Creating Signed, Written Contracts Over the Telephone: An Update

August 26, 2015
businessman on the phone, phone meeting

In our July 2012 article in Connections Magazine,[1] we wrote about two relatively new sets of laws that companies could use to create what we believe would be legally binding signed and written contracts over the telephone: (i) the Electronic Signatures in Global and National Commerce Act (“E-SIGN”), 15 U.S.C. §7001, and (ii) the Uniform Electronic Transactions Act (“UETA”). Under E-SIGN and UETA, electronic contracts (i.e. contracts that are comprised of “electronic records” and/or “electronic signatures”) have the legal force of physically signed and written contracts. It is important for businesses to have physically signed, written contracts—or their legal equivalent—because certain types of agreements must be memorialized by a signed writing, such as contracts for goods over $500. We believe that when parties knowingly and intentionally make audio recordings of their agreements over the telephone, they are creating signed and written contracts that are legally binding and satisfy the Statute of Frauds.

At the time of our earlier article, there was little case law on how businesses could enter into signed, written contracts through audio recordings. The case law that did exist suggested that the intent of the parties mattered most when determining whether the parties had created a signed, written contract. To help businesses avoid potential problems, we recommended that they adopt a multi-step approach to ensure that all parties (i) understood they were entering into a contract—i.e. creating an “electronic record,” and (ii) intended to be bound—i.e. creating an “electronic signature.”

To accomplish the first goal, we recommended that businesses secure their customers’ consent to being recorded. Next, we suggested that they clearly inform their customers about all material terms, including cancellation, return, and refund rights. Finally, we recommended that they explicitly warn their customers that they were entering into a binding, written contract. If businesses followed these steps, then they likely would be able to prove the parties’ intent to create the electronic record.

To accomplish the second goal, we suggested that businesses adopt a two-step approach to show that the parties intended to be bound. First, we suggested that the seller record the customer’s explicit vocal agreement to the contract. Next, to guarantee the creation of the purchaser’s electronic signature, we recommended that the seller also require the purchaser’s touchtone confirmation. We believed that if businesses followed this vocal-and-touchtone consent approach, then they would likely be able to show that their customers intended to affix their electronic signatures and be contractually bound.

Based upon developing case law on E-SIGN and UETA, it appears that our earlier recommendations on how to create signed, written contracts over the telephone remain valid. As case law has continued to develop, it is clear that the intention of the parties, as manifested through their words and deeds, remains the controlling issue for courts.

As a result, we believe it is possible for any person or business to create signed, written contracts over the telephone, so long as the parties can show that they intended through the recording to make a contract and be bound. For example, in Kansas, the Court of Appeals held that a wife’s knowingly recorded, in-court assent to a separation agreement created an “electronic signature.” According to the Court, the wife’s recorded “I do” established her intent to be bound by the separation agreement, and met the legal definition of a signed writing under UETA.[2] In contrast, the Supreme Court of Kentucky held that a person’s oral assent—recorded in secret—was not an “electronic signature” under E-SIGN that satisfied the Statute of Frauds. Although the parties’ agreement may have constituted an oral contract, it did not meet the definition of a signed writing under the Statute of Frauds. The Kentucky Supreme Court ruled that the parties did not have a signed writing because the would-be signator never intended to affix his consent to the electronic record. As the Court noted, E‑SIGN “contemplates more than a mere verbal asset recorded in secret; it requires the electronic equivalent of a signature, that is, an electronic sound, symbol, or process solemnizing the agreement and evidencing an intent to enter into it.”[3]

The importance of the parties’ intent cannot be overstated. Courts have even gone so far as to hold that signature blocks on emails do not necessarily qualify as “electronic signatures” for the purpose of creating binding electronic contracts. According to several courts, an “electronic signature” occurs, whether via email or through some other method, only if it is affixed with the intention of the party to be contractually bound.[4]

Given all of the above, businesses should take extreme precaution to secure their customers’ consent if attempting to create signed, written contracts over the telephone. At a minimum, businesses should follow the steps outlined in our 2012 article, and reiterated here. Further, businesses must always comply with applicable state and federal audio recording and consumer disclosure laws. Also, sellers should be mindful of the fact that E‑SIGN and UETA are relatively new laws, and, as a result, courts are still trying to understand their applicability and scope.[5] Finally, businesses should always provide visually accessible written disclosures to their customers when they are required to give written disclosures under state and federal law. For example, some states require written warnings to be given in boldface type and large font to satisfy consumer protection statutes. Under E-SIGN and UETA, oral communications, or recordings of oral communications, to consumers can NEVER constitute written disclosures required by state or federal law.[6]

Through E-SIGN and UETA businesses are able to create signed writings via electronic mediums both new and old, including online, email, fax, and telephone. With the proper steps to ensure the parties’ knowing and intentional consent, we believe that businesses and consumers can avoid litigation and create legally recognized and binding written contracts with audio recordings over the telephone.

[1] Written with Mark Rasch, currently the Chief Security Evangelist at Verizon.

[2] In re Marriage of Takusagawa, 38 Kan. App. 2d 401, 166 P.3d 440 (Ct. App. 2007).

[3] Sawyer v. Mills, 295 S.W.3d 79 (Ky. 2009).

[4] See J.B.B. Investment Partners, Ltd. v. Fair, 232 Cal. App. 4th 974 (2014); United Propane Gas, Inc. v. Pincelli & Assocs., No. 5:13-cv-00190-TBR, 2014 U.S. Dist. LEXIS 15176 (W.D. Ky. Feb. 6, 2014).

[5] See Valiavicharska v. Celaya, No. CV-10-4847, 2012 U.S. Dist. LEXIS 42213 (N.D. Cal. Mar. 22, 2012) (incorrectly citing a subsection of E-SIGN regarding consumer disclosures in support of the correct proposition that a party cannot orally sign a declaration that she has never before seen or read).

[6] See Progressive Casualty Ins. Co. v. Estate of Palomera-Ruiz, 224 Ariz. 380, 231 P.3d 384 (Ct. App. 2010) (holding that an insurer’s oral communication did not satisfy Arizona requirements to give written notice to a consumer).