Electronic signatures: once upon a time….

Some nights ago I was reading my youngest son a Mr Men book at bedtime, Mr Clumsy in fact. Originally written in the 1970s, many of the Mr Men books contain amusing anachronisms that largely go unnoticed by even today's young audience. However, in imparting this particular story I wryly smiled at the scene when Mr Clumsy goes into his bank and spills ink all over the bank manager when writing a cheque. The notion that, as a matter of course, we might use a leaky ink-filled fountain pen let alone writing out a cheque, seems eccentric if not faintly ridiculous.

However under English law and particularly in certain forms of transactions, so-called "wet ink" signatures remain an immovable fixture. And so the publication of the Law Commission's final report on the electronic execution of documents back in September 2019 ought to herald a much-needed shift in the current law and practice surrounding the execution of documents in England. That report followed earlier consultations and influential papers in the past decade emanating from The Law Society and the Financial Law Committee of the CLLS on virtual closings and e-signature.

But the speed of change is more Mr. Slow than anything else. That isn't necessarily a bad thing of course. English commercial law is centuries old and while our common law system is dynamic, flexible and non-proscriptive, relative to codified systems, conventions are deeply rooted. It still takes time for issues to percolate through either the court system or parliament (or both) and for the judiciary or the legislature to pilot a new course, especially one to a brave new world (Happyland?).

English law is not generally insistent on written contracts or execution formality but there are categories that broadly fall into those involving historic instruments with their roots in statute (think guarantees, bills of exchange, bills of sale and dispositions under the Law of Property Acts) or where they fall within the regulatory landscape of financial services (consumer credit and security financial collateral).

Equally, signatures are not prescribed as such. The common law has variously permitted ink-stamps, signature machines, a chain of emails and their customary automated sign-offs (even a simple "Many thanks"). Many would argue that physically putting pen to paper focuses one's mind perhaps a little more than clicking a button (or two) however the authorities coalesce around whether the relevant method authenticates the instrument involved.

The Electronic Communication Act 2000 responded to the burgeoning world of online communication born in the previous millennium. It implemented earlier EU legislation. Among other things it attempts to recognise the validity of electronic signatures in English law and to bring the rest of the statute book with it in that regard (it has since been updated to acknowledge electronic seals but generally the "section 8" powers have not been used to overwrite execution anachronisms).

So, two decades on, why the apparent reticence to advance headlong into the world of e-signatures? It's not that long (well a decade or two) since I started practising and in that comparatively short time finance transaction completions have migrated from late-night boardrooms, vast walnut tables awash with engrossments and bleary-eyed trainees to virtual signings and "Mercury" practices. So electronic signatures are surely the next step?

The main sticking point, at least in the world of secured lending and more particularly real estate finance, is the need to execute documents by deed, and, in some instances for "wet ink" versions to be filed on public registers. Deeds bring with them a degree of discipline of execution and perceived authenticity that originally responded to historic frauds and misfeasance. In that context it may be hard to justify an apparent weakening of those safeguards.

In a REF context, agreements that should be executed as a deed (whether as a formal requirement or to get the benefit of the special characteristics of a deed) are:

• Legal mortgages of land (including 'debenture' security and 'legal charges')
• Powers of attorney (contained in most security documents)
• Appointments of security trustees
• Guarantees of loans (where there are concerns about past consideration for loans already advanced)

For now deeds are here to stay but moves to reform the law of secured transactions more generally have expressly sought to drag such transactions into the 21^st century and dispense with the need for execution formalities by eliminating the legal distinction between deeds and non-deeds. There is some momentum behind the reform efforts but they are still some way from the statute book.

Execution as a deed does not necessarily mean that it is incompatible with electronic signature. However, evidential issues can, and will, arise in terms of the commensurate formalities for witnessing and attestation. That is, the requirement for the physical presence of the witness who attests the signature is thought to be harder to ascertain and later prove in the case of an electronic signature process. Adding access data, time stamps and other breadcrumbs and audit trails that come with electronic authorisations such as key encryption and 'envelopes', multi-layered documentation, traceable IP addresses and the like perhaps raise more questions than answers. That is, there is arguably more scope for, say, Mr. Nosey to test the veracity of witnessing in an electronic execution context when compared with the comparatively straightforward assumptions that might be made in the case of a physical wet ink signing.

With the increasing ubiquity of video conferencing and the FaceTime generation, we have already seen the first case that looked at whether you can validly witness remotely. Witnessing means physically observing the execution, attesting means the further step of recording in the document that you have observed the execution. Electronic signing platforms mean that documents may be opened or viewed on different devices in different locations and the attesting witness must be sure the document they attest is the same as the one they observed being signed. Current law, based on the statutory provisions and public policy concerns, appears to preclude anything other than actual, physical presence. (Interestingly the attestation, and the witnesses signature need not happen contemporaneously and may be added after the event.)

The registration formalities for certain instruments – most significantly HM Land Registry's current insistence on wet ink signatures  - also preclude electronically signed documents, including contracts signed under hand as well as deeds. (Indeed another example of the Land Registry's propensity to go above and beyond, means that while there is no statutory requirement for a witness to add their address when attesting, HMLR nevertheless requires it.)

That being said HMLR is now taking steps to rollout electronic execution of mortgages by individuals under the test conditions of its own pet project.

It's worth pointing out that there are no particular barriers to security documents signed electronically, including deeds, being registered at Companies House (in the case of a corporate security provider). And a security document that purports to create a legal charge over land but which isn't validly executed as a deed may nevertheless create a valid equitable charge.

So, where does that leave us? Well it is undoubtedly a step forward that the Law Commission's Report has endorsed electronic signatures however best practice and deal discipline still needs to evolve to meet the challenges that e-signing brings. Crucially the old rules of execution still apply and must be kept in mind when blazing an electronic trail.

Furthermore, in this short(ish) blog we haven't been able to touch on the many other complicating factors one might yet encounter such as cross-border recognition of e-signatures, encryption technologies, corporate and contractual authority to e-sign and dating documents/automated time-stamps and so on.

In simple terms when considering if it's ok to use an electronic signature on your transaction, the message really is to proceed with caution, guided by your trusted adviser of choice. Invoking the spirit of the Hargreaves family's other creations arriving some 18 years after Mr. Messy's chaotic appearance, think, Little Miss Wise.