, claims, losses, costs, and expenses arising out of or resulting from any defect in the goods or services provided and any act or omission of the seller, its agents, employees, or subcontractors.
10. Independent Contractor/Insurance.
  
  Where the seller’s employees come onto the purchaser’s premises to do work, it is wise to include language that states that such work is being done as an independent contractor and requires the seller to provide adequate insurance, including workers’ compensation, comprehensive general liability, and comprehensive automobile liability coverage.
11. Changes.
  
  In order to be able to make changes in the original order, purchase order terms and conditions should contain language that permits such changes. Of course, the language should be fair and equitable, allowing for adjusted delivery dates and compensating the seller for increased costs that result from the changes.
12. Force Majeure.
  
  A force majeure clause allows the purchaser to not accept goods if a strike, natural disaster, or other unanticipated event occurs and the goods cannot be used.
13. Price Warranty.
  
  A price warranty clause states that the price being charged is at least as low as the price being charged to others for comparable goods in comparable quantities. This language should be fairly broad and not limited to the same goods in the same quantities. In addition it is helpful to include language in the purchase order stating that the price specified is the price to be paid and that taxes, shipping, packaging or other charges cannot be added unless specifically agreed to in writing by the purchaser. It is also desirable to have a clause that states if no price is stated in the purchase order, the price is deemed to be the price when the products were last supplied to the purchaser, or the current market price, whichever is lower.
14. Inspection.
  
  Purchase order terms and conditions should contain a clause clearly stating the right of the purchaser to inspect, test, and reject the goods at any time, even after the goods have been paid for. The clause should also give the purchaser the right to return the goods at the expense of the seller, in addition to any other rights and remedies the purchaser may have.
15. Remedies.
  
  This clause usually states that all remedies of the purchaser are cumulative and any remedies stated in the purchase order are in addition to and do not exclude any remedies allowed by law.
16. Delivery.
  
  Delivery terms should be set forth in the purchase order, such as f.o.b. seller’s or buyer’s place of business. If the delivery terms are f.o.b. seller’s place of business, the risk of loss of the goods passes to the purchaser upon delivery of the goods by the seller to the carrier. If f.o.b. buyer’s place of business is specified, the seller is responsible for the goods until they are tendered to the purchaser at the destination. It may be useful to state that the purchaser is not obligated to accept early, late, partial, or excess deliveries.
17. Set-off.
  
  A clause authorizing the purchaser to set off any money owed to the seller against money owed by the seller to the purchaser is sometimes included in purchase order terms and conditions.
18. Buyer’s Property.
  
  If the purchaser provides the seller with tooling in order to allow the seller to make the products or the seller makes its own tooling and charges the purchaser the cost of such tooling, the purchase order terms and conditions should contain language stating that the purchaser is the owner of such tooling and that the seller will safeguard and be responsible for such tooling and deliver it to the purchaser upon request.
19. Waiver.
  
  It is helpful to include a clause that says the purchaser’s waiver of any breach of any of the terms and conditions of the purchase order or the waiver of any right shall not act as a waiver of any other breaches or rights.
STANDARD TERMS AND CONDITIONS OF SALE

In addition to having standard terms and conditions printed on the back of their purchase order forms, most companies also have a standard set of terms and conditions of sale on the back of their invoices or purchase order acknowledgements. Many of the areas covered are the same as those covered by the purchase order terms and conditions, but favor the seller rather than the purchaser. The following highlights some of the more common terms and conditions of sale.
1. Magic Language.
  
  As with purchase order terms and conditions, the most important provision in a set of terms and conditions of sale is the “acceptance/agreement” or “magic language” clause. The purpose of this language is to allow the seller to impose its terms and conditions on the purchaser while attempting to prevent the purchaser from imposing its terms and conditions on the seller. As discussed above, Section 2-207 of the Uniform Commercial Code provides that a definite and seasonable expression of acceptance or a written confirmation that is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered, unless acceptance is made conditional on assent to the additional or different terms. Additional terms are considered as proposals for addition to the contract and become part of the contract unless the offer expressly limits acceptance to the terms of the offer, the additional terms materially alter the offer, or notification of objection to the additional terms has already been given or is given within a reasonable time.
  
  Like a purchaser, a seller must decide if it wishes to business only on its terms and conditions or whether it wants to have a deal and then do its best to make its own terms and conditions applicable. However, because the respective terms and conditions of the purchaser and the seller will probably not agree with respect to warranties and limitations of remedy and in the event of a conflict in terms, the Uniform Commercial Code provides good warranties and remedies for purchasers, sellers should strongly consider taking the “all or nothing” approach. The following is an example: “Acceptance of purchaser’s order is expressly conditioned on purchaser’s agreement to all the terms contained herein. No other terms are acceptable.”
  
  In addition, because of credit concerns, sellers generally want the right to decide which orders they will accept and which they will reject. Accordingly, most terms and conditions of sale contain language such as “All orders are subject to acceptance by Seller. No contract of sale will be formed until a written acknowledgement has been issued by Seller.”
  
  As noted above in the discussion of purchase order terms and conditions, the conduct of the parties may recognize the existence of a contract even though the forms exchanged between the parties do not. Where this is the case, the terms of the contract between the buyer and the seller consist of the terms on which the forms of each party agree, plus any supplementary terms incorporated under the UCC. Therefore, a seller who is not careful could end up with the UCC implied warranties of merchantability and fitness for a particular purpose even though it tried to exclude them by agreeing to do business only on its own terms and conditions.
2. Cancellation/Termination.
  
  Many purchase order forms, as well as terms and conditions of sale, allow the purchaser to terminate the contract for convenience. The terms and conditions of sale usually impose cancellation charges of some form, such as out of pocket costs for labor and material, an overhead charge, and profit on the goods produced. Purchase order terms are less generous to the seller, such as allowing the seller to be reimbursed for direct out-of-pocket costs incurred by the seller prior to the date of cancellation that cannot otherwise be recovered (such as by resale to another purchaser).
3. Confidentiality.
  
  Terms and conditions of sale do not contain confidentiality provisions as frequently as purchase order terms and conditions. However, if confidential information is to be given to the purchaser in the course of securing or producing the order, or if the purchaser visits the seller’s plant for inspection or other purposes, the seller may want to include a clause in its terms and conditions that states that this information is proprietary and obligates the purchaser to not disclose the information to others. Consideration should also be given to whether a separate, more detailed confidentiality or non-disclosure agreement should be executed where the information provided is particularly sensitive.
4. Assignment.
  
  Because the UCC generally favors the ability to assign contracts, sales terms and conditions often prohibit the contract from being assigned or allow assignment only upon the prior written consent of the seller.
5. Entire Agreement.
  
  This clause states that the terms and conditions of sale constitute the entire agreement between the parties and there are no other written or oral agreements that cover the subject matter of the terms and conditions. The purpose is to prevent the purchaser from claiming that there was an understanding between the parties other than that reflected in the terms and conditions.
6. Warranty and Limitation of Remedies.
  
  Purchase orders almost always contain extensive warranties and remedies available to the purchaser. A seller will in most cases want to disclaim the implied warranties of merchantability and fitness for a particular purpose and limit the buyer’s remedies. In order to disclaim the implied warranty of merchantability, the word “merchantability” must be used and the disclaimer must be conspicuous. In other words, it must stand out such as by being printed in bold, capital letters, larger type, or all of the above. No particular words are necessary to disclaim the warranty of fitness for a particular purpose, but the disclaimer must be conspicuous. A seller will usually want to limit the buyer’s remedies to repair, replacement, or return of the purchase price, at the seller’s option, and to disclaim liability for any indirect, incidental, or consequential damages.
7. Changes.
  
  Most purchase order terms and conditions will contain language allowing the purchaser the right to make changes in the original order and placing the obligation to accommodate those changes on the seller. To counteract such a provision, terms and conditions of sale should require agreement between the seller and the purchaser on such terms as price, delivery, and other key terms in order for the changes to be effective.
8. Force Majeure.
  
  A force majeure clause excuses the seller’s performance if some unanticipated event occurs, such as war, fire, flood, strike or other labor stoppage, transportation delay, shortage of material, fuel, equipment, etc. Although both purchase orders and terms and conditions of sale usually contain force majeure clauses, language in the terms and conditions of sale is typically more extensive with respect to the types of events covered.
9. Price.
  
  Terms and conditions of sale generally typically state that prices quoted are subject to change without notice and the price to be charged will be the price in effect on the date of shipment. In addition, it is common for the terms and conditions to state that the price specified is the price for the product only and taxes, shipping, packaging or other charges are extra. The terms and conditions may also state the seller’s terms of payment.
10. Delivery.
  
  As with purchase orders, delivery terms should be set forth in the terms and conditions, such as f.o.b. seller’s or purchaser’s place of business. If the delivery terms are f.o.b. seller’s place of business, the risk of loss of the goods passes to the purchaser upon delivery of the goods by the seller to the carrier. If f.o.b. purchaser’s place of business is specified, the seller is responsible for the goods until they are tendered to the purchaser at the destination. Under the UCC, unless otherwise agreed, the terms of delivery are f.o.b. seller’s place of business.
  
  Terms and conditions of sale also typically state that delivery dates are estimates and the seller assumes no liability for any loss or damage due to delivery delays.
11. Tooling.
  
  If the seller provides tooling in order to make products for the purchaser, the seller’s terms and conditions will usually make it clear that the seller is the owner of such tooling.
12. Waiver.
  
  As a precaution, terms and conditions of sale should include a clause that says the seller’s waiver of any breach of any of the terms and conditions of sale or the waiver of any right shall not act as a waiver of any other breaches or rights.
13. Quantity.
  
  It is a good idea and fairly common to include a provision on quantity to the effect that items shipped will be plus or minus 10% of the quantity ordered.
14. Purchaser’s Condition.
  
  A seller may wish to include language in its terms and conditions that it can suspend performance or require payment, security, or other adequate assurance if it believes that the financial or other condition of the purchaser warrant such action.
15. Patents
  
  If goods are manufactured according to specifications provided by the purchaser, the seller will want to include language in its terms and conditions providing that the purchaser will indemnify the seller against any claims of infringement based on the specifications.
WARRANTIES
1. What is a warranty?
  
  A warranty is a promise or representation made by a seller that can be legally enforced. Warranties made in connection with the sale of goods are covered by the Uniform Commercial Code. A warranty can either be express or implied. The UCC provides for two implied warranties, the warranty of merchantability and the warranty of fitness for a particular purpose.
2. Express Warranties
  
  Express warranties are promises or representations by the seller that are part of the basis of the bargain. In other words, if a seller makes a promise or representation to the buyer that induces the buyer to purchase the product, the seller has made an express warranty. There are many types of representations that have the potential to be considered express warranties, including specification sheets, proposals, samples, catalogs, pictures, and oral statements made by the seller’s sales personnel, but only if they become part of the basis of the bargain. Statements of mere opinion or “puffing” by a seller will not constitute warranties.
  
  Purchasers who want specification sheets, proposals, catalogs, samples, etc. to become warranties should refer to them in the purchase order or attach a copy to the purchase order if possible. For example, a purchase order might list “One XYZ Widget, as referenced in Seller’s April 2004 catalog, page 24” or “Ten XYZ Widgets matching the sample furnished to Purchaser by Seller on March 31, 2004.”
3. Implied Warranties
  1. Merchantability.
    
    Under the UCC’s implied warranty of merchantability, to be merchantable, the goods must, in general, pass without objection in the trade, be fit for the general purpose for which they are normally used, and be of fair average quality. Whether goods are merchantable or not is subject to much variation and interpretation. Therefore, purchasers are wise to try to obtain express warranties wherever possible and not rely on the implied warranty of merchantability. Likewise, sellers should disclaim the implied warranty of merchantability for fear that any dissatisfaction by the purchaser with the product will lead to a claim of breach of the implied warranty.
    
    In order to disclaim the implied warranty of merchantability, the disclaimer must mention “merchantability” and be conspicuous. Conspicuous means that a reasonable person would notice the disclaimer, such as larger or other contrasting type or color. For example, SELLER EXPRESSLY DISCLAIMS AND EXCLUDES ANY IMPLIED WARRANTY OF MERCHANTABILITY.
  2. Fitness for a Particular Purpose.
    
    The implied warranty of fitness for a particular purpose requires that the seller know a particular purpose for which the goods are required, the purchaser must rely on the seller’s skill or judgment to select or furnish suitable goods, and the warranty must not be disclaimed.
    
    Whether or not the warranty arises in a particular case is a question of fact to be determined by the circumstances. The purchaser does not need to actually tell the seller of the particular purpose for which the goods are intended or of the purchaser’s reliance on the seller’s skill and judgment if the circumstances are such that the seller has reason to realize the purpose intended or that reliance exists. Although the purchaser must, in fact, rely on the seller, there is no bright line that says exactly how much reliance is necessary. Obviously, the more reliance the purchaser places on the seller, the stronger the argument for the presence of the implied warranty.
    
    As with the implied warranty of merchantability, sellers should disclaim the implied warranty of fitness for a particular purpose. The disclaimer must be in writing and be conspicuous, but no particular language is required. The following is an example of a warranty disclaimer where an express warranty has been given:
    
    THIS WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, AND SELLER EXPRESSLY DISCLAIMS AND EXCLUDES ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
    
    Implied warranties can also be excluded by language such as “as is,” “with all faults,” or other language which calls the buyer’s attention to the exclusion of warranties and makes it plain that no implied warranties exist. Although not specifically required by the UCC to be conspicuous, courts in some states have invalidated “as is” disclaimers that were not conspicuous.

ACCORD AND SATISFACTION

It is not uncommon for a dispute to arise between a seller and a purchaser over the amount owed for products purchased. For example, the seller may insist $50,000 is owed, but the purchaser believes the amount should be reduced because of various defects, late delivery, etc. The parties negotiate back and forth, but without success. What is the result if the purchaser decides to send the seller a check for $30,000, writes “Full Payment” on the check, and the seller then cashes the check?

At least in Oregon, the purchaser will not have accomplished its intended result. Oregon law provides that the cashing of a check marked “paid in full,” “payment in full, “full payment of a claim,” or words of similar meaning or accompanied by a statement containing such words does not establish an accord and satisfaction that binds the payee or prevents collection of any remaining amount unless the payee personally, or by an officer or employee with actual authority to settle claims, agrees in writing to accept the amount stated in the check as full payment of the obligation.

In other states, such as Washington, the result will likely be different. Under Washington law, subject to certain exceptions described below, the claim of the seller will be fully discharged if the check was tendered in good faith as full satisfaction of the claim, the amount of the claim was subject to bona fide dispute, the seller obtained payment of the check, and the check contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.

However, the claim will not be discharged if (i) the seller (if it is an organization such as a corporation) proves that it, within a reasonable time before the tender of the check, sent to the purchaser a conspicuous statement that communications concerning disputed debts (including a check tendered as full satisfaction of a debt) are to be sent to a designated person, office, or place, or (ii) the seller proves that within 90 days after payment of the check, the seller tendered repayment of the amount of the check to the purchaser. The foregoing rules regarding non-discharge of the claim will not apply, however, if the purchaser can prove that the seller, or an agent of the seller having direct responsibility with respect to the claim, knew that the check was tendered in full satisfaction of the claim.

It is important to note that in Washington, crossing out the full payment language or writing on the check that it is accepted under protest and with full reservation of rights will not negate an accord and satisfaction that meets the requirements described above.

UNIFORM ELECTRONIC TRANSACTIONS ACT IN OREGON

In 2001, the Uniform Electronic Transactions Act (“UETA” became effective in Oregon. UETA reduced uncertainty associated with the enforceability of electronic contracts and signatures. The fundamental tenet of UETA is that contracts executed electronically or online, such as through email or by clicking “I agree,” may not be denied legal effect or enforceability solely because they are in electronic form or were formed electronically.

Although Oregon made no substantive changes in its adoption of UETA from the version of UETA approved by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”), it did enact additional state-specific provisions which will be discussed later. Consequently, to understand Oregon law it is first necessary to clearly understand UETA.

Rule of Equivalence

UETA was the first major effort to gain traction toward providing uniform laws related to transactions in electronic commerce. Its fundamental tenets can be found in ORS 84.019:

A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.
A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
If a law requires a record to be in writing, an electronic record satisfies the law.
If a law requires a signature, an electronic signature satisfies the law.

Under UETA, records created, generated, sent, communicated, received or stored by electronic means can be the legal equivalent of paper documents. Furthermore, electronic signatures can be the legal equivalent of physical signatures. The term electronic signature is broadly defined under UETA 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.”¹ The use of specific technology to create a valid signature is not necessary, the signer’s intent at execution is what governs. As noted in the Official Comments, whether a record has been “signed” is a question of fact and subject to proof under other applicable law. A recorded voice, email header or footer, firm name on a facsimile, or other electronic communication might all constitute an electronic signature if the requisite intent to sign is found. Similarly, clicking “I agree” on a website may also be deemed an electronic signature.

Scope

The application of UETA has a generally broad scope, but includes a number of significant limitations. ORS 84.007 specifies that UETA applies only to electronic records and electronic signatures relating to a “transaction.” A transaction is broadly defined in ORS 84.004 as “an action or set of actions occurring between two or more persons relating to the conduct of business, commercial, or governmental affairs.” Although not clear in the language of UETA, the Official Comment notes that “commerce” and “business” are to be construed broadly to include transactions involving individuals who may qualify as “consumers” under other applicable law. The Comments also clarify that unilateral or non-transactional actions are not included within the scope of UETA. Regardless whether inside the scope of UETA, ORS 84.007 provides that all transactions remain subject to other applicable substantive law.

UETA does not apply to transactions governed by laws listed in ORS 84.007. Therefore, transactions governed by laws related to the creation and execution of wills, codicils, or testamentary trusts and the Uniform Commercial Code (UCC), other than sections 1-107, 1-206, article 2, and article 2A, are excluded.

It is important to note that UETA is an opt-in statute. Under ORS 84.013, both parties must specifically assent to conduct transactions by electronic means. No party can be compelled to engage in transactions by electronic means, and any party consenting to electronic means may later refuse to engage in future transactions by electronic means. However, whether the parties agree to use electronic means may be determined by the context and surrounding circumstances of the transaction, including the parties’ conduct.

Default Rules

UETA, following the model of the UCC, is principally a set of default rules. Except where otherwise specified in UETA for certain policy considerations, the effect of any provision of that Act may be varied by agreement of the parties. Here are the more significant rules to consider:

Attribution. ORS 84.025 provides the rather vague rule that an electronic signature is attributable to a person if it was the act of that person. Although such “act of the person” may be shown in any manner, UETA encourages the use of security procedures, explicitly pointing out that a showing of the efficacy of any security procedure is specifically relevant in determining the person to which an electronic record or electronic signature is attributable.

Change or Error. ORS 84.028 also encourages the use of security procedures by providing that if two parties agree to use a particular security procedure, and one party fails to conform to that procedure, the conforming party may avoid the effect of any changes or errors that occurred and could have been prevented had the other party also conformed. This section additionally provides a process for an individual to avoid any changes or errors resulting in an automated transaction with an electronic agent if the electronic agent does not provide an opportunity for prevention or correction of the error.

Time and Place of Sending and Receipt. ORS 84.043 includes detailed rules on when and where an electronic record is deemed sent and received, similar to the “mailbox rule” under UCC Article 2. Generally, an electronic record is sent when it enters a system outside the sender’s control and received when it enters a system designated by the recipient for the receipt of such records.

Application

In addition to the general rule of equivalence discussed above, UETA provides several specific rules regarding its application in certain circumstances:

Notarization and Acknowledgement. ORS 84.031 allows satisfaction of any notary, acknowledgment, verification, or oath requirement under any law through the use of an electronic signature, provided such electronic signature is attached to or logically associated with the underlying signature or record being notarized, acknowledged, etc.

Record Retention. ORS 84.034 provides that an electronic record will satisfy any law that requires a record be retained if the electronic record is accurate and remains accessible for later reference. Governmental agencies may specify additional retention requirements within their respective jurisdictions. Since UETA is limited to prospective application from the date of its passage under section 4, it should not be relied upon to convert current paper records into electronic format with the intention of destroying the paper originals.

Admissibility in Evidence. ORS 84.037 provides simply: “In a proceeding, evidence of a record or signature may not be excluded solely because it is in electronic form.”
Electronic Agents. ORS 84.040 allows for the formation of contracts through the use of electronic agents. An electronic agent is defined as “a computer program or electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual.”

Transferable Records. ORS 84.046 enables the use of electronic negotiable instruments, referred to as “transferable records,” by establishing a system which parallels UCC Article 3 and 7 (ORS chapters 73 and 77). To create and maintain transferable records under the statute, a system must be implemented that only allows a single (unique, identifiable, and unalterable) authoritative copy of the transferable record. Any person seeking to enforce a transferable record must be in “control,” similar to a “holder” under the UCC, of the transferable record.

Government Agencies. ORS 84.049, ORS 84.052, and ORS 84.055 are optional provisions under UETA, which were adopted in Oregon. These sections authorize governmental bodies to regulate the use of electronic signatures and records in transactions to which they are a party and encourage government bodies to adopt standards that promote consistency and interoperability.

Consumer Protection

Consumer protection is a significant political issue for any state considering adoption of UETA. To understand the issue, it is important to have some familiarity with the federal Electronic Signatures in Global and National Commerce Act (E-Sign) which generally became effective on October 1, 2000.² E-Sign is similar to UETA in many ways and was enacted to resolve the lack of uniformity among state laws and ensure the enforceability of electronic signatures and contracts in interstate commerce, regardless whether individual states adopt UETA. Seeking to preserve states’ rights, E-Sign includes complex and narrow “exemption to preemption” provisions which allow states to opt-out of a major portion of E-Sign. States may opt-out by adopting the uniform version of UETA or alternative procedures and requirements which are consistent with E-Sign.³ Oregon’s statute was carefully crafted to fall within this exemption by adopting both the uniform version of UETA and additional provisions consistent with E-Sign.

One of the significant distinctions between E-Sign and UETA is that E-Sign includes detailed consumer protection provisions not found in UETA.⁴ Because of the exemption to preemption mentioned above, a state adoption of the uniform version of UETA arguably preempts E-Sign’s consumer protection provisions. The Oregon Legislature made a policy decision to adopt the consumer protection provisions of E-Sign into Oregon law. Consequently, ORS 87.070 contains the consumer protection provisions found in E-Sign with no substantive change. Those provisions contain certain criteria which must be met before various statutory notice requirements can be satisfied by electronic means and preclude the use of electronic notice for actions such as termination of utility services or residential eviction.

It should be noted that UETA does contain more general requirements regarding the presentation of electronic records. According to ORS 84.022, if certain information is required by law to be provided, sent or delivered in writing, an electronic record must be capable of retention by the recipient at the time of receipt to satisfy that law. Capable of retention includes the ability of the recipient to print or store the electronic record. Any specific format or presentation requirements specified in a law must also be complied with in the electronic record. If any sender inhibits the ability of a recipient to store or print an electronic record, the record is not enforceable against the recipient.

Digital Signatures

In discussing “electronic signatures,” one should note the important distinction between this term and “digital signatures.” As mentioned, any electronic sound, symbol or process may be deemed an electronic signature if the requisite intent to sign is present. Digital signatures, on the other hand, are technology specific forms of electronic signatures which offer additional advantages such as authentication and encryption. Documents executed with digital signatures provide greater assurance of the identity of the signatory and are more difficult to alter and forge.

Prior to the passage of UETA, Oregon had adopted an Electronic Signature Act which thinly addressed the enforceability of electronic and digital signatures and provided an infrastructure for registering companies which issue digital signatures (Certification Authorities). With the passage of UETA, the Oregon Electronic Signature Act was renamed the “Digital Signature Act.” The Digital Signature Act’s application is limited to digital signatures and makes appropriate reference to the UETA provisions that govern the enforceability of electronic signatures.

Conclusion

Between E-Sign and UETA, there is substantially less risk associated with the enforceability of electronic contracts and signatures today. Although electronic contracting in Internet based transactions is fairly common, these new laws will foster more extensive development and use of electronic contracting technology.

ORS 84.004(8)
15 USC §§ 7001 to 7031.
15 USC § 7002(a).
See 15 USC § 7001(c).

APPENDIX A

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