In this article, we're going to answer the question "are electronic signatures legally binding in Australia?" The legality of the use of wet ink, original signatures is well settled. However, with the emergence of new technology and the proliferation of e-signatures due to COVID-19, it's important to understand the law surrounding the use of electronic signatures.
This article was originally titled The great Australian puzzle, and was published in the Law Institute Journal of Victoria).
Author: Farrah Motley, Solicitor of the Supreme Court of Queensland, Australia
Businesses implementing uniform commercial agreements across multiple states and territories need to be aware of the difficulties with the enforceability of electronic signatures.
This article explores the challenges faced by Australian businesses that seek to implement electronic signature technology in commercial agreements. We answer the question "are electronic signatures legally binding in Australia"?
Commercial contracts and deeds that use electronic signature technology may not be enforceable in every Australian jurisdiction due to the differing approach of the various legislatures.
Businesses need to appropriately balance legal risk and operational efficiency when implementing a uniform approach to electronic signatures in their commercial agreements.
What is the issue with using electronic signatures?
For businesses that operate across multiple states and territories, navigating the Australian legal landscape can be challenging. Businesses must appropriately balance legal risk with commercial interests, particularly for high-volume and high-risk commercial agreements such as credit applications accompanied by personal guarantees.
This multi-jurisdictional complexity becomes more evident when businesses seek to take advantage of new technology in circumstances where the technology is legally recognised in some, but not all, jurisdictions. The use of electronic signatures in credit applications (a form of contract) and personal guarantees (a form of deed) are good examples of the divergent legal treatment across Australia.
It's nevertheless surprising how few businesses stop and ask the question ""are electronic signatures legally binding in Australia?"
Key commercial agreements
Businesses frequently use credit applications in extending credit to their customers. The credit applications may be supported by a personal guarantee. This seeks to ensure that if the trading entity to which credit has been extended does not pay for the goods or services supplied, the business has recourse against the individual that signed the personal guarantee.
There are important differences between the legal nature of a credit application and a personal guarantee. A credit application is a form of contract signed on behalf of a trading entity, whereas a personal guarantee is a form of deed signed by an individual.
To be legally enforceable, a credit application must feature the key elements of a contract:
an intention to create a legal relationship
On the other hand, a personal guarantee must satisfy the legislative requirements of a deed as set out in the respective state and territory legislation. For example, s45 of the Property Law Act 1974 (Qld) (which is generally consistent with other jurisdictions) provides that a deed must be:
signed by the individual
witnessed by someone who is not a party to the document
expressed to be a deed.
Businesses have traditionally satisfied these legal requirements for both contracts and deeds by appropriately drafting the documents and requiring customers to execute hardcopies. For companies that extend credit to a large number of customers, the volume of paperwork can be difficult to manage, costly and administratively time-consuming.
Technology has rapidly evolved to offer solutions that reduce the administrative burden, improve efficiency and fasten the pace at which business transactions take place. In particular, electronic signatures play an increasingly important role in commercial agreements. However, businesses should exercise caution when relying on electronic signatures, particularly with respect to high-risk commercial agreements.
What is an electronic signature?
Before we can say whether electronic signatures are legally binding in Australia, we need to define what is meant by an electronic signature.
A signature demonstrates a person’s intention to be bound by the terms of the relevant agreement. This is a key element of a both a binding contract and deed. Defining what a signature is has been the subject of great legal debate. In Legal Services Board v Forster, Emerton J accepted an argument that:
“a signature is not necessarily the writing in of a name, but may be any mark which identifies it as the act of the party”.
Progress was made by the various legislatures across Australia with the introduction of the various Federal, State and Territory Electronic Transactions Acts (“Transactions Acts”).
On their face, the Transactions Acts are largely consistent. They all recognise that an electronic signature performs the function of evidencing a person’s intention in relation to a document to the same extent as a traditional handwritten signature. They recognise that an electronic signature meets the necessary requirements provided that:
there was a method used to identify the person and to indicate that person’s intention in respect of the information communicated and the method was either:
as reliable as appropriate for the purpose for which the electronic communication was generated or communicated, in light of all the circumstances, including the relevant agreement; or
proven in fact to have fulfilled the functions above by itself or together with further evidence
and the person to whom the signature is required to be given consents to that method (“Enforceable Signature Rule”).
There are different ways to sign a document electronically. One is to apply an image of the signor’s handwritten signature to a document or even by using an email signature. For instance, in Stellard Pty Ltd & Anor v North Queensland Fuel Pty Ltd a name was typed at the bottom of an email and supplemented by evidence of intention in the trail of emails. This was held to constitute a binding signature for the purposes of the relevant Enforceable Signature Rule.
Another way to sign a document electronically is to “digitally” sign with public key infrastructure. This method involves the use of a cryptography platform, such as Docusign, in verifying the signor’s digital identity. Public key infrastructure works by producing a “public key”, which is a randomly selected set of numbers that encrypts a document, and a “private key”. The private key is also comprised of randomly selected numbers which are then used by the recipient to decrypt a document.
To ensure that the parties can identify one another:
the private key is only made available to the signor
the signor can verify the sender’s identity by confirming with an independent third party “certificate authority” that the public key belongs to the purported sender.
These forms of electronic signature appear to satisfy the Enforceable Signature Rule. In turn, they appear to provide legal validity to electronically signed commercial agreements. But - there are important exceptions. These exceptions apply variably across Australian jurisdictions and may create obstacles for businesses seeking to enforce commercial agreements.
Electronic signatures and contracts
To demonstrate the potential pitfalls of using an electronic signature to sign contracts, I will use the example of a credit application. The purpose of a credit application is to outline the terms under which a business is prepared to extend credit to a customer and ensure that there are appropriate avenues to take recovery action against a delinquent trading entity. Credit applications must be enforceable to carry out this purpose effectively.
Electronic signatures applied to credit applications that are signed by a corporate entity appear to be governed by the Enforceable Signature Rule set out in the Electronic Transactions Act 1999 (Cth) (Cth ETA). This is not so. The Corporations Act 2001 (Cth) (Corporations Act) is expressly excluded from the application of the Enforceable Signature Rule in the Cth ETA. The effect of this exclusion is to bar the party seeking to enforce the contract from relying on the so-called “indoor management rule”, which is available when documents are signed in accordance with s127 of the Corporations Act.
In 2014, the implications of being unable to rely on the indoor management rule was discovered by a vendor who unsuccessfully sought to enforce a $1.5 million contract against the purchaser of property. Only one of the directors of the purchaser executed the purchase contract. It was therefore not signed in accordance with s127 of the Corporations Act and the indoor management rule did not apply. As the purchaser’s constitution did not provide the relevant director with the authority to bind the company, the contract was unenforceable against the purchaser.
Electronic signatures and deeds
Electronic signatures applied to documents signed by individuals are governed by the respective Enforceable Signature Rules in state and territory Transactions Acts. Similarly, state and territory legislation prescribes the formalities required for an enforceable deed signed by an individual.
In Queensland, New South Wales, Western Australia and South Australia (“Exclusionary States”), documents that are required to be witnessed by a person other than the author are expressly excluded from the application of the Enforceable Signature Rule. In each of those four states, it is an essential feature of a deed that they are witnessed by a person other than the author.
Personal guarantees generally accompany a credit application and provide recourse against individuals in addition to or as an alternative to taking recovery action against a delinquent trading entity. They afford an added layer of protection to businesses extending credit to their customers.
Personal guarantees are generally expressed to be deeds – to overcome issues such as a lack of consideration and to avoid the ambit of the unfair contracts legislation – and must therefore be witnessed. That the Exclusionary States discriminate between an electronic signature and a traditional handwritten signature in respect of deeds supports the conservative position that the witnessing element requires the witness to be physically present at the time of signing.
It follows that electronically signed personal guarantees may be unenforceable as deeds in the Exclusionary States. This then begs the question; if the personal guarantee is not enforceable as a deed, is it enforceable at all?
How to avoid the risk that an electronic signature is unenforceable
Until the Transactions Acts in the Exclusionary States are amended so that deeds are caught by the operation of the Enforceable Signature Rule, there are legal risks. These risks are associated with the enforceability of electronic signatures in some commercial agreements. Businesses must either accept the legal risks or take steps to mitigate them. It should be noted that these legal risks might only arise if they are raised as a defence.
The first strategy seeks to reduce legal risk but has the effect of decreasing operational efficiencies. Businesses could implement procedures to ensure that commercial agreements that fall outside the ambit of the Enforceable Signature Rule are executed using handwritten signatures only. Depending on the jurisdictions in which businesses implement their commercial agreements, this may require having a separate process for the Exclusionary States.
The second suggested strategy should be employed with caution until it has been considered by the courts. It seeks to retain the benefit of electronic signing technology and attempts to overcome potential arguments by a debtor that the commercial agreements are not binding on them. It requires drafting the commercial agreements by inserting, for example:
in relation to credit applications, a warranty by the signor of a credit application that they have the authority to bind the trading entity and are acting within the powers conferred on them, for example by the relevant constitution
in relation to personal guarantees, a warranty by the guarantor and any purported witness that the witness was physically present at the time of signing and witnessed the act of applying the electronic signature.
There is also a third option in relation to personal guarantees. Electronic signature technology may be customised so that immediately after the signor has applied their electronic signature, a separate private key is sent to the witness. The witness is then only able to attest to the witnessing element if the private key decrypts the document and the technology is able to verify that the same electronic device used by the signor was also used by the witness.
However, while this process would verify that the witness was physically present, it is unclear whether an electronically signed and witnessed deed of personal guarantee is otherwise enforceable at common law. This is in light of the fact that deeds are excluded from the operation of the legislative Enforceable Signature Rule.
In fact, in the NSW case of Williams Group Australia Pty Ltd v Crocker the Court found that an electronically signed and witnessed deed was invalid on grounds other than the electronic nature of the document and signatures. Instead, the judgment appeared to indicate that, had the purported signor actually applied his signature and a witness verified their physical attestation of the signature, the deed would have been enforceable.
Businesses can take steps to mitigate the legal risks associated with using electronic signature technology to implement commercial agreements in multiple states and territories. However, there appears to be an inverse relationship between legal risk and operational efficiency. Legal professionals should use electronic signature technology with care, particularly in relation to credit applications and personal guarantees. Documents aiming to reduce risk should be comfortably enforceable.
So, the answer to the question "are electronic signatures legally binding in Australia?" is this - in some circumstances. This means that businesses need to take particular care in using electronic signature and seek legal advice where appropriate.
How can we help?
Prosper Law is a commercial law firm. Located in Brisbane and operating online, Prosper Law provides legal services to business right across Australia. Contact our Legal Principal, Farrah, to find out how we can help you with your legal matter.
Want more? Check out another of Prosper Law's publications which answers the question 'What is a Deed?'.
Author: Farrah Motley | Legal Principal
PROSPER LAW - A Law Firm for Businesses
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