Electronic Contracts: Definition and How to Create One

November 8, 2023 • Contract Management • 9 minutes

Electronic contracts, or e-contracts, have become integral for businesses in all industries and verticals. They offer a streamlined alternative to traditional paper contracts, making it easier for parties to sign, manage, and store important documents.

In this article, we’ll dive into what exactly an electronic contract is, how it differs from its paper counterpart, and its legal standing. We’ll also explore the advantages of using electronic contracts in specific industries, and provide a step-by-step guide on how to create one.

So whether you’re new to the concept or considering the switch to digital, this article has got you covered. Let’s get into it!

What is an electronic contract?

An electronic contract is a legally binding agreement that exists in a digital format. Unlike a traditional paper contract, which requires physical signatures and printed documents, an electronic contract is created, signed, and stored electronically. This could range from a simple PDF to a more complex document with interactive fields and electronic signatures.

Differences between traditional paper contracts and electronic contracts

While the core elements of a contract—offer, acceptance, and consideration—remain the same in both formats, there are some key differences:

  • Speed and efficiency: Electronic contracts can be signed and shared instantly, cutting down the time needed to finalize agreements.
  • Accessibility: With e-contracts, you have the ability to access your agreements from anywhere at any time, given that they are stored digitally. This contrasts with paper contracts, which require physical storage and manual retrieval.
  • Signature process: Traditional contracts often require in-person signing or the cumbersome process of mailing documents back and forth. Electronic contracts, on the other hand, can be signed electronically, streamlining the signing process significantly.
  • Cost: Traditional paper contracts can incur costs for printing, mailing, and storage. E-contracts eliminate most of these costs, only requiring software or cloud storage fees for management and storage.
  • Environmental impact: Electronic contracts are eco-friendly, cutting down on the need for paper and the energy required for physical storage and transportation.

Understanding these differences can help you appreciate the convenience and efficiency that come with transitioning to electronic contracts.

Are electronic contracts legally binding?

Yes, electronic contracts are legally binding as long as they meet the following four conditions: offer, acceptance, consideration, and mutual intent to enter into a legally binding agreement. These are the same fundamental elements required for traditional paper contracts to be considered legally valid.

Let’s examine these four conditions in greater detail:

  • Offer: One party must propose terms for an agreement. This can include the exchange of goods, services, or anything of value. In electronic contracts, the offer is often presented in a digital format that the other party can review before agreeing.
  • Acceptance: The other party must accept the terms proposed by the offering party. In the context of electronic contracts, clicking an “I Agree” button or electronically signing the document often signifies acceptance.
  • Consideration: Both parties must exchange something of value for a contract to be legally binding. In most contracts, this is typically a good, service, or monetary payment.
  • Mutual intent to enter into a legally binding agreement: Both parties must intend for the contract to be legally enforceable. In electronic contracts, this intent is often established through explicit language within the document and the use of secure electronic signatures.

By ensuring your electronic contract meets these four conditions, you increase the likelihood that it will be considered legally binding in a court of law. Laws like the Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act (eSIGN Act) further reinforce the validity of such agreements, ensuring that a compliant electronic contract will stand up in a court of law.

What are the advantages of electronic contracts?

The advantages of electronic contracts are numerous, and can significantly streamline various aspects of business operations. Key benefits include the following:

  • Efficiency
  • Accessibility
  • Cost savings
  • Security
  • Flexibility

Let’s take a look at each of these benefits in detail.

Efficiency: Speeding up the signing process

Electronic contracts can be prepared, sent, signed, and stored within minutes, allowing for a much faster transaction process compared to traditional paper contracts. This saves time for all parties involved.

Accessibility: Easy retrieval and management

Since electronic contracts are stored digitally, they can be easily accessed and managed from anywhere with an internet connection. This simplifies tasks like contract review, amendments, and audits.

Cost savings: Reduced overheads

Electronic contracts eliminate the costs associated with printing, mailing, and storing physical contracts. This is not only a direct cost benefit but also contributes to more sustainable business practices.

Security: Enhanced encryption and tracking

Many electronic contract platforms offer advanced security features like end-to-end encryption and detailed audit trails, ensuring that your contracts remain secure and compliant.

Flexibility: Customizable templates

Digital formats allow for easily customizable contract templates. This makes it convenient to adapt contracts to specific needs without starting from scratch each time.

Industry-specific examples of electronic contract use cases

Today, electronic contracts are widely used across many industries and types of businesses, including the following:

  • Real estate agencies
  • Tech startups
  • Healthcare organizations
  • Retail companies

Now let’s examine each of these industry-specific use cases in greater detail.

Real estate agencies: Streamlined document sharing and signing

In the real estate industry, electronic contracts enable quicker property transactions by allowing instant sharing and signing of important documents. This speeds up the sales cycle and allows real estate agents to manage multiple transactions more efficiently.

Tech startups: Faster onboarding process for new employees

Tech startups often require agility in scaling their teams. Electronic contracts streamline the onboarding process by enabling quick creation, dissemination, and signing of employment contracts.

Healthcare organizations: Improved compliance and record-keeping

In healthcare, where compliance with laws and regulations is crucial, electronic contracts offer better control over document management and easier retrieval during compliance audits.

Retail companies: Simplified vendor management

For retail businesses, managing multiple vendor contracts can be challenging. Electronic contracts provide a central repository for cloud contract management, making it easier to find vendor contracts when they’re needed, and follow contract renewal best practices.

Across all these industries and more, organizations that use electronic contracts are enjoying faster and more secure signing, as well as centralized and efficient contract management. In the next section, we’ll see how you can join this revolution by creating your own e-contracts.

How to create an electronic contract

Creating an electronic contract is a straightforward process that can be broken down into the following steps:

Step 1: Draft the terms and conditions

Start by outlining the terms and conditions of the agreement. You can do this in Microsoft Word or Google Docs, or in the online editing tool provided by a contract management software platform like Concord. Make sure to cover all essential clauses, including an electronic signature clause. For a full walkthrough, check out our article on how to draft a contract.

Step 2: Add electronic signatures

Once you’ve drafted the terms, the next step is to include spaces for electronic signatures, and insert your own. For a step-by-step walkthrough of this stage of the process, check out our guide on how to create an electronic signature.

Step 3: Implement a signing process

Many electronic contract platforms offer drag-and-drop features that make it incredibly easy to insert signature fields, initial fields, date fields, and more. This simplifies the setup of your contract, making it easy for parties to countersign in the correct places with just a few clicks.

Step 4: Send for signing

After setting up the electronic contract, it’s time to send it for digital signing. Email addresses play a vital role in this process. Most platforms allow you to enter the email addresses of all parties who need to sign, and will send out automated reminders to help ensure that everyone signs on time.

By following these steps, you’ll be well on your way to creating a legally binding electronic contract that’s easy to manage and store.

How to implement electronic contracts

Implementing electronic contracts into your business operations involves more than just creating and storing the documents. Here’s how you can ensure a smooth transition:

Train team members in using e-contracts

It’s crucial to train your team on how to use electronic contracts. This includes showing them how to draft, edit, and send contracts for digital signing. It’s important that everyone understands the platform you’re using and follows a standardized process for consistency and legal compliance.

Implement legally valid methods for agreeing to the terms

When using electronic contracts, you must implement legally valid methods for parties to indicate their agreement to the terms. This is where clickwrap and browsewrap agreements come into play.

  • Clickwrap agreements: These require the user to actively click an “I Agree” button before proceeding. This shows explicit agreement to the terms and conditions laid out in the contract.
  • Browsewrap agreements: In contrast, browsewrap agreements assume that the user agrees to the terms by simply using the website or service. However, this method is generally considered less legally secure than clickwrap agreements.

By properly implementing electronic contracts, you’re not just streamlining your business operations, but you’re also providing a more secure and legally sound environment for transactions to take place.

How to manage and store e-contracts

Managing and storing electronic contracts efficiently is crucial for any organization. The importance of having a centralized system can’t be overstated. A centralized repository not only keeps all your contracts in one place for easy access but also enhances security by offering features like encryption and restricted access.

Contract management software is an ideal solution for storing and managing e-contracts. These platforms offer an array of features that simplify contract lifecycle management, from creation and signing to renewal or termination. For a detailed understanding of how contract management software can aid in this, check out our complete guide on contract management software.

As we’ve seen throughout this article, electronic contracts offer a diverse array of benefits, including faster signing processes and enhanced accessibility. And their legal validity, underpinned by legislation such as the UETA and the eSign Act, is driving ever-wider adoption across industries like education, healthcare and technology.

The transition from traditional paper contracts to electronic formats can fundamentally improve how your business operates. It simplifies processes, reduces errors, and accelerates deal closure. So, there’s no better time than now to start implementing electronic contracts into your business operations and reap the benefits.

 

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