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On Target – May 2021

Electronic signatures: 5 pitfalls to avoid

 

Not too long ago (at least the older members of our team like to think so) completions were a distinctly physical affair; rooms full of paper that the signatories would ceremonially parade around, signing where instructed by their lawyer, and swiftly inspected by the counterparty’s lawyer to check all were true “wet ink” originals.

Photocopied or faxed signatures were eyebrow-raisers, accepted only on a solemn promise to come good with originals asap. How times have changed, in particular since the COVID-19 pandemic struck. Not only are completions typically achieved by email, but electronic signatures are fast becoming the norm. However the law, at least in England and Wales, is still lagging behind, and this article outlines some key pitfalls to avoid in your next e-completion.

1. Do you have a simple contract or deed?

An “electronic signature” may take many forms, such as a typewritten signature in an electronic document, an inserted image of a handwritten signature, or a signature inputted on an electronic signature platform. As for any signature, these are only effective if they are identifiable as an indication of the relevant party’s intention to be bound by the document in question.

However English law distinguishes between simple contracts (when in writing, referred to as a contract entered into “under hand”), and deeds. A deed requires additional formality, notably a requirement for the witnessing of signatures (or, in the case of entities, more than one signature) due to the gravity of the transaction being undertaken. English law provides, for example, that transfers of land, powers of attorney and agreements without consideration (i.e. having no tangible benefit to one of the parties) must be executed as deeds. The parties to a contract might also choose to document their agreement as a deed, in order to benefit from a longer limitation (enforceability) period.

Leaving general rules of contract and execution aside (see point 5 below in respect of the latter), simple contracts can be validly concluded using electronic signatures. However in the context of deeds we hit a snag; a deed is validly executed by an individual only if it is signed by them in the presence of a witness who attests the signature.

At present, and despite the relative isolation that COVID-19 lockdowns have caused, English law still requires contemporaneous, physical witnessing. In other words, the witness must be physically present (not over a video call or other electronic means) with the signatory at the point of signing. This remains the case despite some electronic signature platforms suggesting use of “video witnessing”, or allowing a witness to be nominated (and sent a link to attest the relevant signature) without requiring any evidence of physical proximity at the time.

The requirement for physical witnessing – in the context of lockdowns where proximity to non-household members was generally prohibited – also raises the issue of choice of witness. Witnessing serves to identify a person who can provide unbiased evidence that a document was signed, by whom, and in what circumstances (i.e. of free will or otherwise). While family members are not prohibited from witnessing a signature to a deed, it follows that a person who might be considered biased does not make an ideal witness, and other contracting parties might reject the relevant signatures. In the absence of alternatives many lawyers accepted family members as witnesses during lockdown, but we do not expect this practice to continue as the pandemic eases. Note also that, as a matter of law, a party to a deed cannot witness another party’s signature.

2. Have the counterparties agreed the execution process?

If you are proposing to complete using electronic signatures, has that process been agreed with your counterparties?

The nature of your counterparties can be relevant here. Some parties, such as debt finance providers, might require wet-ink originals to meet internal policies, or global standards. Equally, the documents tabled at your completion might, for one or more parties, form part of or support a larger transaction, where due execution is a sensitivity and ‘traditional’ signing methods preferred. We expect such requirements to diminish over time, but for now it remains prudent to enquire.

3. Are governmental or regulatory agencies relevant?

Regardless of the views of the contracting parties, a governmental agency may have a different view. Typically, an M&A transaction will involve, either as a condition precedent to closing or as a post-completion step, making filings or applications to a competition (anti-trust) authority, tax authority, company registry, court or regulator.

Will they accept the electronic signatures you and your counterparties envisage? If not, who loses out? It could be that the legal priority of a security interest is prejudiced if the filing is rejected, or a deadline missed or fine levied.

4. What other jurisdictions are involved?

In a cross-border matter, it is worth considering whether other jurisdictions will recognise your intended method of electronic signing. In particular, would an overseas court or registry require certified or notarised and apostilled copies, and is your lawyer/notary willing and able to provide such copies based on electronic signatures?

If the parties are proposing any mixture of methods (e.g. different signing platforms, or a combination of wet ink and electronic signatures) this can raise the risk of a third party objecting to the documents presented to them.

5. Does your preferred execution method comply with the English “Mercury” rules on document execution?

This is particularly relevant if your electronic signing process includes the use of typewritten signatures, inserted images or submission of an incomplete document through an electronic signing platform.

The options available for generating a signed document can be summarised as follows:

(i) signing the document “complete” – i.e. (if using a signing platform) submitting the entire document and automatically generating a complete signed copy or (in all other cases) returning (e.g. by email) the entire document and the signed signature page,
(ii) generating/returning by email only the signed signature page; or
(iii) creating a pre-signed signature page in advance of finalising the document.

Following a 2008 court case known as the “Mercury” case, deeds must always be returned using option (i) above, and while simple contracts may be enforceable if executed using any of those three options, best practice is to follow option (i) in all cases. Failure to ensure your e-completion adheres to the Mercury execution rules could render the relevant document unenforceable.


Is this brief too brief? Expert legal advice is on hand from MJ Hudson’s corporate and M&A. Just contact any of the On Target team (details below), and we’ll gladly help.