The new federal law on electronic records and signatures, which takes effect on Oct. 1, may preempt state laws that currently require bids for municipal securities to be accepted in the form of written documents, a bond lawyer is warning.
"I don't think a lot of states know that their contract law may be preempted by the new Electronic Signatures in Global and National Commerce Act," Wayne D. Gerhold, a lawyer with Thorp Reed & Armstrong in Pittsburgh, said yesterday in a brief interview. The act was approved by Congress and signed by President Clinton in June.
Under the new federal law, known as E-SIGN, two parties are permitted to use an electronic bidding system if they both agree to it. Gerhold warned in a recent paper that E-SIGN "could be the camel's nose under the tent" -- the beginning of the creation of a federal contracts law that preempts the traditional statutory and common law that has developed in the states.
Gerhold raised the preemption issue on Friday in Chicago during a panel session at the National Association of Bond Lawyers' 25th annual Bond Attorneys' Workshop. He was reviewing recommendations on electronic bidding made recently by a NABL panel in a paper.
The NABL Committee on Opinions and Documents, which is chaired by W. Jackson Williams, a partner with Williams & Anderson in Little Rock, recommended a list of items that bond counsel should check when advising municipal issuers about the electronic bidding of their municipal securities. The first recommendation was that counsel check the federal and state laws that apply to electronic bidding, including maturity by maturity bidding if planned, as well as the laws governing the use of electronic records and signatures.
A number of states have adopted the Uniform Electronic Transactions Act, which validates the use of electronic records and signatures and was approved by the National Conference of Commissioners on Uniform State Laws in July 1999. As of last month, versions of the UETA had been adopted by 22 states and were pending in another 10 states, according to Gerhold. E-SIGN contains portions of the UETA, but differs in some respects. Gerhold said bond lawyers should check both federal and state laws to determine how they might apply.
The NABL committee cautioned bond lawyers to be aware that "an electronic signature is not necessarily an actual signature. A transaction can be consummated in any electronic manner so long as the parties express some form of acquiescence to conduct the transaction electronically, such as clicking on the 'I agree' icon."
The UETA defines an electronic signature as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with an intent to sign the record." It defines an electronic record as "a record created, generated, sent, communicated, received, or stored by electronic means."
Section 7 of the UETA says that a record, signature, or contract may not be denied legal effect or enforceability solely because it is in electronic form or because an electronic record was used in its formation.
The NABL panel also recommended that bond counsel review the various screens that the electronic bidding service posts on its Web sites, the contractual language that appears and must be agreed to by a bidder, as well as any other screens may be viewed by the bidder during the bidding process.
"A lot of people think this is just the invitation to bid, but it's actually part of the contract between the bidder and the issuer," Gerhold said.
In addition, the NABL panel said, bond counsel should make sure the bidding forms contain language specifying a jurisdiction and venue for any litigation that might result because of disputes involving electronic bidding.
Bond counsel also should ask the issuer or bidding service how they are verifying that a bid submitter is who they say the are. Typically, bidders are pre-registered and assigned codes or passwords, Gerhold said.
The panel recommended that the bond counsel review the agreement between the clearing agent and the issuer when bids are to be made on a maturity-by-maturity basis rather than all-or-none basis. "It is important to review the computer screens which lead the maturity-by-maturity purchaser into a binding agreement to purchase a specific maturity for the bid price," the committee said. "It would be better to make sure the clearing agent has the contractual obligation of paying the appropriate funds to the issuer on the day of the closing," it said.
