Give me a sign: what are the risks of accepting an electronic signature on a commercial contract?
If your business accepts a commercial contract that has been signed electronically, there is a risk that the contract will not be enforceable against the person that had allegedly signed it if the electronic signature was applied without authority.
To combat this risk, you may consider sending the electronically signed document back to the party that allegedly signed it to obtain their separate confirmation that they had in fact considered the document and applied their signature electronically.
Recent contract law case
This use of electronic signatures in contracts was recently considered by the New South Wales Court of Appeal. Briefly, the facts of the case are:
- Williams Group Australia Pty Ltd (Williams), a supplier of building materials, approved a credit application which was electronically signed by IDH Modular Pty Ltd (IDH) using a technology called HelloFax.
- The credit application required the directors of IDH to personally guarantee the obligations of IDH (such as the payment of all moneys owing to Williams by IDH). The guarantees were also electronically signed using HelloFax.
- Williams supplied building materials valued at $889,534.35 to IDH on credit.
- IDH went into liquidation. Williams sought to enforce the personal guarantees against the three directors of IDH, to make them pay for the monies owed to it by IDH.
- One director of IDH, Mr Crocker, challenged the enforceability of the personal guarantee, arguing that he did not affix his electronic signature to the document using HelloFax, and that it had been applied by someone else in his organisation without his knowledge or consent.
Enforceability of the contract
Williams argued that:
- Mr Crocker was bound by the guarantee because he had acquiesced to his signature being electronically applied to contracts by other people in his organisation. In support, it argued that other people had access to Mr Crocker’s HelloFax password, that Mr Crocker had failed to change his password to the system and accordingly the person in his organisation had applied Mr Crocker’s electronic signature to the personal guarantee with his apparent authority.
- Even if Mr Crocker had not given apparent authority to any person to apply his electronic signature, he was subsequently aware of and had consented to being bound by the guarantee by:
- signing other credit applications noting Williams as a trade referee; and
- placing purchase orders with Williams.
Williams was required to disprove Mr Crocker’s evidence that he did not know that he personally committed to the guarantee. Ultimately, Mr Crocker won and was not required to personally pay the monies owing to Williams by IDH.
Position at law
The Court found that:
- Williams’ ability to rely on the electronic signature and enforce the personal guarantee against Mr Crocker required Mr Crocker to have held out that the person who had applied his electronic signature had his authority to do so. Williams failed to prove that Mr Crocker had made any such representation.
- Mr Crocker would have required full knowledge of all the material circumstances under which the guarantee had been signed in order to have ratified the application of his signature to the guarantee after the fact. While Mr Crocker could access the list of signed documents through the HelloFax system, the list did not note that the directors had provided a personal guarantee.
The Court commented there was some authority that would support the conclusion that placement of a “genuine” electronic signature on a document without any authority may amount to forgery, however it was not required to decide on this point.
Accepting contracts with an electronic signature
This case is a timely reminder that while accepting a contract with an electronic signature may be very convenient, if the electronic signature is applied without the relevant party’s consent or knowledge (and essentially, forged) the Court may not uphold the contract against the party that allegedly signed it.
As with any transaction that may be susceptible to forgery, making appropriate enquiries can ensure that the document is properly authorised and enforceable.
Author: Priti Joshi
Contributing Author: Michael Cossetto