Electronic Signatures on Legal Documents – What are the risks?

Electronic signatures provide a quick, cheap and easy way to sign documents and receive signed documents. They can also be useful when signatories are separated by a large distance. Currently, there is very little legislation governing electronic signatures. Despite their convenience, there are a range of legal risks connected with using electronic signatures. Some of these risks have been recently considered by the New South Wales Court of Appeal.

Williams Group Australia Pty Ltd v Crocker

In September, the New South Wales Court of Appeal handed down a judgment considering the enforceability of an ‘all-moneys’ director’s guarantee document with electronic signatures belonging to the company directors. The signed guarantee was attached to a trade credit application in favour of the supplier, Williams Group Australia Pty Ltd. After the company defaulted on a debt, the supplier sought to enforce the director guarantees. In usual circumstances, the directors’ obligations under the guarantee would indemnify the creditor for the company’s debt. However, this was not the case for one of the directors, Mr Crocker, who challenged the enforceability of the guarantee. He claimed that he did not place the electronic signature on the guarantee, nor did he authorise anyone else to do so. He argued that the electronic signature was added to the document by an unknown person at the company.

The New South Wales Court of Appeal held that Mr Cocker was not liable for the guarantee. The main reason for this was that he did not give ‘ostensible authority’ to the unknown person to affix his signature to the director’s guarantee and credit application documents. ‘Ostensible or ‘apparent’ authority is the ‘appearance’ of authority. This type of authority is a legal relationship between the principal and the agent which is created by the representation made by the principal to the third party that the agent has the authority to enter, on behalf of the principal, into contracts of a kind within the scope of the ostensible authority. This renders the principal liable to perform the obligations imposed by the contract. The relevant representation can include the words and conduct of the principal. A common example is the appointment of an individual to a position such as managing director. In these cases, the individual appears to have the authority which his usually possessed by individuals who hold such a position.

This was not the case in Mr Crocker’s circumstances, as he had not made any representations that the other unknown person was authorised to affix his signature to the document. The court also found that an email sent to the director stating that the ‘trade application’ document had been signed did not amount to ratification of the guarantee. In order for the director to be notified of the guarantee, there needed to be more than just an email which listed the application as an attachment.

The court took the following circumstances into account:

  • Mr Crocker did not put the ‘Hellofax’ electronic signature system into place. He was just a user of the system.
  • Mr Crocker did not change his access password since the system was set-up. This meant that he was not the only person who knew the password.
  • Mr Crocker did not give anyone his username, password or permission to place his electronic signature on documents.
  • The signature affixed by the unknown person was not a signature that Mr Crocker had previously uploaded to the Hellofax system.
  • When Mr Crocker accessed the Hellofax system, a list of documents with his signature would be displayed. Mr Crocker did access this system before the claim by the supplier. However, the guarantee itself was not displayed on the list of signed documents on the Hellofax system. Mr Crocker also received an email from Hellofax listing the ‘trade application’ as a signed document. There was no reference in the email or the attachment to a ‘guarantee.’ Therefore, Mr Crocker could not have ‘full knowledge of the material circumstances.’

Managing the risks of using electronic signatures

It is important that only authorised persons affix electronic signatures. How can you do this when using an electronic system? Firstly, ensure that only people authorised to electronically sign documents can do so. This will involve reviewing your systems, controls and procedures. Only authorised users should know the necessary passwords and log-in details. Secondly, make sure that the system used for electronic signatures is secure. One of the best ways to do this is to require ‘dual authentication,’ which involves the use of both an online password and security code.

You also need to act with caution when the other party to a document has signed electronically. As in the case above, the person who affixed the signature must have had the actual or ostensible authorisation of the signatory. In many cases, this is impossible to check. However, it is good practice to send a follow-up email to the signatory seeking confirmation that they authorised for their electronic signature to be affixed to the document.

Need advice on your electronic signature system? Disputing the validity of a document which has been electronically signed? Please don’t hesitate to contact Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website. We have experience in advising Newcastle and Sydney based businesses of contractual rights and best practices.