We live in a digital age and times of advancing technologies, which dictate the way businesses interact with each other in commercial transactions.
Nowadays, most communication between the parties, including exchange of documents or contracts is commonly done electronically.
Electronic communication and electronic transmission of documents is especially convenient in cross-border transactions, where counter-parties are located in different countries.
This article reviews legal validity of electronic signatures in commercial transactions and associated risks for the parties.
What is electronic signature?
First of all, electronic signature should be differentiated from a ‘digital signature’.
Digital signature is based on cryptographic authentication of a sender by technological means, in a form of a coded message, or an encrypted data.
Electronic signature is not encrypted. It represents a name, identifier or a signature in electronic form. It is affixed to or logically associated with, a document or a message, identifies its signatory and indicates the signatory’s approval of the information contained in the document or message.
Electronic signature is often represented in a form of a scanned signature of a person used on an electronic document or as indication of a name of a sender typed in a person’s email.
The use of electronic signature on a document is recognised both in Australia and internationally pursuant to the United Nations Convention on the Use of Electronic Communications in International Contracts (Electronic Communications Convention) (2005) (Convention) and the Electronic Transactions Act 1999 (Cth) (ETA).
Conditions of validity of electronic signatures
In Australia, pursuant to the ETA, electronic signature on a document has the same effect as a handwritten signature subject to the following:
- a person must use a method to identify themselves and indicate their intention in respect of the document signed;
- in the light of all the circumstances, the method must be reliable as appropriate for the purpose for which the electronic communication was generated; and
- the person to whom the signature is given consents to the method indicated above.
Therefore, for electronic signature to be valid, the parties signing the documents must both agree to its use and to the use of electronic transmission of documents. That is normally done by including a statement to that effect in a contract or agreeing to the protocols of documentary exchange between the parties.
Using someone’s electronic signature without the person’s consent or knowledge may result in challenging the document in court.
That occurred in a recent case of Williams Group Australia Pty Ltd v Crocker [2016] NSWCA 265, in which a Guarantee was signed electronically without knowledge of a person whose electronic signature was used. As a result, the Court held the Guarantee to be invalid.
It is therefore essential that the person whose electronic signature appears on a document must have clear intention to authorize its use in a particular instance.
Execution of documents by corporations
Pursuant to s 127(1) of the Corporations Act 2001 (Cth) (Corporations Act), a corporation may execute documents by having them signed by:
- two directors; or
- a director and secretary; or
- the sole director/secretary.
The Corporations Act does not specify whether ‘signed’ includes electronic signature.
In addition to that, if a company has a common seal, s 127(2) of the Corporations Act requires the seal to be fixed to the document. Thus, s 127(2) seems to assume that the document should be signed by handwriting in paper form.
Since the Corporations Act is specifically excluded in relation to the provisions of the ETA, the companies cannot rely on its assumptions that the document signed electronically has been duly executed by the company. Therefore, some lawyers advise their clients against executing documents electronically.
However, pursuant to s 129 of the Corporations Act, a corporation may sign a document by any method. Section 129 seems to capture electronic signature as well and the companies are not generally restricted to use electronic signatures while executing documents unless that method of execution is specifically excluded by legislation.
Despite that, considering conflicting views of lawyers and state authorities in that respect, it is advisable that the companies keep proper evidence that electronic execution of documents was authorised and that the person who signed the document consented to the use of their signature on the document.
Benefits and risks of using electronic signatures
Execution of documents by using electronic signatures ensures speed and efficacy of business transactions. It does not require printing, signing and scanning documents, does not require pen and paper and can be done at any time and place, all is needed is a computer and access to the Internet.
However, using electronic signatures also poses some risks to all parties involved.
First of all, there is a risk of fraud or forgery of an executed document. Pursuant to the ETA, the purported originator of an electronic communication is bound by it if the communication was sent by the purported originator or with the authority of the purported originator.
Taking into account various cyber security threats, it may be challenging to verify both the identity of the person whose electronic signature appears on executed document and whether the document has actually been transmitted electronically by or on behalf of that person.
On the other side, if any unauthorized person gets access to your electronic signature and uses it without your consent, it may become challenging for you to prove the fraud or forgery.
Therefore, it is essential that you create proper safeguards to make sure that your electronic signature is properly secured and not misused.
Dependence on stakeholders
If you intend to execute a document electronically, it is essential that you consider all stakeholders involved as well as applicable legislation to verify whether execution of a document electronically would be possible.
For example, your counter-party may prefer the document to be executed by handwritten signature to provide them with more comfort and may insist on handwritten signature.
Considering differences in established business practice between Australia and other countries, a foreign counter-party may not have an established practice of signing documents electronically and would prefer to sign all documents by handwriting.
In addition, there may be a situation where a counter-party is located in a country which is not signatory to the Convention and its legislation requires handwritten signature on the document.
It should also be noted that some Australian authorities do not accept documents signed electronically. It is therefore advisable that you contact a specific authority to verify if electronic signature would be accepted.
Our Services
If you are looking to utilize electronic signatures, Privacy Solicitors of Pavuk Legal may advise you on its suitability in particular circumstances and assist you to ensure that your electronic signature on a document is legally recognised.
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