Why you should think twice before signing up for electronic signatures

While executing legal documentation by means of an electronic signature is convenient and becoming more common, this needs to be weighed against issues of security and enforceability. Recently, the Supreme Court of New South Wales held that a company director was not bound by a personal guarantee that was signed by applying his electronic signature.

Kate Latta, Maddocks Lawyers

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Key questions

Underlying the case of Williams Group Australia Pty Ltd v Crocker ^[1] is an acceptance that an individual can sign an important document, such as a personal guarantee, by applying their electronic signature. The case highlights, however, the risk which must be considered by examining the following questions:

What are the circumstances in which an electronic signature may be applied?	Will the relevant document be binding?
Personally by the signatory:	Yes.
By a person other than the signatory where authority was expressly granted to that person:	Yes, if it is clear that the signatory: had knowledge of the material circumstances to the transaction; and expressly provided their consent for a specific document to be signed by that person applying their electronic signature.
By a person other than the signatory where authority was expressly granted to that person:	Yes, if it is clear that the signatory: had knowledge of the material circumstances the transaction; and subsequently, expressly ratified the application of their electronic signature to the specific document by the other person.

Facts

Williams Group Australia Pty Ltd (JH Williams) sold building materials to IDH Modular Pty Ltd (Company) under a credit agreement that included a personal guarantee and indemnity by each of the directors. One of the directors, Mr Crocker, (Director) executed the credit agreement (including the personal guarantee) by applying his electronic signature to the relevant documents.

The Company used an electronic signature system known as 'HelloFax'. HelloFax allows users to upload an electronic signature which can then be applied to documents electronically. Hellofax assigned to the Director's account a user name and password at the time that the HelloFax account was established and, when the credit agreement was executed, had never changed his password.

JH Williams sought to enforce the personal guarantee of $889,534.35 against the Director. The Director claimed, and JH Williams ultimately accepted, that he had not executed the relevant documents himself but that another person had used his HelloFax account to upload and apply a signature to the credit agreement on his behalf.

The Court held that the personal guarantee was not enforceable against the Director after finding that:

• mere failure by the Director to change his password to his HelloFax account did not demonstrate any intention by the Director to authorise another person to apply his signature to a document (particularly a document which resulted in him incurring a considerable personal liability);
• there was no evidence to suggest that the Director had held out, or represented, to JH Williams that any other person was authorised to place his signature on the documents; and
• as the Director did not have proper knowledge of the material circumstances of the transaction, nor could it be established by the evidence presented to the court that he was properly aware of the particulars of the personal guarantee, the Director could not be taken to have ratified the execution of the personal guarantee by another person.

Key things to consider regarding electronic signatures

First, there are certain documents which can't be signed electronically, such as wills, statutory declarations, and powers of attorney in certain jurisdictions. Also, the Electronic Transactions Act 1999 (Cth) does not apply in relation to the Corporations Act 2001 (Cth).^[2]

A party to a contract cannot rely on a person's electronic signature applied by another person that is not the owner of that signature as valid execution of the contract unless there is clear evidence:

• of the owner's intent to authorise execution of the relevant document by another person by applying the owner's signature; and
• that the owner properly understood the transaction and the documents to be electronically signed.

Where a party proposes to execute a document electronically, both parties should be mindful of the relevant risks. These include issues with accurately identifying who applied the electronic signature, when the electronic signature was applied and that all relevant informed consents were obtained before applying such electronic signature.

Parties (whether executing by electronic signature or relying on execution by electronic signature) should ensure that proper records are taken and retained at the time of execution of an agreement. This ensures that, should any issues of enforceability arise, it can be clearly demonstrated that execution properly occurred and that the relevant person understood their obligations under the document to which their electronic signature was being applied.

A good example of when that evidence will be useful is when third parties later make inquiries about whether a document was properly executed, including banks who review constituent documents when lending to trusts, companies and SMSFs.

Questions not addressed by this case

The case does not consider whether a person signing a document in their capacity as trustee of a trust or as a director of a company must apply their electronic signature personally or if they too can direct another person to apply their electronic signature, or ratify the application of their electronic signature by another, in the same manner as an individual, acting in their own capacity, may do so.

More information from Maddocks

For more information:

• read our earlier ClearLaw article titled "Electronic signatures: when are they effective?"; or
• contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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