Posted by & filed under Credit, Electronic Signatures, Technology.

Dec 15, 2015

By: Wanda Borges, Esq., Borges & Associates, LLC

The diligent credit executive must be ever mindful of the multiple functions that can be performed by a well-drafted credit application. A credit application is not only a useful source of information for evaluating the prospect’s credit, but also provides a wealth of information that can be used to collect your company’s claim from a customer that later hits dire financial straits. Under the right circumstances, a credit application can also become a binding contract.

With many companies now utilizing an online or electronic credit application, credit grantors need to determine the intended purpose of the online or electronic credit application, and whether that online/electronic credit application can be enforceable in court.

Credit applications serve multiple purposes

First and foremost, a credit application exists so that the credit grantor can obtain as much information as possible to enable the credit grantor to determine the creditworthiness of its potential or existing customer. In addition, the credit application should provide to the credit grantor information regarding the credit applicant, including but not limited to the precise legal name of the applicant, the legal structure of the applicant (i.e. corporation, limited liability company, sole proprietor, partnership, etc.), ownership information and tax identification number.

The second predominant purpose of a credit application is to set forth, in written format, the terms and conditions of sale which should be insisted upon by the credit grantor and adhered to by the customer.

There are various credit laws, particularly when the customer is a sole proprietor or small business owner, that need to be expressed and this author has always recommended that those requisite statutory phrases be included in the credit application itself. These statutes include the ECOA, FCRA, and Dodd-Frank. Further, some credit grantors build a security interest into the credit application terms and conditions of sale. While this won’t be a full-blown security agreement, the basics of UCC Article 9 must be included if the grant of a security interest is to be at all enforceable.

A properly executed/signed credit application can become a binding contract. Such things as attorney’s fees, interest, late charges, the grant of a security interest, a choice of law, venue, and jurisdiction are among the many terms which are only enforceable if it is determined that a contract actually exists which binds the parties.

The legality of an online/electronic credit application

An online/electronic credit application is perfectly legal if its purpose is to gather information, state terms and conditions, and set forth statutorily required content. The real question is “Can an online/electronic credit application become a binding contract?”

One online credit application contains these words: “Applicant authorizes investigation of its credit to be used for all Creditor’s business purposes. Customer agrees Creditor’s Terms and Conditions of Sale shall govern all transactions using Creditor open account payment credit terms. Applicant agrees to pay all charges in full within the due date of the invoice and is responsible for all collection costs and attorney’s fees. There is a link to the Creditor’s Terms and Conditions of Sale which comprise two pages and include provisions for credit terms, interest, late fees, governing law, and consent to jurisdiction.

This language is followed by a box to be checked as an “Agreement” and a box containing the initials of the credit applicant followed by this language, “By initialing this form you agree that all information is accurate to the best of your knowledge. Your initials serve as your signature.” This may or may not be enforceable in a court of law depending on numerous factors.

A contract is simply any agreement that can be enforced in a court of law or equity. A contract requires, at a minimum, an offer and acceptance, evidence of mutual assent, each party’s capacity to enter into a contract, legality of the subject matter, and consideration. Generally, in order for a contract to be binding, it should be in writing and it should be signed. Under the Uniform Commercial Code, a sale of goods having a value in excess of $500 must be in writing.  There is an exception for a normal course of business transaction between merchants. However, in the case of a credit application and the terms and conditions which may be included in that credit application, this is much more than simply a sale of goods. Therefore, each of the minimum elements of a contract must be met. Almost each of these elements is in existence in the example set forth. The one questionable element is whether or not there has been acceptance of the contract by the customer. A signature by a customer is the best evidence that the contract has been accepted.

In determining whether or not an online/electronic credit application can become a binding contract, the focus is on the existence of “acceptance” which is readily proven by the existence of a signature by the customer. Since October, 2000, an e-signature is permitted to form a binding contract with the passage of the E-Sign Act (Electronic Signatures in Global and National Commerce Act). In 2001, Article 9 of the Uniform Commercial Code was amended to permit an electronic signature to security agreements. Revised Article 9 provides for a security agreement to be authenticated instead of being signed. Authentication means to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with intent of authenticating person to identify the person and adopt or accept a record.

The problem with many online/electronic credit applications is that the protocols necessary to truly establish an electronic signature are not in place. An e-signature is defined 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.” 15 USC 7006, Sec. 106(5).

The E-Sign Act also states, in pertinent part, “…Notwithstanding any statute, regulation, or other rule of law… with respect to any transaction in or affecting interstate or foreign commerce— (1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability 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.” 15USC 7006, Sec. 101(a).

The “Best Evidence Rule” has not changed. A copy is as good as an original, provided there is no dispute over the authenticity of the original. The problem in enforcing the contract intended to be created by the online/electronic signature will arise when the customer denies that the box was checked or that the initials belong to him or that the signature is his/hers.

To create a true electronic signature under the definitions above would require IT departments to set up encryption capabilities or other processes so that one computer absolutely knows who is the sender of the document (and signature). Rarely do I see that happening.

In summation, online/electronic credit applications have become more efficient ways to obtain data, may speed the process for granting (or denying) credit, and may, therefore, result in faster sales by the credit grantor. However, it is my opinion that the utilization of an online/electronic credit application will not insulate a credit grantor from the possibility of future litigation as to the enforceability of specific terms, conditions, or legal issues.

 

WANDA BORGES, ESQ. is the principal member of Borges & Associates, LLC, a law firm based in Syosset, New York. For more than thirty years, Ms. Borges has concentrated her practice on commercial litigation and creditors rights in bankruptcy matters, representing corporate clients and creditors’ committees throughout the United States in Chapter 11 proceedings, out of court settlements, commercial transactions, and preference litigation. She is a nationally recognized  lecturer and author on various legal topics including Bankruptcy Issues such as 503(b)(9) claims and preferences, the Uniform Commercial Code, ECOA, FCRA, antitrust law, and current legal issues such as the Credit Card Surcharge litigation and proposed legislation such as the Marketplace Fairness Act.

Originally Published July 2015

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