A 2016 case in the New South Wales Court of Appeal provided a stark warning to parties relying on e-signatures to enforce contractual obligations. Since then, there has been no legislative reform or reported judicial consideration of that case, so credit managers are advised to remain cautious when relying on e-signatures on credit accounts and guarantees.

What is an e-signature?

E-signatures, or electronic signatures, is a broad term used to describe electronic data that conveys the intent of an old-school wet ink signature.

In its simplest form, an e-signature can be a name typed into an email, a scanned image of a wet ink signature, or the clicking of an ‘I accept’ box.

‘Digital signatures’ are a more technically sophisticated form of electronic signatures; they are akin to electronic fingerprints.  They use mathematical code to demonstrate the authenticity of the signature. Digital signatures are different to electronic signatures in that they are capable of being linked to hidden data, which can verify the identification of the person applying the signature.

Digital signatures are created by software products such as Adobe eSign Services, DocuSign, EchoSign, eSign+, e-SignLive, eversign, Fluix, HelloFax, HelloSign, PandaDoc, PDCflow, Sertifi, Signable, SignNow SignRequest, or RightSignature.

To create a digital signature, a private ‘key’ is used to generate a unique code associated with a particular document. The private key should only be known and used by the person who created it.

What is the relevance of e-signatures to credit managers?

Credit Applications, Terms and Conditions and Guarantees are contracts. In order to create a valid contract that is legally binding, there must be an offer, acceptance, consideration (except where the contract is a Deed) and a mutual intent to be bound.

A wet ink signature, or an e-signature, is the proof that the party accepts the terms of the contract and intends to be bound by the contract.

If there is doubt about the reliability of a signature on a credit application or guarantee, credit managers may not be able to enforce unpaid tax invoices.

Williams Group Pty Ltd v Crocker (2016) NSWA 265

The importance of the enforceability of e-signatures was brought to the attention of the Credit Industry in 2016 when Williams Group Australia Pty Ltd (‘Williams’), a supplier of building materials, was unable to enforce a personal guarantee executed with an e-signature.

Facts

Williams sent a credit application and deed of guarantee and indemnity to be signed by the company IDH Modular Pty Ltd (‘IDH’), and by its three directors individually as guarantors. Both documents were signed using digital signatures created by the software Hellofax. When this software had been installed at IDH, all directors, including Mr Crocker, had been provided with an initial username and password; the private key to their e-signatures. Mr Crocker did not change the password and anyone who knew the initial password could log into Hellofax and affix Mr Crocker’s electronic signature to documents. An unknown staff member affixed Mr Crocker’s e-signature to the Williams’ credit application and guarantee.

Williams supplied building materials valued at $889,534.35 to IDH on credit. IDH went into liquidation, defaulting on its obligations. Williams sought to enforce the personal guarantees against the three directors for monies owed.

Mr Crocker challenged the enforceability of the personal guarantee, arguing that someone else in the company had affixed his e-signature to the credit application without his knowledge or consent.

Decision

The Supreme Court of NSW found Mr Crocker was not bound on the basis that Williams was unable to prove Mr Crocker had knowledge of the guarantee and had provided authority for the guarantee to be signed on his behalf. A confirmation email sent by Williams to Mr Crocker enclosing a copy of the signed guarantee did not prove his intention to be bound at the time of the contract formation because there was insufficient proof that he knew about the email.

The Court of Appeal upheld the first instance decision and dismissed the appeal with costs.

Ensuring e-signatures are enforceable

Electronic signatures are a legally valid method of signing credit applications and guarantees, and due to their convenience, are increasingly replacing wet ink signatures.

Commonwealth legislation introduced in 1999 allows electronic commerce to operate on the same basis as paper-based commerce. In addition to the usual requirements for a paper contract, Section 9 (2) of the Electronic Transactions Act 1999 (Cth) (‘the Act’) provides that a contract can be formed electronically if:

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

Section 10 of the Act provides that an e-signature is valid if:

a)      there is consent by the recipient to receive information electronically;

b)      the method of signing identifies the person and indicates the person’s intention in respect of the communication; and

c)       having regard to all the circumstances of the transaction, the method of signing is reliable for the purpose for which the electronic communication was generated or proven in fact to identify the person and their intention;

It is important credit managers ensure their administrative processes meet these requirements.

Potential Difficulties

Simple electronic signatures such as a tick in a box or a PDF image of a wet ink signature are usually adequate for uncomplicated transactions such as registering online to vote, or signing the terms and conditions for a purchase on eBay. However, in commercial transactions, where significant sums may be involved, it may be difficult for a party to prove that relying on an e-signature was reliable and appropriate. The Court in Alonso v SRS Investments (WA) Pty Ltd (2012) WASC 168 held that it is necessary to examine ‘whether the parties conduct, viewed objectively, reveals tacit understanding or agreement or a manifestation of mutual assent, which evinces an intention to create legal relations’.

To a large extent, digital signatures minimise the risks of using e-signatures, as they are a more secure and reliable verification of a person’s identity, but only where the private key to a digital signature is kept secret.

Using digital signature software is considerably safer and more secure than unsophisticated electronic signatures, but credit managers should be wary of the remaining risks of fraud, dishonesty and customers who fail to update their passwords and keep them secret.

What can credit managers do to protect their company’s interests?

  • Ensure Terms and Conditions include a clause consenting to electronic communication.
  • Keep original copies of signed credit applications and guarantees to illustrate the kind of signature applied.
  • Create processes that confirm:
    • the identity of the person who affixed the e-signature;
    • the authority of that person to affix the e-signature; and
    • the actual knowledge of the customer that his/her signature has been affixed to a credit application and guarantee.
    • Ensure electronic and paper contracts are stored appropriately and can be easily accessed.
    • Where a document has been witnessed, obtain the contact details of the witness in case the witness needs to confirm the authenticity of the customer’s signature.
    • Once a credit application has been approved, send a letter to each guarantor to verify his/her knowledge of a credit account being opened in reliance upon his/her personal guarantee.
    • Keep accurate records of telephone calls and face-to-face meetings with customers to show the customer knows of the credit application and is relying upon the credit provided. This will assist to show that even if a guarantor did not authorise the signing of the credit application, his/her later conduct ratified the contract.
    • If using digital signature software, choose products that have additional verification and authentication techniques. Even though there is no guaranteed method of verifying an e-signature with 100% certainty, the most reliable software will utilise secure online databases that provide a certification authority (‘CA’). A CA requires users to provide specific information to confirm their identity and issue a digital signature certificate. The recipient of the digital signature (the credit manager) can then use the certificate to verify the authenticity of the e-signature.
    • Ensure digital signature software is kept up to date and has an effective archiving system, so data may be retrieved quickly in the event of a dispute.
    • If your company does not use digital signature software, consider requiring that guarantees are signed face to face or sent to customers in hard copy and signed in the traditional manner with wet signatures.

Summary

Legislative reform could remove the doubt caused by the Williams decision, but as yet, has not occurred. Thus credit managers need to remain alert to the potential risks of relying on e-signatures.

Ultimately, it’s about the evidence a credit manager can produce to verify a customer knew about a credit account and consented to its terms and conditions and any associated guarantees.

 

Frank Gambera

Director

McMahon Fearnley Lawyers

fmg@mcmahonfearnley.com.au

(03) 9670 0966

 

Frank Gambera acknowledges the assistance of Heather McIntosh in the writing of this article.

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