Electronic Signatures: Benefits, Risks, and a Cautionary Tale

25 March 2018 in Articles

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Ray Tomlinson is credited with inventing email as far back as 1972, however, if anyone had suggested back then that, in less than 40 years, email and electronic signatures would be widely accepted as a way of transacting business, their comments would almost certainly have been met with a fair amount of scepticism. However, this is exactly what we are dealing with today. Forrester Research estimated in May 2015 that the annual growth in demand for the use of electronic signatures was just in excess of 50%, and that by 2017, 700 million transactions would be authorised by electronic signatures.

Some benefits of electronic signatures

  • Fast – electronic signatures allow customers to sign up quicker and easier, eliminating delay and enhancing the customer experience.
  • Secure – assuming you keep your password safe (see below).
  • Easily tracked using software.

Some risks of electronic signatures

  • Forgery – as with traditional paper-and-ink signatures, forgery or identity theft is a real risk for electronic signatures. To reduce this risk, electronic signatures should be kept secure with password protection and 2FA (two-factor authentication) where possible.
  • Fraud – there is also the possibility that a person could alter a digitally-signed document after it is signed. Of course, the risk of this kind of dishonesty is not limited to electronic signatures. As with traditional paper-and-ink agreements, both parties should keep their own copies of what was agreed, just in case.
  • Exclusions – signatures on some types of documents (such as deeds, Wills, property transfers etc.) must be witnessed by an independent third party and are, therefore, unable to be signed with an electronic signature. If those kinds of documents are signed by an electronic signature, the document may be invalid.

Regulation of electronic communications in Australia

The regulatory framework for recognition of electronic communications including electronic and digital signatures in Australia is found in the Electronic Transactions Act 1999 (Cth) (“the Act”). Each State and Territory has also enacted their own versions. The Act facilitates the use of electronic transactions, recognises the importance of the information economy to economic and social prosperity in Australia and aims to promote confidence in the use of electronic transactions and enable business and the community to use electronic communications in their dealings with government. The Act sets out a framework for signatures in electronic communications including the requirement that a method be used to identify both the person giving the electronic signature and that person’s intention in respect of the information communicated. The Act also requires that the identification method used must be appropriate for the purpose for which the electronic communication was generated or communicated, in light of all the circumstances of the particular matter including any relevant agreement. Alternatively, the method used must be proven to have in fact fulfilled the identification and intention requirements either by itself or together with further evidence.

Case Study

Notwithstanding our increasing reliance on electronic signatures the 2016 decision of the NSW Supreme Court in Williams Group Australia Pty Ltd v Crocker [2016] NSWCA 265 highlights that there are still risks associated with this mode of communication. In Williams, a company creditor was unable to enforce a director’s guarantee signed with an electronic signature. The amount of the debt was almost $900,000.

Background to the proceedings

Mr Lee Crocker was a builder and the director of Image Designer Homes Pty Ltd (IDH). IDH was established in 2010 and manufactured, supplied and installed pre-manufactured building modules. IDH Modular Pty Ltd (in liquidation) (IDHM) was a related company established in June 2012. The three directors of IDHM were Mr Caleb Brooks, Mr Lee Crocker and Mr Mark Walsh. In around May 2012, Mr Brooks advised Mr Crocker that he had set up an account with HelloFax which would enable the directors to upload an electronic signature which could then be applied to documents electronically. This system would allow the IDHM directors to sign documents electronically when it was not convenient to do so in person. Mr Crocker initially accessed the HelloFax system on 26 June 2012. However, he never changed the password for his account. The password had been set up by Mr Brooks. IDHM opened a trading account with the Williams Group Australia Pty Ltd (Williams Group) in July 2012. The application for the trading account ostensibly bore the signature of each of the three directors. However, the Court accepted that Mr Crocker never accessed HelloFax for the purpose of applying his signature for any application to the Williams Group. By July 2013 IDHM was indebted to the Williams Group for the amount of $889,534.35. The Williams Group commenced proceedings in the Supreme Court of NSW seeking the enforcement of guarantees that had allegedly been given by all three of the directors of IDHM to secure the terms of the trade credit agreement.

Ostensible authority and when an electronic signature is not actually a signature

Mr Crocker claimed that he had neither executed nor authorised the execution of the guarantee with the Williams Group on his behalf. He also submitted that he had no knowledge that he had agreed to sign up to such a substantial potential liability. The Williams Group argued that Mr Crocker had given actual authorisation or, at the very least, if actual authorisation had not been given, Mr Crocker’s subsequent conduct effectively ratified the execution of his signature, and that even if Mr Crocker had not actually applied the electronic signature to the guarantee it should be enforced against him. In support of these arguments the Williams Group submitted firstly that by failing to change the default password set up on the HelloFax account by Mr Brooks, Mr Crocker had impliedly authorised Mr Brooks or any other person who received the login details set up by him, to execute documents on Mr Crocker’s behalf. In the alternative, they argued that even if no actual authorisation was given the fact that Mr Crocker had been sent a confirmation email should be sufficient to show that he had subsequently ratified the use of his signature. Mr Crocker gave evidence that he did not recall ever seeing any emails of this nature.

No actual authorisation or subsequent ratification

The Court was not satisfied that any actual authority had been given and found that the evidence provided fell short of anything revealing actual intention. In addition, the Court accepted Mr Crocker’s evidence that he did not in fact ever see any emails which would have supported the alternative claim of ratification.

Important points to take from the decision

There are four main points we can take from this decision:
  1. Implicit authorisation by an executor to use another person’s signature should not be assumed. Applying an electronic signature without permission is akin to forging someone’s handwritten signature;
  2. The failure to change a default password set up by another director will not automatically result in liability if someone else with access to that default password uses the signature. However, if an individual took positive steps to permit access to their signature such as proactively providing their password to another individual a different conclusion might be drawn;
  3. Where an electronic signature is used to execute a contract the party accepting the signature should consider mitigating any risk of a forgery or improper use of the signature by taking appropriate steps to ascertain that the signature has been properly applied with consent. This could include having the execution witnesses or requiring a confirmation email before proceeding on the basis of the signature; and
  4. Courts will be reluctant to find that there has been a ratification or acceptance of an unauthorised use of an electronic signature unless there is clear evidence that the person who is said to be bound by the signature not only saw the relevant document and understood the effect of the document but also failed to take any action to remedy the situation.
As the use of electronic agreements and signatures become ever more popular, questions about the proper use of electronic signatures are likely to continue to be an ongoing issue. If you or someone you know wants more information or needs help or advice, please contact us.