Electronic signatures encouraged by Law Society practice note

In recent years, the UK business community has increasingly embraced electronic signature as a means of executing contracts on corporate and commercial deals. This seems… Read more

In recent years, the UK business community has increasingly embraced electronic signature as a means of executing contracts on corporate and commercial deals. This seems a no-brainer, given the extent to which deal-making now happens remotely – often across time zones, the need of high-volume contracting businesses to streamline their execution logistics and the sheer number of electronic signature software tools now on the market (DocuSign and Adobe Sign, to name two of many).

And yet there is some lingering uncertainty around the validity of electronic signatures as a means of executing various forms of contracts, particularly when it comes to deeds or documents that are subject to statutory formalities, for which case law authority is rather thin on the ground.

A new practice note issued by the Law Society and CLLS in July of this year looks set to address this issue and help individuals and businesses executing corporate and commercial transactions better understand when and how they can use electronic signatures.

What is electronic signature

Electronic signature is an umbrella term that captures various different methods of indicating agreement to terms presented in electronic form. These range from clicking on an icon to place on order in an e-commerce transaction to using advanced cryptography-based digital signatures in a document or message. To be legally effective as a signature, any such method must demonstrate the signatory’s intention to be bound by the terms he or she is signing up to.

The Law Society/CLLS practice note focuses on the methods of electronic signature that are most commonly used in the context of a corporate or commercial transaction, namely, a person:

• either pasting his or her signature as an image or inserting an electronic representation of his or her signature (e.g. where using an electronic signature tool) into the appropriate signature block of an electronic version of a contract;
• typing his or her name into a contract or an email containing the terms of a contract;
• accessing a contract through an online electronic signature platform and clicking to have his or her name inserted into the appropriate signature block of the electronic version of the contract; or
• using finger or a stylus to sign his or her name in the appropriate signature block of an electronic version of a contract on a touchscreen.

What is the law on validity of electronic signature

As a matter of law, the validity of using an electronic signature for execution is clear for certain types of contracts and less so for others.

At one end of the spectrum, it is a well-established principle of English law that a simple contract does not need to be in any particular form or executed in a particular way, so using an electronic signature to execute a simple contract should be valid.

However, things are a little murkier for “formal” contracts – contracts that are required by legislation to be “in writing”, “signed” or “under hand” (such as a guarantee or an assignment of copyright) or for deeds, which are likewise subject to strict formalities.

While there is case law authority for the validity of certain forms of electronic signature for executing particular “formal” contracts – for example, the case of J Pereira Fernandes SA v Mehta [2006] EWHC 813 (Ch) confirms that typing a name into an email can be a valid signature for the purposes of a guarantee – and certain general principles be inferred from this body of case law, these authorities still need to be applied on a case-by-case basis to the specific form of electronic signature a party may want to use for a particular kind of contract. This is obviously not ideal for parties looking to execute transaction documentation on short notice using electronic signatures.

The new eIDAS Regulation (Regulation (EU) No 910/2014), which came into effect in July 2016 with a view to harmonising the rules on electronic signature across EU member states (including, for the time being at least, the UK), goes some way to addressing this uncertainty by providing that an electronic signature should not be denied legal effect solely on the grounds that it is electronic form. However, it is still unclear to what degree the Regulation will assist for the electronic signature of “formal” contracts and deeds.

While it is not definitive legal advice, in light of the uncertainty in this area, the Law Society/CLLS practice note (which has been prepared by a joint working party of The Law Society Company Law Committee and CLLS Company Law and Financial Law Committees (the JWP) and approved by Mark Hapgood QC as Leading Counsel) is a welcome guide to the practical steps that businesses and individuals should follow to achieve valid electronic signatures of contracts in accordance with the principles set out in the relevant legislation and case law.

The Law Society/CLLS Note

The Law Society/CLLS note takes the key types of contracts that typically feature on a corporate and commercial transaction and considers the validity of electronic signature (and the related practical considerations) for each in turn.

The key takeaway from the note for businesses and individuals is that, in the opinion of the JWP and Leading Counsel, simple contracts, “formal” contracts and deeds may all be executed using electronic signature and can exist solely in electronic form. However, due to the additional statutory formalities that apply to deeds, there are a number of practical considerations the parties will need to take in account when using electronic signature to execute a deed, namely:

• a company signing electronically will need to ensure the execution complies with the Companies Act 2006 requirements for valid execution of a deed – i.e. executed by two authorised signatories of the company or by a director in the presence of a witness; an individual signing electronically will need to do so in the presence of a witness;
• an electronic signature (by or a company or an individual) will be validly witnessed where another person genuinely observes the signing and signs the relevant attestation block (either electronically or by “wet ink” on a hard copy of the electronically signed deed);
• the JWP and Leading Counsel suggest it is best practice for the witness to be physically present to witness the signature rather than attending via a videoconference link; and
• given the statutory requirement for deeds to be “delivered”, the parties to the deed will need to make sure their signing arrangements include steps to confirm when delivery takes place.

Finally, for companies proposing to use electronic signature, the note also points out that it is important to ensure there is no restriction on this in the company’s articles of association or resolutions and, where an overseas company is proposing to use electronic signature to execute and English law-governed contract, the parties may wish to seek local advice as to whether that company can validly use electronic signature.

In the accompanying press release to the Law Society/CLLS note, Elizabeth Wall (chairperson Law Society Company Law Committee) comments that a key thrust behind the note is to get the legal industry

“comfortable with electronic signatures and [to] embrace the practical benefits of e-signing.” As lawyers advising technology and technology-enabled clients that are keen to take advantage of technological developments in deal execution, we welcome the note and hope it has the intended consequences.

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