Electronic signatures – progress, but don't throw away your pen

Signature is a familiar but elusive concept. Legislation requires a signature in a number of cases but leaves the task of definition to the courts. The progress of electronic communication through email and the internet has made this task more urgent and arguably more difficult.

The Law Commission – a statutory independent body which keeps English law under review – has attempted to make sense of the case law and relevant statutes in its September 2019 report Electronic execution of documents, which followed a consultation paper published in 2018. The Law Commission published an earlier advice paper entitled Electronic Commerce: Formal Requirements in Commercial Transactions in December 2001 which has influenced both lending practice and the UK government's approach to this issue.

Mention should also be made of the notes prepared by a joint working party of The Law Society, City of London Law Society and Financial Law Committee on virtual closings and execution of a document using an electronic signature in 2009 and 2016 respectively, both of which have been influential on business and legal practice.

In this article, we assess the progress that has been made in making electronic signatures acceptable in finance transactions from an English law perspective, and in relation to assets in England and Wales.

General requirements for entry into contracts

English common law does not generally require contracts to be in writing. The basic requirements are an offer by one party to enter into the contract; an acceptance of that offer by the other party which is communicated to the party who made the offer; valuable consideration flowing between the parties; and an intention to create legal relations.

The offer and acceptance do not generally have to be in writing and an offer can be accepted by conduct rather than a verbal acceptance. However, some statutes require certain contracts to be in writing and to be signed by one or both the parties or give a particular status to contracts expressed in this way.

Examples of agreements where statutes require a written contract

Examples include:

• Guarantees: The Statute of Frauds 1677 (SOF) requires a contract of guarantee to be in writing or evidenced by a memorandum in each case signed by or on behalf of the guarantor. Failure to comply makes the guarantee unenforceable through the courts.
• Regulated credit agreements: The Consumer Credit Act 1974 (CCA) requires signature of a document for a regulated credit agreement to be "properly executed". Failure to comply does not make the agreement void but means that an order of the court would be required to permit the lender to obtain a judgement against the borrower.
• Bills of Exchange and promissory notes: The Bills of Exchange Act 1882 requires a written document signed by the person giving it for an instrument to be categorised as a bill of exchange or promissory note. Failure to comply means that the holder will not have the protections given to holders of compliant bills or notes but does not necessarily mean that they are ineffective.
• Mortgages of goods by individuals: The Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882 require that a transaction under which an individual grants security over chattels in written form must be in a form specified in the 1878 Act and be signed and witnessed and registered at the High Court. Failure to comply usually makes the mortgage void.
• Legal assignments of receivables and assignments of equitable interests: s136 The of the Law of Property Act 1925 (LPA) requires a signed written document for a legal assignment of a debt and for express written notice to be given to the debtor, while s53 requires a disposition of an equitable interest to be in writing signed by or on behalf of the person making the disposition. An assignment of a receivable may still be a valid equitable assignment despite failure to comply with s136. However, where the requirements of s53 are not complied with the disposition is void. s53 is mainly of interest to funders who purchase receivables and comes into play where a funder did not acquire them under a perfected legal assignment and wishes to dispose of them to a third party.
• Contracts to dispose of interests in land including contracts to grant security interests: Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires contracts for the disposition of an interest in land (including the grant of security) to be made in writing signed by or on behalf of both parties.
• Financial collateral: The Financial Collateral Arrangements (No 2) Regulations 2003 require "security financial collateral arrangements" and "title transfer financial collateral arrangements" to be in writing to benefit from the favourable treatment given to such arrangements under these regulations.

Examples of agreements which should be executed as a deed

In some cases, a document must be executed as a deed or a special status is given to a deed:

• Debentures and legal charges: The LPA requires a deed to create a legal mortgage of land; gives a mortgagee under a deed statutory powers of sale and appointment of a receiver; gives a mortgagee that exercises its power of sale by deed the ability to overreach later mortgages.
• The Powers of Attorney Act 1971: This requires a power of attorney such as that contained in most security documents to be executed as a deed.
• Appointments of new security trustees in respect of syndicated loan facilities: The Trustee Act 1925 provides that on the appointment of a new trustee by deed a declaration in the deed is capable of vesting the trust property in the new trustee subject to certain exceptions.

How the courts have approached signature issues before the internet age

Signature is not defined in any of the statutes which require one. The earlier decisions of the courts show a willingness to extend the meaning beyond the conventional idea of a person writing out a version of their name in a 'wet ink' signature on a piece of paper. The English courts have interpreted signature requirements under specific statutes as satisfied by an X, type-written, faxed or ink-stamped signatures.

Early cases on the use of a mark as a signature no doubt reflect generally lower standards of literacy but the invention of the telex and telephone began the era of electronic communication in the nineteenth century. In Godwin v Francis 1870 LR5 CP 295 at least one of the judges was prepared to accept that a printed name in a telegram sent with the signed authority of the named person could constitute a signature for the purposes of a section of SOF (although the Section has since been repealed).

More recently in Re a Debtor (No 2021 of 1995) [1996] 1 BCLC 538, Laddie J held that a completed form of proxy for a creditors' meeting was validly signed if sent by fax, on the basis that the receiving fax machine was instructed to reproduce the creditor's signature on the resulting print-out.

The cases show that the courts look at whether the method of signature authenticates the document rather than whether a conventional signature has been used.

The expression 'authenticate' is widely used in the case law and commentary on this subject and was explained by Romer LJ in Eban v Goodman [1954] 1 All ER 763 by reference to a quotation from Stroud's Judicial Dictionary as "authenticating a document as being of, or as binding on, the person whose name or mark is so written or affixed".

Where a statute requires the use of a "document" this expression will be interpreted by reference to contemporary technology if it is clear that this gives effect to the 'true original intention' of the legislation.

The development of the internet as a means of communication led to legislation at European and UK level to facilitate e-commerce and the use of electronic signatures. The latest EU legislation in relation to electronic signatures is Regulation (EU) No 910/2014 of 23 July 2014 which repeals the previous Directive of 1999.

Electronic Communications Act 2000 (ECA)

The ECA was originally enacted to implement the EU Directive on Electronic Signatures of 1999 and to further the then government's commitment to e-commerce. It has been updated to reflect the terms of the EU Regulation of 2014.

Section 7 of the ECA provides that an electronic signature incorporated in or logically associated with an electronic communication or with electronic data, and the certification by any person of such signature, are each admissible in evidence as to the authenticity or integrity of the communication or data.

An electronic signature is anything in electronic form which is incorporated into or logically associated with an electronic communication or electronic data and purports to be used by the individual creating it to sign.

For this purpose an electronic communication is:

• a communication comprising sounds or images or both and a communication effecting a payment
• transmitted between persons or between devices or from a person to a device or vice versa
• by means of any electronic communications network or by other means while in an electronic form.

The authenticity of a communication or data means any of the following:

• whether it comes from a particular person or source
• whether it is accurately timed or dated
• whether it is intended to have legal effect.

Section 7 of the ECA confirms that electronic signatures are admissible as evidence in English legal proceedings to determine the authenticity or integrity of any electronic communication in which they are incorporated or with which they are logically associated. However, it does not provide that electronic signatures will satisfy a particular statutory signature requirement.

New sections dealing with electronic seals were added to the ECA with effect from 22 July 2016.

Section 8 of the ECA gives the government the power to amend any requirements of existing legislation (such as the CCA as it was in 2000) which are incompatible with the use of electronic signatures.

Law Commission 2001 advice paper

Before the Section 8 power was exercised, the Law Commission published its 2001 advice paper. This set out its views that:

• electronic communications and websites are capable of being 'writing'
• digital signatures using private key/public key encryption, faxed or scanned manuscript signatures, a name typed in an email and clicking on a button on a website are capable of satisfying a statutory signature requirement
• information stored in an electronic form is a 'document' and is capable of satisfying a statutory requirement for a document unless the context requires otherwise.

The Commission pointed out that requirements in the CCA to send copies of documents by post could not be satisfied by electronic communication.

In the context of guarantees, the Commission expressed the opinion that:

• the writing requirement in section 4 of the SOF could be satisfied if a guarantee was entered into through website trading or by email
• the associated signature requirement is capable of being satisfied by clicking on a button on a website or by typing a name.

How has the UK government used its powers under Section 8?

While many orders have been made covering areas such as the sending of official notices there is one which is of direct interest to lenders and that is confined to the consumer credit area.

The government amended the CCA and Regulations made under it through the Consumer Credit Act (Electronic Communications) Order 2004.

The 2004 Order did not, as some in the credit industry had wished, explicitly provide that references in the CCA to documents and signatures would include electronic documents and electronic signatures.

The amendments were limited to substituting the term "background medium" for "colour of paper" in relation to the requirements for the legibility of wording in a document setting out a regulated agreement, permitting signature boxes to contain instructions about communication of a signature by electronic means where the agreement is intended to be concluded in this way, providing that copies of agreements can now be sent electronically (rather than by post) and making provision governing the electronic transmission of documents.

The government apparently took the view that there was already sufficient basis in law for the use of electronic documents and signatures for CCA purposes.

A further change was made by the Consumer Credit Act 2006 which amended the definition of "documents" in the CCA to include information recorded in any form.

Despite the above reservations, the use of online signatures to complete regulated credit agreements has gained considerable traction and finally received judicial approval in Bassano v Toft [2014] EWHC 377.

In this case the judge held that clicking on an on-screen "I Accept" button which generated a pdf document bearing the borrower's typed name was effective to authenticate the loan agreement and communicate the borrower's agreement to be bound by its terms. The judge held that this constituted signing the loan agreement so as to fulfil the requirements of s. 61 of the CCA.

Types of electronic signature

The government's 2018 consultation paper gives a helpful summary of the main methods of signing electronically. These divide into:

• those where the person signing does something which gives the appearance of a signature in something like one of the forms accepted by the courts in pre-internet case law, but on an electronic document on a screen, and
• the use of more sophisticated digital techniques such as public and private key infrastructures.

The case law focuses on the former with little if any take-up of digital signature technology in the lending space.

Guarantees

Guarantees are required by SOF to be in writing signed by or on behalf of the guarantor. If a guarantee does not comply with these requirements there is no basis on which a court can permit it to be enforced.

The Law Commission Advice of 2001 supported the possibility of creating a guarantee through a website or email, citing the provision of the Interpretation Act 1978 which provides that "writing" includes typing, printing, lithography, photography and other modes of representing or reproducing words in a visible form.

In Mehta v Fernandes [2006] EWHC 813 (Ch), the High Court concluded that a sender's email address automatically inserted into the header of an otherwise unsigned email after its transmission could not constitute a signature for the purposes of SOF.

This was because its automatic inclusion in the email was incidental in the sense that it "just happened to be there" and, in the absence of evidence to the contrary, could not be held to be intended to act as a signature giving legal effect and authenticity to the content of the email.

On the other hand, the judge expressed the view that if a person creates and sends an electronically created document, that party will be treated as having signed it to the same extent as if he had signed a hard copy of the document.

In WS Tankship II B.V. v Kwangju Bank Ltd and another [2011] EWHC 3103 (Comm) the court considered a guarantee set out in a SWIFT message (a form of secured communication used by banks for international transactions). The SWIFT message did not purport to be signed on behalf of the bank, nor was the bank named in the body of the guarantee. However, the SWIFT system generated the name of the bank in the header to the SWIFT message.

The Court found that this was a sufficient signature for the purposes of SOF. The name of the bank appeared in the header, because the bank caused it to be there by sending the message. The judge stated that was the case whether or not the signature was automatically generated by the system, and whether or not stated in whole, or abbreviated (although in fact the name of the bank appeared in complete form).

In Golden Ocean Group Ltd v Salgaocar Mining Industries PVT and Salgaocar [2011] EWHC 56 (Comm), the issue was whether a chain of emails, one of which contained the first name of a broker acting for one of the parties, satisfied the requirements of SOF. It appears to have been common ground that an electronic signature is sufficient and that a first name, initials or even a nickname would suffice. In this case the inclusion of the first name was held to be sufficient. The Court rejected the argument that such a signature was not appropriate to authenticate a contract of guarantee, since professional brokers understand that their communications give rise to obligations binding on their principals.

In Lindsay v O'Loughnane [2010] EWHC 529 (QB), an email was considered in the context of the Statute of Frauds (Amendment) Act 1828, which requires representations as to creditworthiness to be in writing signed by the party making them. Mr Justice Flaux held that an email with a typed signature could satisfy this requirement provided that there was a written indication of the identity of the sender. This could be either "including an electronic signature or concluding words such as "regards" accompanied by the typed name of the sender of the email".

The effectiveness of an automatically generated signature has been considered again in Neocleous V Rees [2019] EWHC 2462 (Ch), this time in the context of section 2 of the Law of Property Act (Miscellaneous Provisions) Act 1989 which applies to contracts for the disposal of interests in land.

In this case, a solicitor had manually typed the words "Many Thanks" above his name which was automatically generated by the software used to send emails. The judge found that the inclusion of the name was a sufficient signature on the basis that the name and other details were included as a result of a conscious decision of which the sender would be aware. The insertion of the words "Many Thanks" showed an intention to connect the name with the contents of the email. The presence of the name at the end of the email was a conventional style of signature.

Security documents which are required to be executed as deeds

Security documents such as debentures from companies and legal charges of land from both companies and individuals are executed as deeds to enable the lender to have a valid legal charge over land and to have the benefit of the statutory powers and protections given to mortgagees under the LPA.

Guarantees of loan facilities are frequently drafted as deeds to avoid challenge on the basis of technical rules relating to past consideration because the loan to the Borrower has already been made.

Execution of debentures by companies

The Companies Act 2006 (CA 2006) gives English companies three possible means of doing this:

• the company can affix its common seal if it has one, provided that it complies with any requirements of its articles as to witnessing
• the document can be signed on behalf of the company by two directors or a director and its secretary
• the document can be signed on behalf of the company by a director in the presence of a witness who attests the signature.

The document must also make it clear on its face that it is a deed and satisfy the common law requirement that it be delivered.

Section 45 of the CA 2006 clearly contemplates a physical seal with the name of the company engraved on it in legible characters. An electronic seal would not fall within this description and the government has not exercised its powers under section 8 of the ECA to make the use of an electronic seal a viable alternative to the use of a physical seal.

There is no obvious reason why two directors or a director and secretary of an English company could not execute a document electronically, subject to the need to comply with the requirements of any registry (see below).

If the company wishes to execute the document through one director alone, the need for the signature to be witnessed and attested is regarded as problematic by the Law Commission, as there could be more doubt that the witness was physically present than in the case of a 'wet ink' signature. If it becomes apparent that the witness was not physically present at the signing by the director, the security document would not be validly executed as a deed.

Impact of registration requirements

A further hurdle is presented by the need to register a security document containing a legal charge over registered land in England or Wales at HM Land Registry. It is not possible to obtain a perfected legal charge over real estate in England or Wales without a debenture or legal charge signed with a 'wet ink' signature, since HM Land Registry will not accept documents which are not signed in this way.

A security document which purports to create a legal charge of land but is not effectively executed as a deed may create a valid equitable charge, but this requires both lender and borrower to have signed the security document or a loan agreement containing a covenant to give such a charge. In this context, it appears that an electronic signature of both parties would be valid to save the security from complete invalidity (see Neocleous V Rees above).

It is possible to draft security documents which are not executed as deeds, but this rules out the possibility of obtaining a registered legal charge over land and requires replacement of the statutory powers in the LPA with contractual powers so far as this is possible. A security document of this kind executed on behalf of a company incorporated in England or Wales electronically can be registered at Companies House.

Legal charges and guarantees executed by individuals

Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that for a document to be validly executed as a deed by an individual the individual must sign in the presence of a witness who attests the signature.

The use of electronic signatures for the execution of legal charges by individuals is ruled out by HM Land Registry's requirement for 'wet ink' signatures. HM Land Registry has its own project to develop and rollout digital services beginning with the electronic execution of mortgages by individuals by digital signature.

Concerns about electronic attestation by witnesses also apply to legal charges and guarantees which are in the form of deeds.

Where a guarantee is not signed as a deed, an electronic signature is capable of satisfying SOF.

Notice and other contractual clauses

The effectiveness of electronic communications and signatures also arises in the context of provisions in financing documents. Whether an electronic communication or signature satisfies a contractual requirement is determined by reference to the context of the contract.

In Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch) the court held that the notices provision of the 1992 ISDA Master Agreement permitting service of notices by 'electronic messaging system' did not permit service of a notice by email because, amongst other things, email was not in common use in 1992.

On the other hand, in C&S Associates UK Ltd v Enterprise Insurance Company plc [2015] EWHC 3757 (Comm), the Court held that an exchange of emails could satisfy a contractual requirement that any variation of a contract should be in writing and signed on behalf of each party.

Signature is not the only issue

Lenders should bear in mind that a valid signature is not the only requirement of a valid loan agreement or security document.

The general requirements for a valid contract briefly mentioned above also apply as do issues such as due authorisation of persons signing on behalf of a company, the possibility of fraud and forgery and undue influence in relation to guarantees.

Of course, these issues also arise in conventional paper transactions with 'wet ink' signatures.

Where we are now

In summary, paper documents with 'wet ink' signatures continue to have an important place in lending transactions.

The reluctance of the government to use its powers under s8 of the ECA has left lenders to make decisions on the basis of case law, much of which either pre-dates the internet age or involves a retrospective review of apparently informal documentation.

Nevertheless, the internet is used to acquire customers in the consumer credit and SME lending spaces and recent case law confirms the validity of credit agreements and guarantees (other than those which are expressed to be executed as deeds) electronically signed through this medium.

However, there is still uncertainty about the degree to which a name inserted into an electronic document automatically (without any positive act from the relevant party) is a signature for this purpose.

HM Land Registry's requirement for a wet signature on documents containing legal charges of land in England and Wales and concerns about the reliability of witnessing arrangements inhibit the use of electronic signatures for security documents.

Public/private key digital signatures are unlikely to gain traction in the absence of case law or further legislation.

Bills of exchange, promissory notes and chattel mortgages from individuals are regarded as too deeply rooted in the world of physical paper for execution in electronic form to comply with the relevant statute. The reforms of the law relating to chattel mortgages proposed by the Law Commission in 2018 have been shelved.