Some business owners are surprised when commercial solicitors say there is an electronically signed binding contract through use of an email footer. Others are equally confused when their email exchange does not amount to a contract.
In this article our commercial solicitors explore what is meant by an electronic signature and the practical steps contracting parties should consider when using digital contracts.
Contents:
- What is an electronic signature?
- Types of electronic signature
- Exercising caution with electronic signatures
- What is a digital signature?
- Are electronic signatures valid and binding?
- Do all contracts need to be signed?
- If one person uses an electronic signature, do all parties need to sign electronically?
- Can electronic signatures be used for different types of contracts?
- Choosing a digital signature providers using a qualified electronic signature process
- Practical points to consider with electronic signatures
What is an electronic signature?
A user friendly definition of the term ‘electronic signature’ is contained in the explanatory notes of the Electronic Communications Act 2000, ‘an electronic signature is something associated with an electronic document that performs similar functions to a manual signature’. An electronic signature can be used to give authenticity and integrity to an electronic contract but a contract is capable of formation without any form of signature, so those authorised to negotiate commercial contracts need to understand the basics of contract formation.
For more information on contract formation take a look at our article on Contract formation: capacity.
Types of electronic signature
In practice electronic signatures come in many different guises and include:
- A name at the end of an electronic document – typed manually or an automatic footer
- Clicking an ‘accept’ button on a website
- Digitised version of a manuscript signature
- Scanning a signature onto a document
- Digital signature
Exercising caution with electronic signatures
Contracts can be created by many different types of electronic communication, so businesses need to know what an electronic signature adds to a document and whether it converts an email exchange or web browsing into a binding contract. Whilst it may be obvious that a digital form of electronic signature creates a contract it is far less clear cut with other forms of electronic signature.
For more information on whether, and in what circumstances an email can become a binding contract read our article: Are emails enforceable contracts?
In a world where clicking a button or pressing send on an email is second nature and takes seconds, it is best to pause and think ‘is this an electronic signature?’ and ‘what am I committing my business to by signing’? If you don’t know the answer to either question then it may be best to stop and seek advice. That’s a useful reminder, whether you are a start-up, scale-up or a listed company, as case law shows many business from high street brands to law firms, have been caught out by finding there is an electronically signed contract.
If you end up in a dispute over a contract, the court may need to determine if the document includes an electronic signature and, if so, the probative weight. For help avoiding commercial contract disputes take a look at our article on How to avoid commercial disputes and minimise litigation risk.
What is a digital signature?
It is easy to get confused by the use of ‘electronic signature’ and ‘digital signature’ and to question if they are one and the same thing. There are differences between electronic and digital signatures so it is worth checking signature requirements to make sure an electronic signature, as opposed to a digital signature, is a satisfactory form of signature.
In essence, a digital signature is a more technologically advanced form of electronic signature. Regulations define two categories of digital signature:
- An advanced electronic signature (AdES)
- A qualified electronic signature (QES)
A qualified electronic signature is the most secure type of electronic signature as it is supported by a qualified certificate issued by a qualified trust service provider and is created by a qualified electronic signature device. If your business is concerned about cyber security, QES should be the standard of electronic signature adopted.
Are electronic signatures valid and binding?
In English law the general rule is that a contract does not have to be in a particular form to be legally binding. A verbal agreement can be valid and binding if the required contractual elements are present. The contractual elements include:
- Offer and acceptance
- Intention to create legal relations
- Consideration and certainty
So, the question to be asked is whether the law requires a contract to be written or signed in a particular way and, if not, are the necessary contractual elements present. The contractual elements test is set no higher for an electronically signed contract than for a traditional wet ink contract. It never hurts to remind ourselves of back to basic contracting principles. For more information take a look at our article on Contract formation: authority.
In 2019 the Law Commission published a report on the use of electronic signatures. In summary, electronic documents will, in general, satisfy a statutory requirement for writing and an electronic signature is capable in law of being used to validly execute a document (including a deed) subject to two provisos:
- The person signing the document must have intended to authenticate the document.
This means they intended to sign and be bound by the agreement. The question of whether the signatory intended to authenticate the document is easily answered when the signatory uses a digital signature as opposed to an electronic signature (such as the use of an automatic email footer with their name on). The footer may authenticate the document, but it can be harder to prove intention to authenticate the document whereas a digital signature provides an audit trail. In Neocleous v Rees [2019] EWHC 2462 (Ch), the court found that an automatically generated email footer with the name and details of the sender constituted a signature for the purposes of a property transaction, but it took commercial litigation to establish this on the facts of the case. The case is a warning for those seeking to rely on electronic signatures and those who press send on an email without first assessing the consequences. The case highlights the fact that electronic signatures can be quite casual in nature but harder to prove authentication and intention, and so more expensive in terms of litigation costs. - The formalities relating to execution of the document are satisfied.
For example, a contract may not be correctly executed by electronic signature if the signature is required to be witnessed and this was not carried out.
Although an electronic signature may be valid and binding, it is worth checking whether the contract will need to be registered with a body and, if so, if the third-party organisation requires the use of a non-electronic signature. As although there may be a binding contract in existence, it can then be frustrating to have to repeat the signature process to achieve registration.
Do all contracts need to be signed?
All contracts do not need to be signed, some can be made verbally so a signature, whether in ink, electronic or digital, is not strictly necessary for the majority of contracts. Commercial solicitors strongly advise against entering into verbal contracts as they can lead to contract disputes over whether a contract has been formed or not.
Contracts formed by electronic communication may not require an electronic signature in many scenarios to be classed as a binding contract. However, an electronic signature can help reduce the risk of disputes over contract formation if one party argues that there was no intention to create legal relations through the exchange of emails or other form of electronic communication.
Although the majority of contracts do not need to be in writing or signed there are statutory formalities for some types of agreement and if those formalities are not followed it means the contract may not be valid. For example, guarantees, which must be made in writing, or evidenced by writing, and signed by the guarantor. Contracts for the sale of land must be in writing and be signed by or on behalf the parties to the agreement.
If one person uses an electronic signature, do all parties need to sign electronically?
If one party has used an electronic signature then the other parties to the contract do not necessarily need to do so. However, a clause saying all parties should sign the contract electronically may be included as a requirement for contract formation, in which case all parties will need to electronically sign the contract. A requirement for all parties to electronically sign a contract is usually included where the contract calls for digital signature as a means of enhanced security and audit trail.
Can electronic signatures be used for different types of contracts?
Electronic signatures can be used for many different types of contract, from sales and purchase agreements to terms of business and distribution agreements. Although electronic signatures can be used for a whole host of contracts, commercial solicitors highlight that:
- If the contract is with a party in another jurisdiction or if the contract says that a contract dispute is to be resolved in a third-party jurisdiction it is worth double checking to make sure the use of an electronic signature will create a binding contract in the relevant jurisdiction.
- If the contract needs to be registered with a third-party, such as a trading body or a public authority, it is best to ascertain if the third-party organisation will accept electronic signatures and if they have specific requirements, such as the use of a digital signature.
Choosing a digital signature providers using a qualified electronic signature process
It is prudent to be cautious about choice of digital signature provider because some types of digital signature carry more evidential weight if there is a dispute over contract formation. In addition, exposure to risks of cyber threat should be minimised by choice of digital service provider, particularly where the contract is of significant value or high risk.
There are many digital signature providers, including:
- Adobe sign
- Docusign
- ESign
- Hello sign
Digital service providers offering qualified electronic signature (QES) is the preferred electronic signature solution as QES is the most secure form of electronic signature.
QES has authenticity, integrity and non-repudiation as the QES process is supported by a digital audit trail and records who signed the document and the email and IP address of the signatory. The audit trail is admissible in court proceedings and provides significant evidential weight in proving the authenticity of a disputed contract document.
In UK and EU jurisdictions, QES has the equivalent legal effect of a handwritten signature and a QES based on a qualified certificate issued in one EU member state has mutual recognition across the EU.
When using the services of a digital services provider, companies need to be aware of their GDPR responsibilities and to enter into a data processing agreement that complies with the provisions for controller processor relationships.
Practical points to consider with electronic signatures
In this article we’ve discussed how the law on electronic signatures is a mix of legislation, regulation and case law, involving both contract and data protection law. It is also complicated by the fact that electronic signatures and contracts come in many different forms so here are the key points to protect your business:
- Training - ensuring employees understand an electronic signature can be something as simple as an email footer and that contracts can be formed by exchange of email if the necessary contractual elements are met.
- Processes - put systems and policies in place to ensure that contracts are not entered into or varied unless there is a clear intention to contract, and the employee has the authority to do so.
- Checking - if an electronic signature is to be used, have a policy of checking that an electronic signature is appropriate for the particular contract. There may be unusual requirements if the commercial contract is with a party who is not in the EU or where there are strict regulatory requirements or for contracts of a specific nature, such as guarantees.
- Plan - when entering into a new contractual relationship, discuss contract signature requirements so either a requirement for wet ink signature or qualified electronic signature does not come as a surprise to either party at the end of contract negotiations.
- Adapt - ensure that the electronic signature is fit for purpose. An electronic signature on the end of an email may suit your purposes for an order of goods within the UK but where there are significant risk or high value or cross border issues or the contract is of a specific nature, think whether a traditional signature is feasible and, if not, use the most enhanced form of digital signature.
- Resource allocation - the cost of using a reputable cloud based QES digital service provider are likely to be far outweighed by the peace of mind offered as well as the reduced risk and cost of a commercial contract dispute over whether the electronic signature on a document is valid and binding. Use of cloud based digital signatures is time and money well spent as your company should either be ahead of the game or at least keeping up with competitors on the use of IT to drive ease of contracting through electronic signature whilst at the same time protecting your business from fraud or commercial contract disputes.
- Review contracts - when reviewing commercial contracts as part of your contract life cycle management, check the provisions in the contract for electronic signature and, if necessary, make sure the provisions refer to your preferred type of electronic signature. For a more in depth look at why you should review your commercial contracts read our article on Why you should regularly update your commercial contracts.
