The Principles Of Electronic Agreement Legal Admissibility Wp 8 07

ProofSpace White Paper

The Principles of Electronic Agreement Legal Admissibility Jacques Francoeur, B.A.Sc., M.A.Sc., MBA (408)-406-6539, [email protected]

Notice: This is not legal advice

ProofSpace White Paper

Table of Contents Introduction

3

Components of an Electronic Signature

3

Electronic Signature Legislation — A Non Discrimination Act

4

The Principles of Electronic Agreement Admissibility

6

Principle 1: Electronic Signature Reliability

7

Criteria 1: Electronic Signature to Electronic Document Binding

7

Criteria 2: Identity Authentication

8

Criteria 3: Electronic Signature Integrity

8

Criteria 4: Electronic Document Integrity

8

Principle 2: Sole Control over Act of Signing

9

Criteria 5: Privacy of Unique Identifier

9

Criteria 6: Sole Control Over Unique Identifier

9

Criteria 7: Revocation of Unique Identifier

9

Principle 3: A State of Informed Consent in the Act of Signing

10

Criteria 8: Awareness of Engaging in a Process of Agreement Formation 11 Criteria 9: Awareness of Intent and Implications of Act of Signing

11

Criteria 10: Notice of Rights

11

Principle 4: The Digital Chain of Admissibility Criteria 11: Audit Trail of How, Who, What and When

12

Criteria 12: Retention

12

Principle 5: Electronic Agreement Trustworthiness

13

Criteria 13: Level of Electronic Signature Reliability

13

Criteria 14: Degree of Control over the Act of Signing

14

Criteria 15: Extent of a State of Informed Consent

14

Criteria 16: Trustworthiness of the Digital Chain of Admissibility

14

Conclusion: A Trusted Electronic Agreement Process ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

11

Evaluation Matrix: Criteria for Legal Admissibility of Electronic Agreements

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003

15 16



ProofSpace White Paper

Introduction In its most basic sense, an agreement is a commitment between two or more parties to perform obligations in exchange for consideration. The agreement cannot be subject to imperfect memory, competing claims or repudiation. There must be a state of awareness that an agreement was being entered into and that a state of informed consent existed during the act of signing. There must be sufficient proof to establish the identities involved, the specifics of the agreement and the time the agreement was entered into; all of which must be retained for a prescribed period. The transformation from a paper-based agreement process to an electronic equivalent makes no difference to the ongoing need to adhere to legal standards, meet legislative requirements and comply with regulatory requirements. However, the electronic paradigm will create many new legal and technical challenges and present risks that will radically change the methods of meeting the standards and requirements and demonstrating their adherence and compliance. This paper will discuss a set of five principles that are essential to the legal admissibility of an electronic agreement. These principles are prerequisites to enforceable electronic agreements as required by existing legal standards and electronic signature legislation. Admissibility can be understood to mean meeting the prerequisite requirements necessary to hold an individual accountable, to obtain a successful dispute resolution judgment or to obtain a favorable court adjudication. This paper will also specify sixteen measurement criteria that can be used as metrics to assess whether the architecture of an electronic transaction will meet the requirements of admissibility. But first, let us define the essential components of an electronic signature and discuss the legal significance of electronic signature legislation — the elimination of a key barrier to executing end-to-end electronic agreements.

Components of an Electronic Signature In order to understand the impact of electronic signature legislation and to identity the minimum requirements necessary to adhere to the act, one must first understand the legal definition of an electronic signature and identify its essential components. The most effective way to do this is to understand the fundamentals of electronic signature laws, as articulated by the United Nations Commission on International Trade Law (UNCITRAL) Model Law 1 on Electronic Signatures (“UN Model Law”). Then to understand the intent of a multinational standard such as the European Union Electronic Signature Directive (“EU Directive”) 2 and finally to consider the specifics of a national act — the United States Electronic Signatures in Global and National Commerce Act 3 (“eSign Act”). From these reference sources, a common set of requirements will become apparent.

1 Model Law and Guide to Enactment: http://www.uncitral.org/english/texts/electcom/ml-elecsig-e.pdf

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

2 European Union Electronic Signature Directive: DIRECTIVE 1999/93/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 December 1999 on a Community framework for electronic signatures. http://europa.eu.int/ISPO/ecommerce/legal/documents/1999_93/1999_93_en.pdf 3 United States Electronic Signatures in Global and National Commerce Act: http://www.ecommerce.gov/ ecomnews/ElectronicSignatures_s761.pdf

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003



ProofSpace White Paper

The definition of an electronic signature as provided by the UN Model Law 4 is: An electronic signature is “data in electronic form in, affixed to, or logically associated with, a data message, which may be used to identify the signatory in relation to the data message and indicate the signatory’s approval of the information contained in the data message.”

The definition as provided by the EU Directive 5 is: “electronic signature means data in electronic form which are attached to or logically associated with other electronic data and which serve as a method of authentication…”

Finally, the definition as provided by the US e-Sign Act 6 is: “The term electronic signature means 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.”

All three definitions require the signature to be affixed to or associated with what is being signed. Therefore an electronic signature cannot exist without a context and the specifics of what is being signed. Furthermore, the UN Model Law and the e-Sign Act definitions add that the act of signing must be an act of approval or intent, respectively and the EU Directive defines the intent as a method of authentication. Therefore an electronic signature cannot further exist without the existence of intent. Consequently, in the most general sense these definitions describe more the formation of an electronic agreement — a signature in electronic form linked to a record in electronic form with the act of signing performing a purpose, either approval, authentication or intent. The objective of electronic signature legislation is then to articulate that these electronic entities, whether they are called signatures or agreements, are equivalent in terms of legal effect and validity as their physical counterparts. This is the focus of the following section.

Electronic Signature Legislation — A Non Discrimination Act The impact of electronic signature legislation is to provide for the non-discrimination of electronic signatures and records as compared to their physical counterparts. That is, no signature or record will be deemed invalid merely because it is in electronic form. In legal terms this means that the legislation provides the same “legal effect and validity” to an electronic signature and record as to the legal effect granted a handwritten signature on a paper record. Note that the legal recognition granted a handwritten signature, which is that of admissibility in a court of law, is far greater than the legal recognition granted an electronic signature, which is not to be deemed invalid. The key challenge is how to get both to have the same legal recognition — that of admissibility. Electronic signature legislation also articulates a number of requirements that must be adhered to and makes clear that the need to comply with any and all other requirements of law is not affected or altered in any way. It only serves to create a fair playing field between physical and electronic signatures and records in terms of their

4 UNCITRAL Model Law on Electronic Signatures Article 2a

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

5 European Union Electronic Signature Directive Article 2.1 6 United States Electronic Signatures in Global and National Commerce Act: Section 106 Definitions (5) Electronic Signature

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003



ProofSpace White Paper

right to exist and be equally considered, subject to specific requirements being met. These requirements are the focus of the Principles of Legal Admissibility. The intent of the UN Model Law is to facilitate the creation of a harmonized and coherent international legal framework for the recognition of electronic signatures. This international legislative interoperability will consequently result in “frictionless” international e-business. This enables an agreement executed or formed in one territory to be legally recognized by another and the creation of a normalized set of industry best practices and standards governing e-business and e-commerce that can interoperate. The UN Model Law 7 states that: “Where the law requires a signature of a person, that requirements is met… if an electronic signature is used which is as reliable as was appropriate for the purpose for which the data message was generated…”

The UN Model Law further states that an electronic signature meets the requirement of law if it is sufficiently reliable (trustworthy) as required by the significance of the act of signing. This “level of reliability” requirement is the subject of Principle 5: Electronic Agreement Trustworthiness and will be further discussed in Section 4. While UN model law and the e-Sign act are “technology neutral,” the EU Directive strongly favors cryptographically based electronic signatures, called Digital Signatures, while still ensuring “neutrality” in terms of the legal effect and admissibility of all forms of electronic signatures. To accommodate this, the EU Directive has articulated two classes of electronic signatures with distinct levels of trustworthiness designed to convey two distinct levels of legal recognition — legal effect and legal admissibility. The first form of electronic signature that is afforded legal effect and validity is a General Electronic Signature (GES). However its admissibility in a court of law is predicated upon its specific ability to meet the requirements of reliability commensurate with the purpose of the signature. The second form of electronic signature, called an Advanced Electronic Signature, is granted a much higher legal recognition. It is guaranteed admissibility in a European Union court of law. This distinction of legal recognition, the right to exist legally (legal effect) and the right to be granted equivalence to a handwritten signature (legal admissibility) in a court of law, is exactly the focus of this paper. It will be further discussed in the following section under Principle 5: Electronic Agreement Trustworthiness. The EU Directive 8 articulates the requirements of legal effect and validity and technology neutrality as follows: “Member States shall ensure that an [GES] electronic signature is not denied legal effectiveness and admissibility as evidence in legal proceedings solely on the grounds that it is in electronic form, or… not based on an Advanced Electronic Signature.”

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

7 UNCITRAL Model Law on Electronic Signatures Article 6.1 8 European Union Electronic Signature Directive Article 5.2

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003



ProofSpace White Paper

The US e-Sign act 9 ensures the non-discrimination of electronic ensuring their legal effect and validity, as follows: 1) A signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforce-ability solely because it is in electronic form; and 2) A contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.

The key point to recognize is that electronic signature legislation ensures that electronic signatures and records will not be denied enforceability solely for being electronic. Rather they place the condition of admissibility squarely on the level of reliability of the signature and the level of trustworthiness of the agreement formation process. So the key question becomes, how to get from legal effect and validity, as provided by electronic signature legislation, to legal admissibility in a court of law, a prerequisite of enforceable electronic agreements. This is achieved by adhering to the Principles of Electronic Agreement Admissibility, discussed in the next section.

The Principles of Electronic Agreement Admissibility This section describes five principles that are essential to meeting the prerequisite requirements of admissibility, as required by electronic signature legislation and established legal standards. These principles are broken down into sixteen measurement criteria that can be used to assess whether the design of an electronic agreement formation process will generate legally admissible electronic agreements. The principles of electronic agreement admissibility are: Principle 1: Electronic Signature Reliability relates to the technical reliability of the electronic signature itself. Principle 2: Sole Control Over the Act of Signing relates to whether the signature applied was in fact applied by the signatory. Principle 3: A State of Informed Consent in the Act of Signing relates to the state of mind of the signatory at the time the signature was applied. Principle 4: The Digital Chain of Admissibility relates to whether the level of trustworthiness of the agreement formation process was sufficient for the purpose of the agreement. Principle 5: Electronic Agreement Trustworthiness relates to the capture and preservation of the electronic forensic evidence of the agreement formation process. These principles are addressed below.

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

9 United States Electronic Signatures in Global and National Commerce Act: Section 101 General Rule of Validity

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003



ProofSpace White Paper

Principle 1: Electronic Signature Reliability The reliability of an electronic signature is a critical requirement to its legal admissibility. Aspects of reliability relate to the technical robustness attributes of the electronic signature and record. To identify the set of requirements as articulated the UN Model Law, the EU Directive and the e-Sign Act, consider the following table that breaks out the components of an electronic signature:

Electronic Signature Components United Nations Model Electronic Signature Law

European Union Electronic Signature Directive

U.S. Global and National e-Commerce Act

Electronic Nature of Signature

“data in electronic form

“data in electronic form

“an electronic sound, symbol, or process

Link of Electronic Signature

in, affixed to, or logically associated with

which are attached to or logically associated with

attached to or logically associated with

What is Being Signed

a data message,

other electronic data

a contract or other record

Identification of the Signatory

which may be used to identify the signatory in relation to the data message

Purpose of Signing

and indicate the signatory’s approval of the information contained in the data message.”

and executed or adopted by a person and which serve as a method of authentication...”

with the intent to sign the record.”

From these three definitions, one can identify the common attributes of an electronic signature that determines its reliability. Note that the one essential requirement falls outside of the technical realm and to informal notions of informed consent — approval and intent, which relates more to the agreement formation process. This will be addressed further in the discussion on Principle 3: A state of Informed Consent in the Act of Signing. The technical robustness attributes of an electronic signature in the form of measurement criteria are:

Criteria 1: Electronic Signature to Electronic Document Binding The robustness of the method used to link the electronic signature to the electronic record being signed is a factor in determining the reliability of an electronic signature and in fact the electronic agreement. Its robustness relates to the ease to which it may be manipulated or falsified. Different levels of robustness are obtained from transaction architectures that embed an electronic signature in the record being signed, affix or attach the electronic signature to the record, or logically associate the electronic signature with the record. ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003



ProofSpace White Paper

Criteria 2: Identity Authentication The “chain of trust” that establishes the link between an electronic signature, a secure private identifier, a registered identity and finally to a physical individual acting as a Signatory can only lead to one unique individual. The UN Model Law 10 requirement is articulated as follows: “An electronic signature is considered to be reliable for the purpose of satisfying the requirement [of law] if the signature creation data [unique identifier] are,…, linked to the signatory and no other person;”

How can the true identity of the signatory be established and the basis of denial controlled to the necessary level? This chain of trust is derived from the architecture of the processes involved in identity management. It starts with the method of vetting the true identity of the individual and generating a unique private identifier 11 that can only be associated with the individual. The chain of trust is then derived from the method of binding the public electronic credential 12 to the registered identity, the method used to transmit with confidentiality the private identifier to the individual and the method of protecting and accessing the private identifier to perform the act of signing. This complex chain of trust is called the Digital Chain of Accountability™ 13 and is outside the scope of this paper. For more information, see www.trustera.com.

Criteria 3: Electronic Signature Integrity The ability to maintain the integrity of an electronic signature is critical to its reliability. It is not only a matter of its capture, but also the ability to preserve, verify the integrity of, and render the signature in human readable form when and where required. The reliability is associated with the ability detect any alteration or modification of the signature after it has been generated. The UN Model Law 14 articulates this requirement as follows: “An electronic signature is considered to be reliable for the purpose of satisfying the requirement [of law] if any alteration of the electronic signature, made after the time of signing, is detectable;”

Criteria 4: Electronic Document Integrity The purpose of an electronic signature as an act of approval of content or intent to be bound is predicated on the ability to maintain and verify the integrity of the content to which the electronic signature is affixed to, associated with or embedded in. That is, the ability to detect any alteration or modification to the content after the record has been signed.

10 UNCITRAL Model Law on Electronic Signatures Article 6.3.a 11 A Private Identifier is a technology neutral term that means the electronic code that is private and uniquely associated with one individual and that is used to create an electronic signature. The EU Directive uses the term Signature Creation Data. Other forms are passwords and private cryptographic keys. 12 An Electronic Credential is a technology neutral term that means the public registered identifier that is used to link the identity of an individual with the private unique identifier. The EU Directive uses the term Signature Verification Data. Other forms are User IDs and Digital Certificates (Public Cryptographic Keys).

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

13 The Digital Chain of Accountability is an architectural construct that measures the trustworthiness of identity management processes. See Technical Brief 2: Digital Chains of Trust at www.trustera.com. The Digital Chain of Accountability is a trademark of trustEra, Inc. 14 UNCITRAL Model Law on Electronic Signatures Article 6.3.c

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003



ProofSpace White Paper

The UN Model Law 15 articulates this requirement as follows: “An electronic signature is considered to be reliable for the purpose of satisfying the requirement [of law] if, … any alteration made to that information [record] after the time of signing is detectable;”

The reliability of an electronic signature is a necessary but insufficient requirement for legal admissibility. It is also requires that the Signatory have sole control over the act of signing, the focus of the nextprinciple.

Principle 2: Sole Control over Act of Signing The sole control over the unique identifier is one of the most critical principles as it is subject to less interpretation. A breach in sole control invalidates the reliability of any subsequent electronic signature. The concept of “sole control” embodies three critical aspects — the privacy, security and unique access to the unique identifier — the effective “signature” of an individual.

Criteria 5: Privacy of Unique Identifier During the identity registration process, an identifier is generated that must be both unique to the individual and only known by the individual — private. Therefore the admissibility of an electronic signature is predicated on maintaining the confidentiality of the unique identifier during its validity period. This is accomplished through appropriate security measures that protect the identifier from unauthorized access or unintended disclosure.

Criteria 6: Sole Control Over Unique Identifier The admissibility of an electronic signature is predicated on the registered individual being the only person who has access to and control over the unique identifier and is the only individual who can exercise the act of signing. Access to the unique identifier and sole control over the act of signing is also achieved by the use of appropriate security measures that ensure only the registered individual is the person who can gain access to the identifier. The UN Model Law 16 articulates this requirement as follows: “An electronic signature is considered to be reliable for the purpose of satisfying the requirement [of law] if the signature creation data [unique identifier] were, at the time of signing, under the control of the signatory and no other person;”

Criteria 7: Revocation of Unique Identifier The individual is not only responsible for maintaining the privacy and of the unique identifier but also notifying the issuer of any breach so that its loss of reliability can be conveyed to any subsequent relying party.

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

15 UNCITRAL Model Law on Electronic Signatures Article 6.3.d 16 UNCITRAL Model Law on Electronic Signatures Article 6.3.b

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003



ProofSpace White Paper

The UN Model Law 17 articulates this requirement as follows: (1) Where signature creation data [unique identifier] can be used to create a signature that has legal effect, each signatory shall: (a) exercise reasonable care to avoid unauthorized use of its signature creation data; (b) without undue delay, utilize means made available by the certification service provider pursuant to article 9 [Conduct of the Certification Service Provider], or otherwise use reasonable efforts, to notify any person that may reasonably be expected by the signatory to rely on or to provide services in support of the electronic signature if: (i) the signatory knows that the signature creation data have been compromised; or (ii) the circumstances known to the signatory give rise to a substantial risk that the signature creation data may have been compromised;

It should be noted that failure to provide immediate notification of a breach could result in an individual’s liability for any damages suffered by a party’s reliance on a breached identity or fraudulent electronic signature. The UN model law 18 articulates this notion of liability as follows: (2) A signatory shall bear the legal consequences of its failure to satisfy the requirements of paragraph (1).

In summary, the sole control over the act of signing is dependent on ensuring that the unique identifier remains confidential, that the registered individual has the sole ability to execute the act of signing and measures are in place to notify the issuer of any breach to privacy or access to the identifier. The reliability of an electronic signature and the sole control over the act of signing are necessary but insufficient requirements for legal admissibility. It is also dependent on ensuring the act of signing is an act of informed consent, the focus of the next principle.

Principle 3: A State of Informed Consent in the Act of Signing An admissible electronic agreement must indicate the signatory’s approval of the information in the document being signed and intent to be bound by its terms. This clearly falls outside of the technology of capturing and preserving an electronic signature and into the domain of awareness of what is being signed and acceptance of the implications of the act of signing — being bound by its terms. This is embodied in what is called Legal Sufficiency 19, which is an established legal standard ensuring that a state of informed consent is present during the act of signing. Legal Sufficiency involves two basic concepts referred to as “Writing” and “Signature,” which combine measurable parameters such as notice and content with less demonstrable notions of context, intent and consent.

17 European Union Electronic Signature Directive Article 8.1

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

18 European Union Electronic Signature Directive Article 8.2 19 US Department of Justice, “Legal Considerations in Designing and Implementing Electronic Processes: A guide for Federal Agencies”, November 2000. http://www.cybercrime.gov/eprocess.htm

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003

10

ProofSpace White Paper

Criteria 8: Awareness of Engaging in a Process of Agreement Formation Legal Sufficiency requires that certain transactions, such as agreements (i.e., contracts), must be reduced to writing on paper to be legally enforceable. The requirement of “writing” is an established legal standard whose “functional purpose” must be respected in the execution of an electronic agreement. The requirement of writing is important as it forces a type of ceremony that builds awareness that a process of agreement formation is taking place and appreciation as to the obligations under the agreement and the consequences for failing to fulfill the obligations.

Criteria 9: Awareness of Intent and Implications of Act of Signing Therefore, the method of electronic agreement execution must clearly establish a state of awareness that a process of agreement formation is taking place and an appreciation as to the obligations under the agreement. The process must produce verifiable records of the obligations that are not subject to manipulation or falsification so that the risks of imperfect memory and competing claims can be mitigated. The second component of Legal Sufficiency is called “Signature.” Legal Sufficiency requires that certain transactions, such as contracts, must not only be reduced to writing but also contain a signature in order to be legally enforceable. The act of signing meeting the requirement of “signature” must clearly establish the identity of the signatory, established by the application of the individual’s unique mark, a clear expression of awareness as to the intent of signing and a clear expression of understanding as to the content and, most importantly obligations of the agreement. The requirement of “signature” is an established legal standard whose “functional purpose” must be respected in the execution of an electronic agreement.

Criteria 10: Notice of Rights In the execution of electronic agreements with consumers, additional requirements to provide clear and unambiguous notice of rights may be necessary. For example, the e-Sign Act 20 imposes the additional requirement to provide clear and unambiguous notice of rights to the consumer, including the right to withdraw consent, and to obtain consent to transact electronically — in a form that demonstrates their ability to receive information electronically. The reliability of an electronic signature, the sole control over the act of signing and a state of informed consent during the act of signing are necessary but insufficient requirements for admissibility. It is also dependent on ensuring that the overall trustworthiness of the electronic agreement is sufficient for its purpose, the focus of the next principle.

Principle 4: The Digital Chain of Admissibility The Digital Chain of Admissibility™ 21 relates to the capture and preservation of information related to all material events involved in the electronic transaction, the audit trail of the how, who, what and when, and the ability to verify and demonstrate its integrity.

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

20 United States Electronic Signatures in Global and National Commerce Act: Section 101 General Rule of Validity subsection c on Consumer Disclosures

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003

11

ProofSpace White Paper

Criteria 11: Audit Trail of How, Who, What and When An electronic agreement involves at a minimum, the electronic signatures of two or more parties; the specifics of the agreement and the time signatures were affixed. The process of reaching an agreement may also involve contextual information related to the intent of the parties, historic information related to the negotiation or case history of the agreement, prerequisite information such as credit checks or electronic credential validity checks and other information that is material to the agreement formation process. Depending on the nature of the agreement, the risks involved, and the level to which an organizations wishes to protect its rights and control the assignment of liability, a specific subset of the agreement activity will constitute material information which may need to be captured and preserved.

Criteria 12: Retention The accurate and complete retention and rendering in human readable form of the electronic signature and record and the audit trail preserving the how of the who, what and when is critical to the admissibility and subsequent enforceability of any electronic agreement. The e-Sign Act 22 articulates this requirement as follows: “Notwithstanding [General Rule of ES Validity], if a statute, … requires that a contract or other record… be in writing, [its] legal effect, validity, or enforceability… may be denied if such electronic record is not in a form that is capable of being retained and accurately reproduced for later reference by all parties or persons who are entitled….”

There is also the issue of Retention Period, which is a significant legal requirement irrespective of the form of the contract — electronic or paper. All electronic agreements must be retained for the legally required Retention Period in a form that can be demonstrated to be accurate and complete. Retention periods can be as short as one week, and as long as a several decades. The e-Sign Act 23 articulates this requirement as follows: “If a… rule of law requires that a… record relating to a transaction… be retained, that requirement is met by… an electronic record… that: accurately reflects the information set forth in the contract or other record [transaction]; remains accessible to all persons entitled to access… for the period required… in a form that is capable of being accurately reproduced…”

The reliability of an electronic signature, the sole control over the act of signing, a state of informed consent during the act of signing and the capture and preservation of the electronic forensic evidence of the agreement are necessary but insufficient requirements for admissibility. It is also dependent on ensuring that the required level of overall trustworthiness of the agreement formation process is met, the focus of the final principle.

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

21 The Digital Chain of Admissibility is a trademark of trustEra, Inc. 22 United States Electronic Signatures in Global and National Commerce Act: Section 101 (e) 23 United States Electronic Signatures in Global and National Commerce Act: Section 101 (d)

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003

12

ProofSpace White Paper

Principle 5: Electronic Agreement Trustworthiness This principle relates to all previous principles in terms of their degree of trustworthiness. That is, the level of reliability of the electronic signature, the degree of sole control over the act of signing, the extent of state of informed consent during the act of signing and the forensic grade of the audit trail. The key question becomes — what level of trustworthiness is required? In general, the level of trustworthiness of all aspects of the electronic execution process must be appropriate for the purpose of the agreement, the legal significance of the act of signing, and the nature and level of the risks, including consideration of the damages that can ensue from the failure of any party to fulfill its obligations. This may be different depending on the nature of the transaction, the environment in which it is being conducted and the requirements of law and regulations. Consequently, this is a case-by-case set of requirements.

Criteria 13: Level of Electronic Signature Reliability The reliability of an electronic signature is predicated on the level of reliability of the attributes discussed in Principle 1: Electronic Signature Reliability. The key question then becomes — to what level of reliability? The UN Model Law 24 articulates the level of reliability as follows: “Where the law requires a signature of a person, that requirements is met… if an electronic signature is used which is as reliable as was appropriate for the purpose for which the data message [agreement] was generated…”

Without a context of what is being signed, the purpose of a signature is undetermined. The “level of reliability” is associated with the purpose of the act of signing – the intent of what is being signed. The act of signing has a number of intended effects, some with more legal significance than others. Consider the following intended effects of signing.

• Contract • Assignment • Witnessing • Notarization

• Authorship • Initial • Endorsement • Approval

• Notice • Origin • Presence • Association

Clearly one can see a significant difference in the legal significance between signatures with the intent to assign legal ownership of intellectual property (Assignment) as compared to a log of an attendance to an event (Presence). Consequently, the legal significance of the act of signing establishes its commensurate level of reliability. The “appropriate” bar must be met – the requirement of law is met if an electronic signature formation method is sufficiently reliable commensurate with the legal significance of the act of signing. The EU Directive 25 has defined a special class of electronic signature (i.e., digital signature) called Advanced Electronic Signature (AES) with a guaranteed level of legal recognition — admissibility as evidence in a European Union court of law, as follows:

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

24 UNCITRAL Model Law on Electronic Signatures Article 6.1 25 European Union Electronic Signature Directive Article 5.1

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003

13

ProofSpace White Paper

“Member States shall ensure that advanced electronic signatures that are based on a qualified certificate and that are created by a secure signature creation device: a) satisfy the legal requirements of a signature in relation to data in electronic form in the same manner as a handwritten signature satisfies that requirement in relation to paper-based data; and b) are admissible as evidence in legal proceedings.”

An AES involves a very high prescribed level of reliability with specified compliance requirements for all aspects of the electronic signature formation process including its corresponding support infrastructure. It exchanges a measurable level of “reliability,” for a guaranteed level of legal recognition — legal admissibility in a court of law.

Criteria 14: Degree of Control over the Act of Signing Sufficient security procedures must be put in place and maintained that provide reasonable assurance that the privacy of the unique identifier will be preserved, the registered individual is the only person that can access to the unique identifier and that the signatory is the only individual able to execute the act of signing. The level of security must be based on the highest level required for all uses of the unique identifier.

Criteria 15: Extent of a State of Informed Consent To control the basis of repudiation, the design of the agreement execution process must be able to reliably establish and demonstrate that the “softer” requirements of admissibility had been met — to a level of certainty. That is, the agreement formation process must clearly demonstrate by design, notice, or response that the individual 1) had been informed as to all their rights and choices, 2) had to of been fully aware that a agreement formation process was taking place, 3) clearly understood the intent of the agreement and that binding obligations were being undertaken, 4) was fully aware of their obligations, and 5) had to of performed the act-of signing in a state of informed consent. The “level of certainty” must be commensurate with the legal significance of the agreement and the nature and risks of the process executing the agreement.

Criteria 16: Trustworthiness of the Digital Chain of Admissibility There are two components to the trustworthiness of an audit trail. The trustworthiness of the information it contains and the trustworthiness of the audit trail itself. This is collectively referred to as the trustworthiness of the Digital Chain of Admissibility. The trustworthiness of the information contained in the audit trail is based on the level of reliability of the electronic signatures, as discussed under Criteria 13, the ability to demonstrate the authenticity of the electronic records and the accuracy and auditability of the electronic time stamps. The later is based on the ability to demonstrate how the legal source of time was obtained from a National Timing Authority, how the network was synchronized, how the application accesses time from the network and finally how a time stamp is embedded or affixed to the record. For more information please consult www.trusterr.com for a white paper 26 on the subject. The level of reliability, authenticity and auditability of the information contained in the audit trail should be sufficient as for the legal significance of the agreement and the environment in which it was executed.

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

The trustworthiness of the audit trail is also related to the technical mechanisms used to preserve and protect its content over time and the ability to verify its integrity

26 “Trusted Time: Essential to eBusiness Risk Mitigation” white paper, published December 2000.

The Principles of Electronic Agreement Legal Admissibility — Revised March 2003

14

ProofSpace White Paper

at any future time. Methods should be used to verify and demonstrate that the audit trail has not been altered or manipulated in any way since it was created - that is, its integrity been maintained. This is a fundamental prerequisite. If this cannot be demonstrated, it invalidates any audit trail irrespective of the level or reliability of the information it contains.

Conclusion: A Trusted Electronic Agreement Process A Trusted Electronic Agreement Process is one whose design and method of execution results in the legal admissibility of the agreement. Admissibility means meeting the prerequisite requirements necessary to hold an individual accountable for their electronic signature, to obtain a successful dispute resolution judgment or to obtain favorable court adjudication. There are five principles that contribute directly to the legal admissibility of an electronic agreement. The first principle is the reliability of an electronic signature, in terms of the robustness of how the signature is linked to the record, the reliability of the chain of trust related to identity authentication and the ability to verify the integrity of the signature and record after the signature is affixed. The second principle relates to reliability of the act of signing itself — the ability of the signatory to be the only one that can exercise sole control over the act of signing. The third principle relates to the state of mind of the individual at the time of signature; that is, whether a state of informed consent did exist during the act of signing. Was the individual aware that they were engaged in an agreement formation process, were they fully aware of their rights, were they aware of their obligations under the agreement and were they aware that they were affixing their legally binding signature that will result in enforceable obligations. The fourth principle relates to the requirement to capture, preserve and retain for as long as necessary all material information related to the transaction in a way that can be verified and shown to be accurate and complete. The final principle relates to the need to design and operate an agreement formation process that is sufficiently reliable and trustworthy commensurate with the legal significance of the act of signing and the nature and risk of the transaction. Legal Admissibility

Electronic Systems and Processes that Comply with Regulations Electronic Transactions that Adhere to Legal Standards & eSign Legislation Reliable Electronic Signatures Authentic Records & Time Stamps

eCompliance

eAdmissibility

eIntegrity

Legal Effect & Validity

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 www.proofspace.com

These five principles are collectively sufficient to ensure that the electronic agreement, its electronic signature and records will be granted legal admissibility in a court of law. This framework of requirements for legal admissibility is illustrated in the figure above. The Principles of Electronic Agreement Legal Admissibility — Revised March 2003

15

ProofSpace White Paper

The paper also specified sixteen criteria that can be used as a guide to assess the degree of confidence that an electronic agreement executed by a particular agreement formation process will be deemed legally admissible in a court of law. These criteria are presented in an evaluation table as follows:

Evaluation Matrix: Criteria for Legal Admissibility of Electronic Agreements Define the Nature of the Agreement and its Risks

Agreement Intent: Legal Significance of Signatures: Environment of Agreement Execution: Nature of Risks and Liabilities: Basis of Repudiation: Method Description

Level of Trustworthiness

Principle 1: Electronic Signature Reliability Criteria 1:

Electronic Signature to Electronic Document Binding

Criteria 2:

Identity Authentication

Criteria 3:

Electronic Signature Integrity

Criteria 4:

Electronic Document Integrity

Criteria 5:

Privacy of Unique Identifier

Criteria 6:

Sole Control Over Unique Identifier

Criteria 7:

Revocation of Unique Identifier

Criteria 8:

Awareness of Engaging in A Process of Agreement Formation

Criteria 9:

Awareness of Intent and Implications of Act of Signing

Criteria 10:

Notice of Rights

Criteria 11:

Audit Trail of How, Who, What and When

Criteria 12:

Retention

Criteria 13:

Level of Electronic Signature Reliability

Criteria 14:

Degree of Control over the Act of Signing

Criteria 15:

Extent of a State of Informed Consent

Criteria 16:

Trustworthiness of the Digital Chain of Admissibility

Principle 2: Sole Control over Act of Signing

Principle 3: A State of Informed Consent in the Act of Signing

Principle 4: The Digital Chain of Admissibility

Principle 5: Electronic Agreement Trustworthiness

ProofSpace 900 Clancy Ave NE Grand Rapids, MI 49503 (312) 933.8823 ©2007 ProofSpace. All Rights Reserved. ProofSpace, Transient Key, the ProofSpace logo, ProofMark and the ProofMark System are trademarks of ProofSpace Inc. All other trademarks are owned by their respective companies.

16