Electronic-signatures – elegant solution or operational risk?

Understanding the legal implications and risks of e-signatures 

The legal industry has proved resilient and innovative in the light of COVID-19. Any stigma associated with remote working has long since been consigned to history. However, one fly in the ointment can be getting documents signed and/or witnessed, which has drawn light on electronic signatures. E-signatures can, when used appropriately, provide a simple and elegant solution to an issue that has been exacerbated by COVID (but which will continue to be an issue in the post-COVID world). E-signature vendors are COVID winners in much the same way that Deliveroo and Netflix are. 

However, while an effective solution, e-signatures – if not implemented appropriately – do carry risk. Jason Pugh, Managing Director, D2 Legal Technology (D2LT), explores what e-signatures mean, how they work and the prudent steps an organisation should take to ensure they achieve their desired objectives, not only today but laying the foundation for a better, automated contract management workflow.

Contractual Evolution 

“Offer”; “acceptance”; “consideration”; and “intention to contract” are the fundamental tenets of a contract under English law and providing they exist, users can be flexible in how they contract with one another. This approach ensures that there is room for legal evolution, including technological innovation.

Within the capital markets arena, the mechanism of trading has itself evolved from a manual process involving frequent human interactions documented through paper, to trading platforms where processes are evidenced electronically.

The next logical step in this evolution has been to digitise the execution of master trading agreements – which are still often subject to the more archaic practice of wet ink signing – by adopting an e-signature solution or platform.

Introducing the electronic signature

An e-signature is a digital medium used to represent a signature. While not themselves new, as a result of COVID-19, we have seen significant increased adoption of this technology across the market. However, like all new technology and processes, it does not come without a health warning.

It is worth clarifying at this stage that, whilst they sound similar, e-signatures are not the same as digital signatures. E-signatures are a legal concept; a lasting representation and capture of intent. Digital signatures, on the other hand, deploy encryption technology that underlies the e-signature, working with not as it.

This nuance is also reflected in the different types of e-signatures organisations can deploy, which can vary materially and lead to both challenges and opportunities.

Practical Issues to consider

While the use of e-signatures can offer parties flexibility and efficiency in executing a document, getting it wrong can expose an organisation to material risk.

Market participants should consider the following issues prior to using e-signatures:

1. Capacity/Authority – Does a signatory/party have the capacity and authority to electronically execute a document? If not, what are the potential ramifications of a lack of capacity (i.e. who can take legal action against who and how does that directly or indirectly impact an agreement)? It should be confirmed that board resolutions or other constitutional documents do not exclude the use of e-signatures.

1. Agreement to use e-signatures – Does the agreement prohibit electronic execution? The terms of a contract should be reviewed to confirm whether parties have consented to the use of e-signatures.

1. Governing law and jurisdiction – Are e-signatures legal and enforceable under the governing law and jurisdiction clauses of the agreement? Some courts may not accept e-signed documents as admissible evidence.

1. Agreement type – Can the agreement type (e.g. deeds, guarantees, loan agreements) be e-signed? Some agreement types may be subject to other formalities.

1. E-signature type – Which e-signature type is required for the agreement? There are generally three groups of e-signatures: Simple, Advanced and Qualified (as defined below).

1. Storage and record keeping – Are there specific legal provisions for digital archiving and storage of electronic agreements?

1. Filing requirements – Can the e-signed agreement be registered or filed with local registries (e.g. Land Registry)? There could be rules requiring hard copies and wet ink signatures of a document to ensure proprietary and other interests are protected.

1. Cross-border implications – Does the e-signed agreement have any nexus with another jurisdiction (e.g. domicile of the party or whether the enforcement is envisaged in another jurisdiction)? The legal effect of e-signatures varies from country to country.

Types of e-signature 

Within the UK and Europe, the legal framework for e-signatures was set out at an EU level by Regulation (EU) No 910/2014 (the “eIDAS Regulation”). On a domestic level, the equivalent regulation is the Electronic Identification and Trust Services for Electronic Transactions Regulation 2016 (2016 No.696). Additionally, the Electronic Identification and Trust Services for Electronic Transactions (Amendment etc.) (EU Exit) Regulations 2019) (the “UK eIDAS Regulation”) have transposed the remaining parts of the eIDAS Regulation into UK law post-Brexit.

Broadly, e-signatures can be divided into three groups:

1. Simple e-signatures – this would include a scanned signature, tick box declarations or an electronic representation of a handwritten signature.
2. Advanced e-signatures – these are uniquely linked to the signatory and are capable of identifying the signatory with data linked to the signature. The data linked with the signature would be able to capture any changes made. Examples of this would include a signature accompanied by a date stamp which cannot be altered.
3. Qualified e-signatures* – these are advanced e-signatures which meet certain legislative requirements. They are created by a qualified e-signature creation device and based on a qualified digital certificate for e-signature, e.g. the digital signature.

English law is flexible and even a simple e-signature is valid, legal and binding (excluding certain filings with HMRC or the Land Registry). Furthermore, section 7 of the Electronic Communications Act (ECA) 2000 provides a statutory recognition and framework of admissibility for all varieties of e-signature, which has been supported by the creation of the UK eIDAS Regulation to provide a framework post-Brexit.

Therefore, the key difference between the three types of e-signature is evidential weight. Only qualified e-signatures are given the equivalent weight of a wet ink signature under the eIDAS Regulation and UK eIDAS Regulation. An advanced e-signature may lack the formal ‘Qualified Certificate’, but it is still immutable by definition and is capable of being tied to the signatory. Use of a simple e-signature clearly satisfies the reasoning behind signing a document as it is done for the purpose of authenticating the document (see Green (Liquidator of Stealth Construction Ltd) v. Ireland).

Consequently, the choice of e-signatures in a commercial environment is premised on the party’s appetite for risk. If the documents are linked to high-value transactions or where there is more opportunity for contention between the parties, using an Advanced or Qualified e-signature should be recommended. Use of these types of e-signatures will provide an English court with additional comfort of the parties’ intentions and that any documents were validly executed. Additionally, from an internal controls perspective, they allow the signing institution to more easily comply with any internal governance and reduce any administrative errors by handling document execution in a controlled framework.

Consequently, where parties intend to use simple e-signatures due to their ease, it should be recommended that detailed audit trails should be kept, mitigating their lack of evidential weight if they were ever challenged in litigation. For institutions with a duty to ensure that they can demonstrate that the contracts they have entered into have been duly executed by their counterparties and are therefore enforceable, the better choice to reduce these risks and concerns would be to use either an advanced or qualified e-signature.

Future 

Incorporating e-signatures into the document negotiation workflow is an important step for organisations to take in this new operating environment. Indeed, the early adoption of e-signatures in an organisation could facilitate implementation of other legal technology. In adopting an e-signature platform, organisations will be able to integrate their execution process into their contract lifecycle management. The ultimate goals for most legal departments are 1) a front-to-back document negotiation platform; and 2) a legal data repository which allows them to understand the content of their contracts at a glance, as well as understanding the general profile of their document universe. Deploying e-signatures aids in moving towards these goals, as it will ensure that the documents will always be machine readable, without the need for expensive and often unreliable OCR software. However, organisations need to ensure the right type of e-signature and the right governing law, in order to mitigate exposing the business to operational and legal risk.

So, whilst COVID may have proved to be a catalyst to adopting robust e-signature platforms and facilitating hybrid working, this may just be the tipping point that facilitates legal departments in moving towards a better, automated contract management workflow from start to finish. The time to act is now.

Understanding the legal implications and risks of e-signatures 

The legal industry has proved resilient and innovative in the light of COVID-19. Any stigma associated with remote working has long since been consigned to history. However, one fly in the ointment can be getting documents signed and/or witnessed, which has drawn light on electronic signatures. E-signatures can, when used appropriately, provide a simple and elegant solution to an issue that has been exacerbated by COVID (but which will continue to be an issue in the post-COVID world). E-signature vendors are COVID winners in much the same way that Deliveroo and Netflix are. 

However, while an effective solution, e-signatures – if not implemented appropriately – do carry risk. Jason Pugh, Managing Director, D2 Legal Technology (D2LT), explores what e-signatures mean, how they work and the prudent steps an organisation should take to ensure they achieve their desired objectives, not only today but laying the foundation for a better, automated contract management workflow.

Contractual Evolution 

“Offer”; “acceptance”; “consideration”; and “intention to contract” are the fundamental tenets of a contract under English law and providing they exist, users can be flexible in how they contract with one another. This approach ensures that there is room for legal evolution, including technological innovation.

Within the capital markets arena, the mechanism of trading has itself evolved from a manual process involving frequent human interactions documented through paper, to trading platforms where processes are evidenced electronically.

The next logical step in this evolution has been to digitise the execution of master trading agreements – which are still often subject to the more archaic practice of wet ink signing – by adopting an e-signature solution or platform.

Introducing the electronic signature

An e-signature is a digital medium used to represent a signature. While not themselves new, as a result of COVID-19, we have seen significant increased adoption of this technology across the market. However, like all new technology and processes, it does not come without a health warning.

It is worth clarifying at this stage that, whilst they sound similar, e-signatures are not the same as digital signatures. E-signatures are a legal concept; a lasting representation and capture of intent. Digital signatures, on the other hand, deploy encryption technology that underlies the e-signature, working with not as it.

This nuance is also reflected in the different types of e-signatures organisations can deploy, which can vary materially and lead to both challenges and opportunities.

Practical Issues to consider

While the use of e-signatures can offer parties flexibility and efficiency in executing a document, getting it wrong can expose an organisation to material risk.

Market participants should consider the following issues prior to using e-signatures:

1. Capacity/Authority – Does a signatory/party have the capacity and authority to electronically execute a document? If not, what are the potential ramifications of a lack of capacity (i.e. who can take legal action against who and how does that directly or indirectly impact an agreement)? It should be confirmed that board resolutions or other constitutional documents do not exclude the use of e-signatures.

1. Agreement to use e-signatures – Does the agreement prohibit electronic execution? The terms of a contract should be reviewed to confirm whether parties have consented to the use of e-signatures.

1. Governing law and jurisdiction – Are e-signatures legal and enforceable under the governing law and jurisdiction clauses of the agreement? Some courts may not accept e-signed documents as admissible evidence.

1. Agreement type – Can the agreement type (e.g. deeds, guarantees, loan agreements) be e-signed? Some agreement types may be subject to other formalities.

1. E-signature type – Which e-signature type is required for the agreement? There are generally three groups of e-signatures: Simple, Advanced and Qualified (as defined below).

1. Storage and record keeping – Are there specific legal provisions for digital archiving and storage of electronic agreements?

1. Filing requirements – Can the e-signed agreement be registered or filed with local registries (e.g. Land Registry)? There could be rules requiring hard copies and wet ink signatures of a document to ensure proprietary and other interests are protected.

1. Cross-border implications – Does the e-signed agreement have any nexus with another jurisdiction (e.g. domicile of the party or whether the enforcement is envisaged in another jurisdiction)? The legal effect of e-signatures varies from country to country.

Types of e-signature 

Within the UK and Europe, the legal framework for e-signatures was set out at an EU level by Regulation (EU) No 910/2014 (the “eIDAS Regulation”). On a domestic level, the equivalent regulation is the Electronic Identification and Trust Services for Electronic Transactions Regulation 2016 (2016 No.696). Additionally, the Electronic Identification and Trust Services for Electronic Transactions (Amendment etc.) (EU Exit) Regulations 2019) (the “UK eIDAS Regulation”) have transposed the remaining parts of the eIDAS Regulation into UK law post-Brexit.

Broadly, e-signatures can be divided into three groups:

1. Simple e-signatures – this would include a scanned signature, tick box declarations or an electronic representation of a handwritten signature.
2. Advanced e-signatures – these are uniquely linked to the signatory and are capable of identifying the signatory with data linked to the signature. The data linked with the signature would be able to capture any changes made. Examples of this would include a signature accompanied by a date stamp which cannot be altered.
3. Qualified e-signatures* – these are advanced e-signatures which meet certain legislative requirements. They are created by a qualified e-signature creation device and based on a qualified digital certificate for e-signature, e.g. the digital signature.

English law is flexible and even a simple e-signature is valid, legal and binding (excluding certain filings with HMRC or the Land Registry). Furthermore, section 7 of the Electronic Communications Act (ECA) 2000 provides a statutory recognition and framework of admissibility for all varieties of e-signature, which has been supported by the creation of the UK eIDAS Regulation to provide a framework post-Brexit.

Therefore, the key difference between the three types of e-signature is evidential weight. Only qualified e-signatures are given the equivalent weight of a wet ink signature under the eIDAS Regulation and UK eIDAS Regulation. An advanced e-signature may lack the formal ‘Qualified Certificate’, but it is still immutable by definition and is capable of being tied to the signatory. Use of a simple e-signature clearly satisfies the reasoning behind signing a document as it is done for the purpose of authenticating the document (see Green (Liquidator of Stealth Construction Ltd) v. Ireland).

Consequently, the choice of e-signatures in a commercial environment is premised on the party’s appetite for risk. If the documents are linked to high-value transactions or where there is more opportunity for contention between the parties, using an Advanced or Qualified e-signature should be recommended. Use of these types of e-signatures will provide an English court with additional comfort of the parties’ intentions and that any documents were validly executed. Additionally, from an internal controls perspective, they allow the signing institution to more easily comply with any internal governance and reduce any administrative errors by handling document execution in a controlled framework.

Consequently, where parties intend to use simple e-signatures due to their ease, it should be recommended that detailed audit trails should be kept, mitigating their lack of evidential weight if they were ever challenged in litigation. For institutions with a duty to ensure that they can demonstrate that the contracts they have entered into have been duly executed by their counterparties and are therefore enforceable, the better choice to reduce these risks and concerns would be to use either an advanced or qualified e-signature.

Future 

Incorporating e-signatures into the document negotiation workflow is an important step for organisations to take in this new operating environment. Indeed, the early adoption of e-signatures in an organisation could facilitate implementation of other legal technology. In adopting an e-signature platform, organisations will be able to integrate their execution process into their contract lifecycle management. The ultimate goals for most legal departments are 1) a front-to-back document negotiation platform; and 2) a legal data repository which allows them to understand the content of their contracts at a glance, as well as understanding the general profile of their document universe. Deploying e-signatures aids in moving towards these goals, as it will ensure that the documents will always be machine readable, without the need for expensive and often unreliable OCR software. However, organisations need to ensure the right type of e-signature and the right governing law, in order to mitigate exposing the business to operational and legal risk.

So, whilst COVID may have proved to be a catalyst to adopting robust e-signature platforms and facilitating hybrid working, this may just be the tipping point that facilitates legal departments in moving towards a better, automated contract management workflow from start to finish. The time to act is now.