April 1, 2020

Covid-19 Australia: When can electronic signatures be used for corporate contracts?

To address the spread of Coronavirus (Covid-19), governments and corporates are increasingly ordering corporate staff to work from home. Given this, it has become increasingly important to consider how to execute contracts in circumstances where staff are separated by location and resources, and whether it is appropriate and possible to legally execute documents by electronic signature.

Simple contracts

In Australia, there are five essential elements necessary for formation of legally binding contracts, namely

  • agreement between the parties - which is established by a clear indication by one party of a willingness to be bound on certain terms and a communication by the other party to the offeror of an unqualified assent to that offer;
  • consideration – which can include money, a thing, or a promise to undertake or not undertake a particular act. The Courts will not generally determine whether there is adequate value to the consideration[1];
  • capacity – which is a question as to whether the party is of sound mind, legal age, or, in the case of a person executing on behalf of a corporation, has the authority to act on behalf of the corporation;
  • an intention to create legal relations; and
  • certainty – which requires the contract to be sufficiently certain and complete so that the parties’ obligations and rights can be ascertained and enforced.

Provided that the above requirements are met, the general position with contracts in Australia is that contracts do not need to be reduced to or represented in writing to be enforceable and accordingly the above principles apply equally to electronic contracts.

Electronic transactions are governed, amongst others, by the Electronic Transactions Act 1999 (Cth) (Commonwealth ETA) and relevant State statutes[2]. The relevant statute in New South Wales is the Electronic Transaction Act 2000 (NSW) (ETA) and this expressly provides that a transaction is not invalid because it took place wholly or partly by means of one or more electronic communications[3].

The ETA further provides that a requirement for writing is in most instances satisfied by electronic communication, provided that:

  • it readily accessible so as to be useable for subsequent reference; and
  • the counterparty consents to the information being given by means of electronic communication.

Further, where the law or the parties require that the contract is signed electronically, the ETA requires that, having regard to all of the circumstances of the transaction, the method of signing must be as reliable as is appropriate for the purpose for which the electronic document was generated. 

In the absence of any specific legal requirement for writing, usually arising under statute, Australian law does not prescribe that contracts must be in any particular form. Accordingly, such contracts can be entered into electronically and can include the parties affixing their signatures by way of electronic signature.

Given, however, that there is an expected increase in fraud arising during the Covid-19 period[4], we would urge a cautious approach when making use of electronic communication and signatures in entering into corporate contracts. Because the circumstances will necessitate parties entering into contracts without necessarily having face to face contact, there needs to be increased scrutiny when entering into contracts to ensure that the correct person has affixed their electronic signature.

Questions as to the identity and intention of a person to enter into a contract has arisen in Australian the Courts previously. In Williams Group Pty Ltd v Crocker[5] the Court had to consider the validity of electronic signatures where the signing party disputed that he placed his electronic signatures, despite the signatures having been inserted using an electronic, password protected, system that enabled users to sign documents electronically. 

In the above case, the relevant party had not changed the password to the electronic system he utilised to execute documents electronically and he successfully argued that he had not authorised the placing of his signature on the relevant documents, and accordingly that an unauthorised person must have done so. The Court required evidence to establish that the relevant party had either affixed the signature or authorised the affixing of the signature, which was not presented in that case.

Given the risk highlighted in the above case, it is important to consider additional precautions which can be taken to ensure a counterparty to a contract which is executing electronically is held to the terms, including measures such as confirmation by email and by phone, or additional pre-contractual representations or provisions in the contract itself in terms of which the counterparty represents that no other person has been authorised or has access to the facilities to apply their e-signature.

Deeds

At common law, for an instrument to be a deed, the parties must comply with certain formalities, namely[6]:

  • the deed must be in writing on parchment, vellum or paper;
  • a personal seal must be placed on the document; and
  • it must be delivered to the counterparty.

In Australia, the States have generally enacted statutes which have amended the common law requirements for deeds. In New South Wales, section 38(1) of the Conveyancing Act 1919 (NSW) provides that:

Every deed, whether or not affecting property, shall be signed as well as sealed, and shall be attested by at least one witness not being a party to the deed, but no particular form of words shall be requisite for the attestation.

Accordingly, in New South Wales, provided that a deed has been signed and witnessed by a person who is not a party to the deed, there is no requirement that it be sealed.

Further, delivery is effected by evidencing clear intention to be bound by the instrument operating as a deed, which is generally accomplished by having the execution clause of a deed begin with words such as “executed as a deed”.

Given the common law requirement that a deed be written on paper, parchment or velum, a deed subject to this requirement is likely to be required to be reduced to physical writing and executed by the parties on such physical document. However, in November 2018, New South Wales introduced amendments to the Conveyancing Act 1919 (NSW) (Conveyancing Act) and Real Property Act 1900 (NSW) which includes provisions that:

  • deeds can be created and exist in electronic form, and can be electronically signed and attested in accordance with Part 3 of the Conveyancing Act[7]; and
  • the Conveyancing Act applies to contracts or deeds in electronic form in the same way as it applies to all contracts or deeds[8].

Even the above amendments introduced in New South Wales do not resolve some practical issues which arise in electronic signatures of deeds, especially in the circumstances which we find ourselves in as a consequence of Covid-19. Some specific problems which arise are as follows:

            Attestation

Generally, in Australia, whether a witness can sign electronically is a matter of debate and the matter has not been tested in the Courts as of yet.

The abovementioned amendments to the New South Wales Conveyancing Act expressly allow for the electronic attestation of deeds but even then does not suggest that this can be accomplished remotely. Accordingly, unless executed in accordance with section 127 of the Corporations Act 2001 (Cth) (Corporations Act), the signature of the party to the deed must be witnessed by a person who is not a party to the deed, and that witness must be physically present to see the relevant party’s e-signing and actually apply their own electronic signature to the electronic version of the deed at the same time. 

For corporations, it will need to be considered whether practically, if a person authorised to execute a deed on behalf of a company (for example, under a power of attorney) is isolated or subject to restrictions imposed as a consequence of Covid-19, that person will be in a position to execute electronically and, if so, whether an appropriate witness will be present to attest to the signature electronically.

            Execution in accordance with section 127

In accordance with section 127 of the Corporations Act, a company may execute a document without using a common seal if the document is signed by:

  1. 2 directors of the company; or
  2. a director and a company secretary of the company; or
  3. for a proprietary company that has a sole director who is also the sole company secretary — that director.

In the event that a corporation executes a deed in accordance with section 127(1), the counterparty is entitled to rely on specific presumptions arising under section 129, including that the document has been duly and validly executed if the same appear to have been executed in accordance with section 127(1). Consequently, parties generally require corporations to execute deeds in this manner.

There has, for several years, been a debate as to whether section 127(1) would permit the directors to execute electronically. The general view is that, as the Commonwealth ETA expressly excludes the Corporations Act from its ambit, a corporation cannot execute an electronic document (and therefore the relevant signatories cannot execute electronically) if it does so in accordance with section 127(1) of the Corporations Act.

The above was recently considered by the South Australian Supreme Court[9], which held as follows:

Given that s 127(1) contemplates a document being executed by two officers signing it, there is good reason to consider there must be a single, static document rather than a situation where two electronic signatures are sequentially applied to an electronic document. As Seddon has noted, it is insufficient that two signatures appear on different counterparts or copies of the same document because no one counterpart or copy would be properly executed by the company under s 127(1).

As a consequence of the above, when executing a deed under section 127(1) of the Corporations Act, the directors and/or director and company secretary will have to sign a physical document.

Practically, parties can exchange scanned electronic copies of the deed executed with an undertaking to exchange physical original copies at a later date, but this does give rise to additional risk should this not happen.

Split execution

Given the above requirement that, in the event that a corporation is executing a deed in accordance with section 127(1) of the Corporations Act, the document must be physically signed by the relevant persons on behalf  of the corporation, a further question that arises is whether the two directors or the director and the company secretary must execute the same physical document.

Judicial clarity is scarce in relation to the question of split execution and the general approach is the cautious one; namely that it is the same document which is to be executed.

In considering whether this should be a physical document, the Court in Re CCI Holdings[10], noted that “it can see no reason why that should be, so long as the two counterparts are treated as a single instrument and that instrument is delivered…”. However, as noted above, the Court in Bendigo and Adelaide Bank Limited (ACN 068 049 178) & Ors v Kenneth Ross Pickard & Anor[11] remarked that “there is good reason to consider there must be a single, static document…”

As a consequence of the circumstances created by Convid-19, parties may find that if they are to execute in accordance with section 127(1) of the Corporations Act, they will not practically be able to do so on the same document. Despite the uncertainty as to how the Court will adjudicate on the matter if so required, the parties may need in the current circumstances expressly agree that this will be executed by the relevant persons in counterparts, so as to reduce any potential risk that the counterparty may take issue with this at a later date.

Corporates will need to revisit their execution protocols to ensure that the authority has been appropriately vested to parties who are practically able to execute contracts on its behalf, that the protocols in place will give rise to enforceable contracts, and that the processes in place during the pandemic period ensure that when executing in accordance with section 127(1) of the Corporations Act, the corporate is best placed to enforce the contracts it has, at least purportedly, entered into.


[1] Woolworths Ltd v Kelly (1991) 22 NSWLR 189

[2] See for example the Electronic Transactions Act 2000 (Victoria), the Electronic Transactions Act 2000 (Tas), the Electronic Transactions Act 2011 (WA) and the Electronic Communications Act 2000 (SA)

[3] Section 7(1)

[4] See, for example, https://www.theguardian.com/money/2020/mar/29/coronavirus-social-disease-fraudsters-adapt-old-scams and https://www.ic3.gov/media/2020/200320.aspx

[5] [2016] NSWCA 265

[6] See, amongst others, Scook v Premier Building Solutions Pty Ltd [2003] WASCA 26

[7] Section 38

[8] Section 6C

[9] Bendigo and Adelaide Bank Limited (ACN 068 049 178) & Ors v Kenneth Ross Pickard & Anor [2019] SASC 123

[10] [2007] FCA 1823

[11] [2019] SASC 123