16/05/2019
In the 21st century, time is increasingly precious, budgets are tight and environmental sustainability is at the forefront of people’s minds. This has resulted in an increasing culture of ‘paper lite’ and the virtual signing and closing of documents.
In this article we explore the validity of electronic signatures and how virtual closings work in practice.
No Pen Required?
In broad terms, English law lays down very few formalities for contracts. The general rule is that parties have the freedom to contract as they wish and, whilst it is of course best practice for contracts to be recorded in writing, can even do so orally.
Where parties have taken the pragmatic step of recording the agreed terms in a simple contract, those contracts are capable of being signed electronically. This can apply even where statute requires that the contract be “in writing” or “signed”.
By way of example, pursuant to section 4 of the Statute of Frauds 1677, guarantees must be in writing and signed by the guarantor, or a person authorised by the guarantor, in order to be legally enforceable. The Court confirmed in the case of J Pereira Fernandes SA v Mehta [2006] EWHC 813 (Ch) that this requirement can be satisfied if the guarantor types his/ her name into an email containing the essential terms of the offer of the personal guarantee. The Court stated in that case:
“I have no doubt that if a party creates and sends an electronically created document then he will be treated as having signed it to the same extent that he would in law be treated as having signed a hard copy of the same document.”
Similarly, in Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd and another [2012], the Court of Appeal accepted that, although one party had requested a guarantee in writing be provided, the negotiating emails (which had not been marked “subject to contract”) were capable of forming a legally binding guarantee – the person putting his name to the emails clearly took responsibility for their contents, and this was enough to constitute a signature for the purpose of the 1677 Act.
The flexibility of English contract law means that the test for what constitutes a signature is not a high threshold: the Court will simply consider whether the mark which has been inserted has been done so in order to give, and with the intention of giving, authenticity to it (Caton v Caton [1867]). As the Courts have found that a typed signature (Newbourne v Sensolid (Great Britain) Ltd [1954]) and a signature made by a rubber stamp (Bennett v Brumfitt [1867-68]) constitute valid signatures it has perhaps no surprise that a similar flexibility is applied to electronic signatures.
The position is more complex for documents which must be witnessed. For example, deeds must be signed by an individual in the presence of a witness who attests the signature pursuant to section 1(3)(a) of the Law of Property (Miscellaneous Provisions) Act 1989.
In its consultation paper No 237 published on 21 August 2018, the Law Commission’s view was that, whilst these requirements are capable of being satisfied by electronic means where the witness is physically present in the same location as the signatory, the same location would be required rather than, say, witnessing through a video conferencing facility.
Execution
A guidance note by the joint working party of the Law Society Company Law Committee and the Company Law and Financial Law Committees of the City of London Society (CCLS Note) suggests three options for dealing with the execution of deeds and documents in a commercial context as part of a virtual closing:
Option 1: PDF/Word document signed by each party (for deeds, real estate contracts, guarantees and simple contracts) - each absent signatory prints and signs the signature page then returns a single email to their lawyer to which is attached (a) the final version of the document (PDF or Word) and (b) a PDF copy of the signed signature page, making it clear which document the signature page relates to. At or shortly after signing, a final version of the document together with copies of the executed signature pages can be circulated by one of the instructed lawyers to evidence execution of the final document;
Option 2: print off and sign signature page from the final document (for guarantees (not executed as deeds) and simple contracts) - each party may email the signed signature page with authority to attach it to the final approved version of the document but do not need to return the final version of the contract as an attachment as the signature page will suffice;
Option 3: pre-signed signature pages collected before documents are finalised (alternative for guarantees (not executed as deeds) and simple contracts) – the signature page is executed by each of the signatories and returned by email to the relevant lawyers or co-ordinating law firm to be held to order of the signatory or his lawyers until authority is given for it to be attached to the document to be signed.
The above options are however non-exhaustive and each transaction should be approached on its own facts.
So…a virtual future?
The CLLS Note provides a list of non-exhaustive ways in which virtual closings can take place which provides a useful steer. There may of course be other methods which work in your particular circumstances so each transaction should be approached according to its own facts. Any method adopted should be agreed in advance with the other party(ies) and documented to minimise the risk of future argument as to whether the virtual signing and closing is effective and binding on the parties.
It is important to bear in mind when considering the validity of an electronic signature and/or whether virtual closing is lawful, the court would always look at the individual circumstances before adjudging if a particular document is validly executed.
