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The importance of the signature – paper, electronic or digital

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By Philip Colman, Principal, MST Lawyers

Paper Signatures

Occasionally a person, whom it is alleged to have signed a contract, will deny that they signed the contract. This may even be the case despite the signature appearing on the document looking like their signature.

It is trite to say that a person wishing to enforce a contract purporting to be signed by another party must prove that the signature on the document is that of the other party.

For centuries, the common practice has been to have the signatures of contracting parties witnessed by someone else. This allows the person seeking to enforce the contract an avenue to obtain evidence of that party’s signature from the witness. This is not fool proof because:

  • On some contracts, the name and address of the witness are not written on the contract;
  • The witness can sometimes not be found; or
  • The witness may deny witnessing the contracting party’s signature or may not remember doing so.

Electronic & Digital Signatures

Electronic and digital signatures are becoming more commonplace in Australian and international commerce. The main difference between an electronic and a digital signature is that a digital signature is linked to certain information within the file and can be verified whereas an electronic signature may just be text on an email.

A party’s signature can be endorsed on the hard copy of documents or it may be transmitted electronically. Australian law allows for the formation of contracts electronically provided:

  1. The contract is appropriately stored and can be accessed after execution; and
  2. The parties have expressly or impliedly consented to receive information electronically[i].

Electronic signatures can give rise to evidentiary difficulties when proof of the identity of the signor is required in circumstances where the signature has not been witnessed by another person.

Digital signatures have been introduced to minimise these risks. Digital signatures use technology that associates the signature with hidden data which can be used in an electronic communication. Digital signatures are therefore unique electronic identities making them a more trusted and secure way of verifying the author of a document.

Most digital signatures rely on public key cryptography as their identity verification core – including popular products like Adobe Sign and DocuSign. With this method, a cryptographically­ generated private and public key (a randomly generated set of digits) is 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 and visible to anyone receiving the document containing the digital signature.

With digital signatures, a risk exists that the identity of the person using the private key is not accurate. A potential failing with digital signatures and public­ key cryptography is that they are dependent on the private key being kept secret. If the private key is exposed, it is open for someone to dispute that they were indeed the person who digitally signed a document. Likewise, cyber-attacks or data breaches have the potential for exposing private keys.

Williams Group Australia Pty Ltd v Crocker[ii]

This recent case, decided by the NSW Court of Appeal in late September, is a good example of how a supplier, who thought it had the legitimate digital signature of a director (guarantor of a customer’s account), failed to enforce that guarantee. The facts were as follows:

  1. Williams Group Australia Pty Ltd (Williams), a supplier of building materials, approved a credit application by IDH Modular Pty Ltd (IDH).
  2. Mr Crocker was one of the three directors of IDH.
  3. The credit application bore the electronically affixed signatures of each director of IDH in their capacity as director and was accompanied by a guarantee, also bearing the signatures of the three directors in their capacities as guarantors.
  4. Each of the signatures had purportedly been witnessed by IDH’s administration manager.
  5. The respective signatures were affixed to the documents using the “HelloFax” system, enabling users to upload their signature and electronically apply them to documents.
  6. Mr Crocker was provided with a username and password by one of his co-directors to enable him to access the HelloFax system. He never changed the password during the period in question, allowing anyone who had the login details to affix Mr Crocker’s electronic signature to documents.
  7. Pursuant to the trade credit agreement, Williams supplied building materials to IDH until May 2013, by which time IDH’s debt stood at $889,534.35. Williams commenced proceedings against IDH to enforce the debt and against the three directors, to enforce their respective guarantees.
  8. In October 2013, IDH went into liquidation. Judgment was subsequently obtained against Mr Crocker’s two co-directors.
  9. Mr Crocker did not dispute that, during the period the IDH credit account was operating, he had accessed the HelloFax system a number of times and that, on those occasions, a list would appear itemising the status of applications on the system.
  10. However, the HelloFax printout in evidence did not itemise the Williams credit application (and guarantee) in the list of completed documents.

Mr Crocker successfully defended the claim made against him on the basis that his electronic signature had been placed on the application and guarantee by an unknown person without his knowledge or authority.

Williams appealed to the NSW Court of Appeal. Williams argued that Mr Crocker’s conduct was tantamount to giving ostensible authority to whoever affixed his signature to the guarantee.

The Court of Appeal rejected this argument noting that:

  • A finding of ostensible authority would require a representation of authority by Mr Crocker of his authorisation of some other person to affix his electronic signature to documents, on which Williams had relied when supplying goods to IDH on credit;
  • Mr Crocker’s mere use of the HelloFax system did not amount to such a representation so as to bind him personally to the obligations imposed by those documents; and
  • An argument by Williams that it relied upon the purported signature of Mr Crocker on the guarantee to supply goods to IDH on credit could not succeed in the absence of any conduct by Mr Crocker consistent with the fact that he signed the guarantee.

Williams also argued that as Mr Crocker had access to the HelloFax system after his signature was affixed to the guarantee, this amounted to a ratification of the guarantee. The Court of Appeal rejected this argument noting that:

  • Even accepting that, when Mr Crocker had access to the HelloFax system, he would have been able to see a list of documents previously completed using that system, the facts did not establish that Mr Crocker had shut his eyes to the obvious such as to justify fixing him with knowledge that a personal guarantee had been given in his name.
  • Upon logging into the system, Mr Crocker would not have seen any reference to a “guarantee” but simply to a “credit application”.
  • For it to be said that he was shutting his eyes to the obvious, it would be necessary to establish more than that there was merely a reference of him signing a guarantee.

Mr Crocker succeeded in this case because Williams, which bore the onus of proving that Mr Crocker executed the guarantee, could not prove that he did so.

How often do commercial entities send out documents for signing and receive by email or fax documents which, on their face, appear to be properly executed, then act as if those documents had been executed? Had this been a case where IDH was challenging its liability under the credit application and there was no dispute that IDH had ordered and received the goods that gave rise to the debt and had not paid for those goods, IDH would not be able to escape liability on the basis it had not executed the credit application. But guarantees are quite different. The guarantor is often not the party ordering and receiving the goods and often has no control over that.

Conclusion

Businesses, when entering into contracts, must assess the level of risk they wish to take when determining how important contracts are signed.

At one end of the scale businesses can insist on a hard copy document with an original signature that is witnessed by a reliable person(s) who can be easily located to give evidence of the signature at a later date.

At the next level, businesses could consider sophisticated digital signature products allowing them to access electronic copies of the documents containing signatures.

At the highest risk, a business can choose to forgo obtaining the other party’s signature on a contract in the hope that the other party would not deny the existence of the contract or its terms. This is not a risk that we, as lawyers could ever recommend.

MST’s lawyers can assist you in ensuring that the processes that you follow in obtaining signatures on contracts carry the least risk of the other party being able to successfully deny that they did not sign the document. For more information, please contact our Corporate Advisory team by email or our Dispute Resolution & Litigation team by email. You can speak to a lawyer directly by calling +61 3 8540 0200

[i] Electronic Transactions Act 1999 (Cth) s.9

[ii] [2016] NSWCA 265