We all know that technology is advancing at a rapid pace.  The way we contact and interact with one another today would be unrecognisable to anyone who conducted the same tasks twenty years ago.  More and more, people are looking for faster and more efficient ways to do business – for ways to close the gap between contacts on the other side of the world. The business we do across borders is also affected: mergers and takeovers, foreign property investments, IT contracting and mining development deals (to list a few) are all regularly negotiated and solidified through electronic communications.

This leads to the interest in electronic execution tools – a phenomenon that may now seem second nature to some – but there is much concern over whether electronic signatures are in fact legally binding and can be evidenced in court.

In this Alert, Partner Hayden Delaney and Law Graduate Briar Francis address the law of contracts formed through electronic means and detail the legal issues surrounding electronic signatures.

Key Points

  • According to Australian and international law, electronic signatures are a valid way of executing agreements.
  • Difficulties with electronic signatures arise when evidence is required confirming the identity of the signor and their intention to be bound by the content of contract.
  • Digital signature tools which incorporate technically accepted identity verification and authentication methods (such as public key cryptography) can mitigate these risks. However there are still important issues to consider.

Electronic Signatures Legally Enforceable but Difficult to Prove

Electronic contracts generally

For a contract to be validly formed, certain elements must be satisfied.  These elements are an intention to create contractual relations; acceptance of an offer; and consideration (that is, a benefit in exchange of obligations – on both sides of the contract – such as payment for services). 

In usual commercial transactions, the formation and execution of a valid agreement by electronic means satisfies these elements under international and Australian law, and is treated like a paper contract.[1]

In addition to the usual requirements for a paper contract, a contract formed electronically is legally valid if:

  • the contract is stored appropriately and can be accessed after execution; and
  • there has been consent between the parties, expressly or impliedly, to receive information electronically.[2]

It is important to note that, by law, a purported originator is bound by a communication if it was sent by the purported originator or with their consent.[3] This creates problems relating to evidencing that this element has been satisfied, particularly in circumstances where parties to transactions are not dealing with each other face to face (often with witnesses present) and cannot verify each other’s identities through traditional means. 

Electronic signatures

An electronic signature can be defined simply as a signature used on an electronic document or transmission.  They are recognised under both international and Australian law as having the same effect as handwritten signatures, subject to the following qualifications:

  • there must be consent by the recipient to receive information electronically;
  • the method of signing must identify the person sending the information, and indicate that this person approves of the content of the electronic document signed;  and
  • having regard to all of the circumstances of the transaction, the method of signing must be as reliable as is appropriate for the purposes for which the electronic document was generated.  Alternatively, evidence of the identity of the signor and their approval of the contents of the electronic document must be self-evident in the document or otherwise available in some other manner. This reaffirms the need as stated above to ascertain the identity of the signor and concretely prove same.[4]

The difficulty in using an electronic signature becomes apparent when you are faced with the task of finding a way to prove the identity of the signor in a setting where the signature isn’t witnessed by another person. There is also the risk, as in any other traditional transaction, that the content of the document could be altered after being signed. Digital signatures have been introduced to try and minimise these risks.

Digital signatures and public key cryptography

A “digital signature” is a term used by some to describe a type of electronic signature.  Digital signatures utilise technology that associates the signature with hidden data which can be used in an electronic communication.  The main difference between an “electronic” and a “digital” signature is that:  

  • a digital signature is linked to certain information and can be verified; whereas
  • an electronic signature may just be text on an email.

Digital signatures are therefore unique electronic “identities” which make them a more trusted and secure way of verifying the author of a document.

Many, if not all, digital signatures rely on public key cryptography as their identity verification core – including popular products like Adobe EchoSign, and DocuSign.  The basic premise behind this method is that a cryptographically-generated private and public key (being a randomly generated set of digits) is used for identity verification purposes.  The private key is only used by, and known to, the person associated with it.  The related public key is shared publicly and visible by anyone else on the receiving end of the document containing the digital signature.

To create a digital signature, the private key is used to generate a unique code from a combination of the private key and the contents of the message.  That code is embedded in the document and becomes the digital signature.  Usually an image attached to the digital signature is calibrated as the visual aspect of the signature, such as an electronic copy of the signor’s paper signature.  This is not legally necessary, however.  The party receiving the document can then view the public key associated with the digital signature, however there is typically no way for the recipient of the public key to discover the private key through this process. 

The information that can be gained by having access to the public key is usually:

  • the name linked to the digital signature; and
  • verification that the contents of the documents have not been somehow altered since applying the digital signature to the document, whether by technical error or tampering. 

Legal risks

There remains a risk that the identity of the person using the private key is not accurate, or at least not immune to legal challenge.  This would be likened to a situation where a handwritten signature is required and a person fraudulently purports to be the intended signor and signs the contract. 

Currently, there is no practical way to verify the signor’s identity with one hundred percent certainty using digital signature tools.  Arguably the biggest failing with digital signatures and public-key cryptography generally, is that they are dependent on the private key being kept secret. If the private key is exposed, it is open for someone to dispute that they were indeed the person who “digitally signed” a document. If a targeted cyber attack or data breach exposed a private key, then it would have a cascading effect on the enforceability of digitally signed documents which depend upon that key.

Accordingly, some may argue that this is also true for more traditional methods of signing, although there is certainly still a commonly held belief that wet ink signing trumps digital signatures in security – this is largely due to the fact that a wet ink signing can be contemporaneously witnessed and verified by another person also signing by a wet ink signing.

To help mitigate against this risk, there have been a number of additional verification and authentication techniques made available to users. Most digital signature software products incorporate a range of additional security measures into the signing process which can usually be configured by the user.  These include the use of biometric authentication, chain of custody features, timestamps, and email and IP address tracking.  Most importantly, software that generates digital signatures encourages the verification of the signor’s identity through a certification authority (CA).  CAs are usually secure online databases that can be accessed by subscribed users.  Here, users confirm their identity by providing certain information to the CA and are issued a digital signature certificate –or a unique ID – that is stored online.  The recipient of the digital signature can then find a person’s digital signature certificate and compare the public key specified on it to the one they received, thus verifying the signor’s identity.

To ensure the security of transactions, it is therefore encouraged that parties have both the digital signature and digital signature certificate systems in place.  Also, it is imperative that private keys are not readily accessible on company databases and are instead held by the person named on the digital signature individually.

Another issue to be aware of is the software’s archiving capabilities.  It is imperative that the digital signature software you choose has an effective archiving system which makes retrieving data as easy as possible.  This becomes important when a dispute arises with regards to whether an agreement was signed months or years after the fact.

The sophistication of your contracts and the signors of these contracts will have a large impact on whether you find these tools useful. 

Practical problems arise when using digital signature products for smaller contracts.  By way of example, it will likely be more difficult to verify the signor of an employment contract as the employee won’t have any real need to create a CA.  That verification feature will then be nonexistent.  This limits the ways in which the signature can be verified, although auditing trails and other verification techniques inherent in the digital signature software itself will still store this information, and these features can still be relied on.  If these smaller types of contracts make up a significant proportion of the documents you will be signing with digital signature software, then the tool might not be worth the risk.  The key consideration will be whether, having regard to your company’s particular circumstances, not being able to rely on this particular layer of security defeats the purpose of using the software altogether. 

Global compatibility

How frequently you have dealings with other countries may affect whether you decide to use digital signature technology to sign important documents. While the UN Electronic Communications Convention dictates that electronic signatures are to be treated in the same way as handwritten signatures, not all countries have ratified the Convention, thus some international parties may still require handwritten signatures before being satisfied that a transaction is valid.

It is also important to note that most companies developing and licensing this sort of software are based in the US.  While most premium products currently adhere to Australian and international law and are used effectively by global customers, their paramount concern will likely be complying with US law.  Electronic signature law is inherently local, so should the laws in the US and Australia develop differently, this may become an issue.  There has been no definitive case law in Australia relating to the validity of digital signature software, although it is valuable to note that cases have been won in the US based on evidence retained by premium digital signature software.

Data retention and the Privacy Act

In addition to the above matters, there may be informational privacy and data sovereignty issues to consider.  This may be an issue where personal information is disclosed overseas, potentially in contravention of informational privacy laws such as the Privacy Act. 

Certain information collected in connection with the digital signature process might be personal information.  This would mean that copies of the background data, namely the paper trail, auditing and archiving information as well as the agreements themselves may be disclosed outside of Australia.  Most products allow users to save any documents that are signed through electronic means locally, however if a cloud storage is being utilised there may be room to negotiate data jurisdiction with the provider of your choice to eliminate this risk. 

Conclusion

Legally, users should be mindful of the need to prove the validity of a digital signature should it be challenged. The key to this is ensuring that you and the parties you deal with register digital signatures with a CA and have access to an effective auditing system. Ideally these features should be easy to subscribe to in conjunction with using your digital signature software.  Most commercially available products have built-in auditing systems which are easily accessible to trace the progress of each digital signature.  Ultimately, you will need to make sure that you are satisfied with both your verification practices and the other party’s.

Good digital signature products will have more than the bare essential verification and authentication features.  Given that electronic security is a constantly evolving phenomenon that has the ability to change the way we conduct legal relations with other parties, it is likely that international and domestic law will be responsive to this progression.  It should be noted, however, that the law adapts slowly to technological change, and often relies on applying old rules to new concepts.  Because of the rapid nature of technological advance, there is no guarantee that a product that reflects the law currently will still do so in a year’s time.  Therefore, a product that is constantly updated to reflect this progress is desirable.  For now, it is good to see that the legal validity surrounding the use of the digital signature products appears to be at the forefront of any updates to the software.

Accordingly, once you have installed a product it is recommended that a review is carried out periodically to ensure that the product still meets your needs.

There are a range of factors to consider when choosing a digital signature software solution.  This alert merely covers the legal aspects of digital signature software and does not give a holistic indication of which software will suit the particular needs of your company, employees, and compatibility with existing internal electronic infrastructure.