The tradition of reaching for your finest fountain pen to sign a contract at the board room is slowly fading.  With technology advancing and the law advancing with it, it is becoming increasingly common for negotiations to take place and a binding agreement reached purely through electronic communications.  And yes, this includes signing the contract!

In the trade credit world, a supplier of goods (the Supplier) often requires the company purchasing the goods (the Purchaser) to execute a credit application as well as having the Purchaser’s director/s execute a personal guarantee. If the Purchaser has more than one director, it may be the directors are not always at the same place at the same time.  This is the attraction of e-signatures.  It allows a business to continue to operate in those circumstances.

Whilst clicking a button and having your signature appear on the dotted line sounds enticing and efficient, Suppliers and Purchasers need to be aware of the pitfalls.

Setting the scene

The nightmare started in Williams Group Australia Pty Ltd v Crocker [2016] NSWCA 265 (Williams Group) when the Supplier received an executed guarantee from a director of the Purchaser, executed by way of e-signature.  The Purchaser defaulted and the Supplier commenced proceedings against the director pursuant to the guarantee.  What the Supplier did not expect was for the director to say “I never signed the guarantee”!

In the Williams Group case, the director alleged that a third party had used his username and password to access the program which stored his e-signature and “signed” the credit application and guarantee without his knowledge.

The nightmare unfolds

The Court looked at two key issues in determining whether the director was liable under the guarantee “signed” by him:

  1. Did the director give express authority to a third party to add his e-signature to the guarantee; and
  2. Failing a finding of the above, was any representation made by the director to the Supplier that he authorised his e-signature to be added to the guarantee?

In terms of the first issue, it was agreed between the parties that no express authority had been given by the director. Secondly, the Court held that there was no representation made by the director to the Supplier that he had provided authority to a third party to add his e-signature to the guarantee.

The Supplier’s issue was that it simply “assumed” the e-signature on the guarantee was both genuine and authorised. The Court found that it was irrelevant, in the absence of any representation of authority, that this may have been a reasonable assumption for the Supplier to make.

Despite the above, surely the fact that the director received e-mails notifying him of documents he had e-signed meant the director had ratified the guarantee and was liable under its terms?

The Court thought otherwise - despite the director receiving these emails, the emails were generally titled “commercial credit application”, which gave no indication to the director that they contained a personal guarantee. Further, there was no evidence suggesting the director read the e-mails.  The Court said that a person cannot ratify something of which they have no knowledge.

How to avoid the e-signature nightmare

The Supplier raised the “flood gate” argument, citing that guarantees containing an e-signature would now be rendered unenforceable.  

Adding to the Supplier’s “nightmare”, the Court responded saying, “if it is the case that drastic consequences flow from the application of the principles relating to ostensible authority and ratification in the electronic signing context, that may be a matter for the legislature to address.”

Until this issue is addressed by the legislature, best practice for suppliers receiving a credit application or a guarantee with an e-signature will be to contact the executor directly to confirm that they either uploaded the e-signature themselves or provided an express direction to a third party to do so. 

Interestingly, the decision in Williams Group Australia Pty Ltd v Crocker [2016] NSWCA 265 to an extent, defeats the purpose of e-signatures, which is to provide a platform for the fast and convenient conduct of business.

Perhaps we should reach for that fountain pen again?!

For more information, please contact Kylie Tate or Dominic Dragicevic on 02 9234 1500.