Electronic Signatures – Binding or not? Part 1

It is a strange thing to find yourself increasingly challenged by the pace of change, and none greater than the impact of technology. People live in a very different way, than say 20 years ago, when I started this business, and the way we communicate with each other is fundamentally altered.

We are under real pressure to respond faster, process more efficiently and create a platform of client interaction that meets the “what’s in it for me” requirement.

We live in a smaller global community, events and the means to communicate have become easily accessible and barriers of distance and time zones have been removed. The way we conduct business transactions is also affected and the bridging of the international barrier has meant much of the mindset has fallen away. People see no issue with downloading agreements from different jurisdictions and using templates for negotiations in many different circumstances. This is regardless of the legal technicalities concerning enforcement if the deal goes bad and great caution should be exercised. Consider the types of transactions affected, the purchase of foreign goods or services on-line, a merger or takeover by a foreign company, property investments by non-Australian residents, contracts for Information Technology and multi-jurisdiction commodity agreements.  These are all regularly negotiated and confirmed using electronic documents and communications.

It is all very well to have documents downloaded, but how do parties effectively sign them? Are electronic signatures in fact legally binding, and can they be used as evidence in court?

The law of contracts formed through electronic means is a tricky area, so consider the following legal issues about electronic signatures.

Main Points

  • Under Australian and International law, electronic signatures are a valid way of executing agreements.
  • When evidence is required confirming the identity of the person signing and their intention to be bound by the content of contract, problems can arise.
  • Digital signature tools and authentication methods (such as public key cryptography) can reduce the risks.

Electronic Signatures – A Difficult Proof?

Electronic contracts

For a contract to be validly formed by law, certain conditions must be evidenced. These elements are:

  • an intention to create contractual relations;
  • acceptance of an offer; and
  • consideration (that is, a benefit in exchange for obligations by both parties such as a payment of deposit).

In most commercial transactions, the formal signing of a valid agreement electronically, satisfies these elements under International and Australian law, and is treated like a paper contract.

In addition to the usual requirements for a paper contract, a contract formed electronically is legally valid if:

  • the contract is stored appropriately and can be accessed after signing; and
  • there has been consent between the parties to receive information electronically, expressly or by implication.

It is important to note that, by law, a person or company will be bound by a communication if it was sent by the person or company, or with their consent. This can create problems on the issue of evidence of intention to be bound, particularly in circumstances where parties to transactions are not dealing with each other face to face (without a witness present).

What are Electronic signatures?

An electronic signature can be defined as, “a signature using software on an electronic document or transmission, either by an encryption method or a scanned version of handwritten signature”. They are recognised under both International and Australian law as having the same effect as handwritten signatures, subject to the following qualifications:

  • there must be consent by the recipient to receive information electronically;
  • the method of signing must identify the person sending the information, and indicate that this person approves of the content of the electronic document signed; and
  • the method of signing must be as reliable as is appropriate for the purposes for which the electronic document was generated, in all of the circumstances of the transaction.  Evidence of the identity of the signing party and that they approve the contents of the electronic document must be identified in the document. This reaffirms the need as to prove the identity of the person signing and their authority to do so (e.g. Director/Secretary of a company).

Note that there are new software programs available that enable a person with qualifications to verify the identity and signature of a person for real estate transactions. For the purposes of new electronic property transactions through PEXA a solicitor can scan a signature, identify the person with 100 points (like a bank) and certify they have done so for this system. This will then enable banks to rely on the signatures and the titles office that will ultimately register the documents for the transaction (such as a release of mortgage or caveat).

The difficulty in using an electronic signature becomes apparent when need to prove the identity of the signing person where the hand written signature isn’t witnessed by another person. Is it really theirs?

There is also the risk that the content of the document has been altered after being signed, as this can happen in any other traditional transaction signed by hand. Digital signatures have been introduced to try and minimise these risks.

Digital signatures and public key cryptography

A “digital signature” is a term used by some to describe a type of “electronic” signature. Digital signatures use technology that associates the scanned signature with hidden electronic data which can be used in an electronic document or communication. The main differences between an “electronic” and a “digital” signature is that:

  • a digital signature is linked to certain information, and can be verified;
  • an electronic signature may just be text on an email.

Digital signatures are therefore unique electronic “identities” which make them a more trusted and secure way of verifying the author of a document.

Many, if not all digital signatures rely on public key cryptography as their identity verification core – including popular products like Adobe EchoSign, and DocuSign. The basic premise behind this method is that a cryptographic private and public keys (being a randomly generated set of digits) are used for identity verification purposes.

The private key is only used by, and known to, the person associated with it. The related public key is shared publicly and visible by anyone else on the receiving end of the document containing the digital signature.

To create a digital signature, the private key is used to generate a unique code from a combination of the private key and the contents of the message. That code is embedded in the document and becomes the digital signature. Usually an image attached to the digital signature is calibrated as the visual aspect of the signature, such as an electronic copy of the signing person’s paper signature. This is not legally necessary, however the party receiving the document can then view the public key associated with the digital signature. There is typically no way for the recipient of the public key to discover the private key through this process.

The information that can be gained by having access to the public key is usually:

  • the name linked to the digital signature; and
  • a verification that the contents of the documents have not been altered since inserting the digital signature to the document (by technical error or tampering).

As you can see there is some complexity about the manner of applying an electronic signature. I will continue more on this next week so make sure you contact us if you need assistance with signing agreements.