E-SIGN Prevents Enforcement of Emailed Contract Terms–Buckles v. Investordigs

By John Ottaviani

Buckles Management, LLC v. Investordigs, LLC, No. 10-cv-00508-LTB-BNB (D. Colo. July 23, 2010).

It has been about 10 years now since Congress adopted the federal Electronic Signatures in Global and National Commerce Act (commonly known as “E-Sign”). Cases interpreting E-Sign have been relatively rare. A Colorado federal court judge last week purported to decide whether an e-mail could constitute an enforceable contract under E-Sign, and concluded that the e-mail in question could not be enforced as a contract. Unfortunately, the Court (and the parties briefing the motion) did not realize that this was not an E-Sign case. The Court should have analyzed the case under the Colorado Uniform Electronic Transactions Act. Had it done so, the result may have been different.

Background

The case involves a failed business relationship that is all too typical. An investor provides money, consulting services, and commercial space to a struggling company, without any legal documents to evidence such terms as whether the transaction is a loan or an investment, etc… When the business relationship falls apart, the parties meet to discuss how to end their relationship. After the meeting, a few e-mails are circulated to memorialize the terms discussed. Attorneys are asked to draft documents, but nothing is ever signed; and the parties disagree as to whether or not there was a final agreement.

The investors filed a lawsuit, asserting claims for enforcement of the purported settlement agreement, breach of loan, breach of a lease agreement, unjust enrichment and accounting. In response, the company and individual defendants asserted counterclaims for breach of contract, unjust enrichment, negligent misrepresentation, breach of fiduciary duty and fraud and false misrepresentation.

Decision

The decision in question arises from defendants’ Motion for Summary Judgment, where they maintain that the Colorado Statute of Frauds, which provides that any agreement not to be performed within one year must be in writing and subscribed by the party to be charged, renders the settlement agreement unenforceable. In response, the plaintiffs argued that the parties exchanged a writing that contained the material terms of the agreement sufficient to satisfy the Statute of Frauds. Specifically, the plaintiffs relied on an e-mail, containing a list of the purported agreed-upon settlement terms, sent from the e-mail account of one defendant (who was a principal of the corporate defendant) to another employee at the company, who in turn forwarded the e-mail to four or five other people (including one of the plaintiffs) with the message “thanks to everyone for participating today.”

The court’s basic framework for analyzing the issue seems correct:

• May an e-mail exchange satisfy the Colorado Statute of Frauds writing requirement?

• If so, does this particular e-mail constitute a “writing subscribed by the party to be charged” within the meaning of the Colorado Statute of Frauds?

• If so, does this e-mail adequately describe the terms of an enforceable contract?

The court embarked on a discussion as to whether the e-mail satisfied the Colorado Statute of Frauds. Initially, the court got the analysis right, and concluded that under Colorado law, an e-mail exchange may satisfy the “writing” requirement of the Statute of Frauds.

With respect to whether the e-mail constituted a writing “subscribed by the party to be charged” under the Colorado Statute of Frauds, here the court got off track, with the help of counsel for the parties. The plaintiffs argued that the e-mail contained an “electronic signature” under E-Sign. Section 106(5) of E-Sign defines an “electronic signature” as “an 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.” The defendants argued that E-Sign did not apply because the settlement agreement did not affect interstate or foreign commerce. The court concluded that E-Sign did apply, but that the e-mail was actually sent by an administrative employee who did not have authority to bind either the corporate defendant or its individual principal. As a result, the court concluded that the signature was not “executed or adopted by [the principal of the defendant] with the intent to sign the record,” so it was not a proper electronic signature under E-Sign. The court concluded that if there was no proper “electronic signature,” then the e-mail was not “subscribed by the party to be charged” under the Colorado Statute of Frauds.

Analysis

Unfortunately, the court and the parties missed the fact that the case is governed by the Colorado Uniform Electronic Transactions Act (“UETA”), not the E-Sign Act. E-Sign has a peculiar “reverse preemption.” Those who have been around long enough recall that in the late 1990’s states were adopting electronic transaction laws, but in a non-uniform manner. In 1999, the National Conference of Commissioners on Uniform State Laws issued its final draft of the UETA, but states continued to enact UETA in a non-uniform manner. These non-uniform enactments were in part responsible for Congress passing E-Sign in 2000. In effect, Congress forced states to adopt UETA in a uniform manner by providing that the state version of UETA would control over E-Sign if UETA were adopted without modification. In most cases, then, if a state has adopted UETA substantially in final form, the state’s version of UETA is controlling over E-Sign. (To date, 47 states, plus the DIstrict of Columbia, Puerto Rico and the U.S. Virgin islands, have adopted UETA).

Would the analysis have been any different under UETA? It might be, because UETA is more comprehensive than E-Sign, including areas not covered by E-Sign.

Under Section 24-71.3-107 of the Colorado UETA, a contract may not be denied legal enforceability solely because an electronic record was used in its formation. So the court was correct in concluding that an e-mail exchange may satisfy the Statute of Frauds “writing” requirement.

But what about the e-mail exchange in this case? The Colorado definition of “electronic signature” is the same as the E-Sign definition. But Section 109 of UETA also allows for signatures to be “attributable” to a person where the person may not have “signed” the record himself (for example, a human agent with authority signs the record). The court concluded that the e-mail was not signed by the indiividual principal of Investordigs, but by an administrative employee. Under Section 24-71.3-109 of the Colorado UETA, whether the e-mail sent by the administrative employee could be attributed to the defendant “may be shown in any manner”. Thus, there is room for the investor to argue that the e-mail was sent on behalf of the principal of the company or that the administrative employee was acting as an agent of the principal. Unless there are additional facts not appearing in the court’s opinion, this would seem to be a classic issue of material fact, sufficient to defeat summary judgment. It is not clear from the record why the plaintiffs did not make this argument.

If the case does not settle, then it is likely that this decision will be remanded on appeal for findings of further fact consistent with the application of UETA, not E-Sign. It may be that, in the end, the investors will not be able to enforce the settlement agreement if they cannot attribute the e-mails to the company itself or the principal, or if the terms are not sufficiently definite to warrant enforcement. But, for the sake of argument, what if the employee was charged with taking notes for the meeting or was otherwise instructed by the principal to send out the e-mails containing the terms? Then it may be that the plaintiffs will be able to resurrect their claims.

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