Electronic signatures: Virtually agreed?

As Covid-19 drives welcome innovation around remote signing protocols in corporate transactions and the use of electronic signatures, Fieldfisher corporate law specialists Beth Walters and Ammar Thair consider how care should be taken with the use and acceptance of electronic signatures in the execution of contracts in light of the increased potential for forgery and fraud. 

What is an electronic signature?

An electronic signature is defined widely and can take a variety of forms including:

• A typed name;
• Electronically pasting a signature (i.e. in the form of an image);
• Automatically inserting a name through an electronic signing platform, such as DocuSign; and
• A biodynamic version of a manual signature (created, for example, using a special pen).

Why are electronic signatures being used?

Aside from the obvious benefits in terms of time and efficiency, the Covid-19 pandemic has brought the need for electronic signing into sharp focus.

With the increase in remote working, not everyone has the ability to print, sign and scan multiple documents from home.

The ability to use electronic signing has therefore ensured transactions have completed swiftly throughout the lockdown period.

Can electronic signatures be used effectively?

Current law permits the use of an electronic signature to execute documents (unless it is explicitly provided that electronic signatures are not acceptable), and they can therefore serve as a valid and viable alternative to a "wet ink" signature provided an authenticating intention can be shown (i.e. proof that the signatory intended to be bound).

These were the findings of a 2019 report by the Law Commission, which was endorsed by the government earlier this year.

However, care needs to be taken where the parties are required to execute a document electronically as a deed (which, under English law, may need to be attested by a witness). A deed may be signed by an individual using an electronic signature.

However, the attesting witness is required to be physically present with the signatory at the time of signing the deed, and this may prove to be a challenge at a time when people are working remotely and socially distancing.

The law in this area may be subject to change, as the joint working party of The Law Society Company Law Committee and The City of London Law Society Company Law and Financial Law Committees have suggested that, provided the witness "genuinely observes the signing", this may be done via video conference or other means.

However, the Law Commission's stance (and best practice) continues to be that the witness must be in the same physical location.

Are there any potential issues with the use of electronic signatures?

The increased use of electronic signatures brings with it the increased potential for forgery and fraudulent practice.

The banking industry, for instance, has endured allegations of widespread document forgery, with whistle-blowers from large banks confirming the existence of such practices at a time when electronic signing was not commonplace and documents were signed in "wet ink".

The concern is that such malpractice would be far simpler to carry out and more difficult to detect in the context of electronic signing.

Naturally, the potential forgery is one of the main concerns in this area, especially where parties to a contract are both geographically distant and socially unacquainted. Great care therefore needs to be taken to mitigate the risks as far as possible.

Practical tips to mitigate risk

• Electronic signature platform - the parties should consider the risks of using electronic signing platforms, and ensure that they have the best infrastructure in place. For instance, is the platform secure? Is there a way to confirm the identity of the person signing the document (i.e. can an access code or extra level of authentication be used)? Does it meet the formalities required for executing a deed (if applicable)? Does it confirm the location (or IP address) of the witness, or can a completion certificate be generated?
• Security – high value transactions require better quality electronic signatures (i.e. more securely linked to the owner). Signatories should take steps to ensure that their electronic signature is properly secured with strong password protection. If someone were to gain access to the signature it could be used without their consent.
• Witness' location – ensure that any witnesses confirm their location in writing (to the extent that this information cannot be obtained via the relevant electronic signature platform), so that if any questions over their location were to arise in the future it can be shown that they were physically present with the signatory.
• Lack of available witness – if finding a physically present witness proves to be difficult, consider amending the deed to be signed by two directors of the company, as opposed to a director in the presence of a witness (section 44(2)(a) of Companies Act 2006). Each of the directors could sign the deed in counterpart. The company’s articles of association and any other constitutional documents would need to be reviewed to ensure that the company is able to execute in this way.
• Lack of independent witness – best practice has always been to ensure that a witness is not the spouse or a family member of the signatory, as the purpose of a witnessed signature is to provide unbiased evidence as to what was signed. Having said that, the law states that family members may witness a signature (provided they are not party to the deed themselves), so a more pragmatic stance is being taken in light of the Covid-19 pandemic to allow for this.

Looking ahead

Whether in response to a new Covid-19 commercial reality, the need to modernise within an ever-digital world or pressure to be more environmentally friendly and reduce paper waste, the acceptance and use of electronic signatures (and platforms) has grown and continues to grow.

It is therefore clear that stakeholders have become more comfortable in executing documents in non-physical form, and the legitimacy of such practices has increased.

However, the risk of fraud remains with even the most advanced platforms, meaning a balance is needed between commercial efficiency, and robust security. 

For more information on electronic signatures, please see our previous articles and resources on this topic:

Electronic Signature Opinion Portal - This portal has been developed by Fieldfisher LLP as a tool to enable ISDA member firms quickly and easily to access and digest the key elements of the Legal Opinions on Electronic Signatures (the "E-Contract Opinions") commissioned by the International Swaps & Derivatives Association, Inc. (ISDA).

CORONAVIRUS – a guide to electronic signatures during the COVID-19 UK lockdown

Electronic signatures - A means of ensuring business continuity during Covid-19?​

Webinar: E-signatures – How to get this right!