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Insight

Waiting for the ink to dry on electronic execution and virtual closings

The sudden arrival of the Coronavirus pandemic followed, in some respects fortuitously, the Law Commission's 2019 report on electronic signatures. Consequently, much was written in the immediate aftermath of lockdown that spoke from a seemingly informed position of the current (English) law on electronic signatures and virtual closings.
 
In the intervening months we now also have the benefit of experience and best practice forged from the white heat of social-distancing. This article seeks to take stock of where we are and what we can realistically expect in terms of dispensing with wet ink signatures and moving to a world of electronic execution and virtual closings.

The 2019 Report, coupled with the Ministerial Statement of the Justice Secretary in response to that report provided some comfort to those practising English law that electronic signatures are a valid form of execution and crucially that no further legislation was required to enable their adoption1.  

In understanding what "electronic signatures" are for these purposes, the 2019 Report was technologically neutral but in simple terms considered the terminology would cover the full range from typed in names, through scanned wet-ink or pasted in image files to encrypted digital signatures applied through e-signing platforms (such as DocuSign(r) or Adobe Sign).

Despite these pronouncements, there nevertheless remained a reluctance to adopt e-signatures and virtual closings wholesale due to certain evidential and technical hurdles - namely the formalities for executing deeds using witnesses in physical proximity to the signatory and the insistence of some registries (notably HM Land Registry) on wet-ink documents based on fraud prevention.

However, the rapid onset of lockdown restrictions in March forced many firms and clients to reassess their risk averse positioning on e-signatures. While necessity was not quite the mother of invention, the need to be able to conclude contracts while staying socially distant or in isolation encouraged closer scrutiny of e-signing and how the practical, evidential steps translated into actual legal risks.  

In June 2020, the Law Society published an update to both their 2016 guidance on executing documents using electronic signatures and the 2010 note on execution of documents by virtual means. The updated guidance was useful in setting out tips for best practice when using electronic signature and clarifying the extent to which electronic signature and virtual execution may be acceptable as practical means for completing transactions.

It is worth noting that none of the guidance issued to date represents a formal change of law in this respect. While there have been a number of cases that have considered electronic execution in recent months, none have diverged from the general understanding as to the legal validity of those forms of execution.

A further development to be aware of is the progress made by HM Land Registry, previously seen as something of an impediment given their need for wet-ink signatures in most cases. In July 2020 they announced they would accept certain "dispositionary deeds" (such as documents creating leases or securing mortgages) where they were signed with a witnessed electronic signature.

However in moving to accept this form of execution, HM Land Registry introduced certain steps and measures that need to be taken when using electronic execution. For the most part these steps are to ensure the security and integrity of the e-signing process so that transactions are protected from fraud, however HM Land Registry recognises that in some instances e-signing platforms may not necessarily be able to meet their requirements.

Dialogue and engagement between systems providers, law firms and HM Land Registry continues and we are hopeful that the mutual benefit of enabling and enhancing the efficiency and integrity of conveyancing means that further progress will be made.

So where does that leave us? Or, perhaps more usefully, what are the challenges that remain when using e-signature and virtual closings?

As we have seen, it is clear that an electronic signature is a valid form of signature under English law. Where problems exist, these are mainly, if not exclusively matters of evidence. That is, ensuring there is nothing that calls into question the identity, capacity or authority of the signatory or their intention to authenticate the document. Indeed these are not problems that are exclusive to electronic signatures and they apply equally to wet-ink execution. Rather the issues with electronic signatures may be magnified because of the way signatures may be applied; whether that is through simply typing a name into a document, pasting in an image file or signing up to an encrypted e-signing platform.

Paradoxically perhaps, the more layers you add to the process, the more avenues there may be to challenge that signature. For example, accessing documents or platforms electronically may leave an evidential breadcrumb trail of metadata that could be investigated where previously with wet-ink signatures certain assumptions had to be made about the factual circumstances around execution.

Returning to the sticking points highlighted before the pandemic as regards the adoption of e-signatures, the following can be said:
 
  • Deeds. They can be executed by electronic signature however formalities must be observed (including witnessing if necessary, see below). Pre-signed signature pages should not be used. Counterparts clauses are recommended. If the document is not intended to be delivered until completion, this must be made clear. Deeds that are to be sent to HM Land Registry should comply with the additional requirements set out in their practice guide. 
 
  • Witnessing. Electronic signatures can be witnessed and a witness can use an e-signature. Witnesses must be physically present and observing the signature (and additional evidence may be useful in this regard when using e-signing platforms). Witnessing remotely by video call may not be valid in the absence of clear legal authority on the point. A witness should be independent and not party to the document but otherwise can include an adult relative, for example. 

Provided there is sufficient discipline and awareness among stakeholders in the signing/execution process, none of the evidential issues is insurmountable and both electronic signatures and virtual closings have been used extensively and assuredly both before and during the current pandemic to conclude transactions. 

That being said it is worth pointing out that some financial institutions in particular remain reluctant to adopt e-signing as a matter of policy while others have accepted them for some, if not all or their execution requirements.

Best practice guidance across the industry and the technical capabilities of e-signing platforms continue to evolve with the intention of minimising those evidential pitfalls. In particular, we are aware of, and engaged in, efforts to develop a cross-party understanding among the transactional practice areas of a number of law firms as regards electronic signing and virtual closing protocols with the aim of conforming approaches as far as possible.
 
Cross-border issues. While this article speaks as to English law, the acceptance and adoption of e-signatures varies considerably around the globe. Even in the UK signature/execution regimes differ between England and Scotland.

Cross-border transactions will necessitate a degree of due diligence as to the e-signature regimes and protocols that apply. Requirements for notarisation and legalisation can be particularly problematic in this regard and local law advice should be sought in each instance.
 
1 The 2019 Report did not cover wills. Wills are subject to a separate statutory regime and are outside the scope of this article.
 

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