This article was written by Helena Busljeta.
In the wake of the coronavirus, many businesses are now having employees work from home. This raises the question of how contracts can be signed when signatories may be working remotely and may not be able to print documents.
This alert sets out high level guidance on electronic contracts and electronic execution. The position is summarised below.
An agreement can be in electronic form and executed electronically.
A deed must be in paper form and signed in wet ink. The only exception is if the Conveyancing Act 1919 (NSW) (”NSW Conveyancing Act”) applies. In that case, a deed can be in electronic form and signed electronically by an individual (including an individual attorney signing for a company).
Section 127 of the Corporations Act and electronic documents
A company cannot validly execute a document electronically under s127 of the Corporations Act 2001 (Cth) (“Corporations Act”). If the document is an agreement, a purported s127 execution may still be valid at common law but the counterparty will not be able to rely on the statutory assumptions as to due execution. The counterparty will need to make enquiries if it wants to satisfy itself on these matters.
Section 127 of the Corporations Act and printed documents
If a document can be printed, companies may seek to execute the document under s127 of the Corporations Act using split execution or modified split execution.
- Split execution is where the officers of a company wet-ink sign different copies of the document. This may not satisfy the requirements of s127.
- Modified split execution is where an officer of the company wet-ink signs the document and then faxes or emails a PDF copy of it to the other officer at a different location, and the second officer then prints and wet-ink signs that faxed or PDF copy. This satisfies the requirements of s127 provided that the first officer personally intended the signature on the print-out to be treated as their signature.
Witnessing and attestation
If a document must be witnessed, the witness must be physically present but the witness can electronically sign the document.
The law on electronic contracts
Unfortunately, the law and market practice in the area of electronic contracts and electronic signatures is complex and evolving. Various arguments can be made that a deed can be in electronic form and signed electronically, and that both an agreement and deed in electronic form and signed electronically satisfy s127 of the Corporations Act. Views among firms may vary because the arguments raise issues on which reasonable minds may differ. However, in the absence of an authoritative decision, the position is unclear and a conservative approach should be taken to minimise risk. If a counterparty wants to be certain that a deed has been validly executed, and that s127 has been satisfied, a paper document should be signed with wet-ink signatures (or via modified split execution).
If a document is not properly signed it might not be binding on the parties. This can result in one or more parties suffering loss.
The following are some practical tips on how to deal with some of the uncertainties raised by electronic execution.
- Obtain evidence of actual authority. Where there is a risk that s127 may not be satisfied, the counterparty should ensure that the ASIC records and identities of directors and secretaries are properly checked and board minutes, powers of attorney and corporate constitutions are reviewed to ensure there are no limits to execution, and ideally find specific authorisation for the relevant signatories to sign the relevant document.
In banking and finance transactions, lawyers acting for a financier and giving an opinion that a borrower or guarantor has duly executed the documents, may require evidence of actual authority of the borrower or guarantor or qualify the legal opinion.
- Obtain evidence that the signatory has authorised the application of their electronic signature.Courts have held that an electronic signature may be invalid if it is applied by someone other than the signatory (for example, another person in their office or who has access to their email) without the knowledge of the signatory. If this is a concern (for example, if there is no attesting witness) it may be prudent to have the signatory confirm that they either personally applied their signature or that it was applied by someone else with their authority.
- Do not use a deed unless absolutely necessary. You should consider whether a deed is necessary having regard to the following:
- Certain dealings with land and leases of land are required to be in the form of a deed. These differ slightly in each state and territory.
- Deeds are valid without consideration, unlike agreements which require the counterparty to provide consideration in return for any promise on which it relies.
- The limitation period for enforcing rights under a deed is longer under a deed than under a non-deed. Deeds have a longer statute of limitations of 15 years in Vic and 12 years in the other states and territories. Mere agreements have a statute of limitations of 6 years.
- Deeds can (depending on their terms) be binding on a party immediately on signing and delivery even if other parties do not sign. However, where this is a concern to a counterparty this can be dealt with in the provisions of the document.
- Security documents in the form of deeds have some additional implied remedies – for example the right to appoint a receiver. In the case of banking security documents, these usually have detailed remedy provisions, and can also take advantage of the remedies under the Personal Property Securities Act 2009(Cth). Accordingly, this should not be a concern.
- A security document usually contains a power of attorney clause under which the grantor appoints the secured party its attorney. An attorney who needs to sign deeds must be appointed attorney by a deed.
- Some special documents do need to be in the form of deeds particularly when there is no consideration given. Deeds poll, priority deeds, subordination deeds, tripartite deeds, and security trust and other trust deeds can all fall into this category. Past consideration cannot be relied on, and so amending deeds and variation deeds may be problematic if there is no present consideration. For example, if an agreement is amended, or if a new group company joins as guarantor, and there is no outstanding default, and no new commitment being given by the financier, then there may in fact be no consideration for the new promises, and so deed technicalities may be more important.
It is worth noting that if a document is expressed to be a deed but does not take effect as a deed because of electronic execution, the document may take effect as an agreement if consideration has been provided. However, there is a risk in relying on the purported deed taking effect as an agreement as this may not occur automatically and the document may not have the intended effect.
- Companies should consider appointing attorneys now. Companies should consider appointing attorneys now while signatories are still able to print and execute for the company under 127 of the Corporations Act. This means that attorney can then electronically execute agreements on behalf of the company.
Also, if the attorney is appointed by a deed, and the NSW Conveyancing Act applies, an attorney who is an individual will be able to electronically execute deeds electronically in NSW in accordance with the NSW Conveyancing Act. The NSW Conveyancing Act applies to contracts governed by NSW law so ensuring that the power of attorney is governed by NSW law will enable the attorney to take advantage of the NSW Conveyancing Act.
It may also be possible for individual attorneys appointed under an existing NSW law governed general power of attorney which is in the form of a deed to sign deeds electronically under the NSW Conveyancing Act.
This alert does not consider:
- remote or virtual signings where signatories in different locations wet-ink sign printed counterparts of a document and electronically exchange scanned copies;
- electronic conveyancing of land or registration of land mortgages and other dealings with land over the counter or through the electronic platform Property Exchange Limited (“PEXA”);
- any requirements under the National Credit Code or the Banking Code of Practice that may affect electronic documents or electronic signatures;
- execution of deeds by foreign corporations;
- smart contracts which are self-executing contracts with the terms of the agreement being directly written into lines of computer code;
- processes around electronic documents and signatures including processes to reduce security and fraud risk and retain records of signed documents.
Please contact us if you have any questions or would like to discuss.