Electronic Signatures can be Risky

Facts

  1. Party A supplied building materials.
  2. Party B, being a customer of A, sought credit from A.
  3. Each of the directors of B affixed their signatures electronically to the Credit Application.
  4. Directors of B also affixed signatures to a Guarantee in favour of A using “Hello Fax”, an electronic password protection system which enables users to sign documents electronically.
  5. One director of B had a username and password for the system but had not changed the password.
  6. Party A supplied the materials to B, who ultimately incurred debts to A of about $889,000.
  7. Party A tried to enforce the debt against B and the individual directors.
  8. Party B went into liquidation and Party A obtained summary judgment against two directors on the basis of the personal guarantees they had signed. However, one director of Party B demonstrated that although he had been a user of the Hello Fax signature system, he had not authorised the placing of his signature on the application and guarantee and that an unauthorised person must have done so.
  9. Accordingly he escaped liability under the guarantee.

Outcome

The first trial judge accepted that the one director of B had not authorised another person to affix his signature.  Party A appealed.  Party A did not press the argument that the director had given actual authority to another person to append his signature but had given ostensible authority.  The Appeal Court dismissed this argument and said there would need to be

“tangible and convincing evidence that the purported signatory had actually, or at least ostensibly authorised the placement of the signature on the contract.”

Practical effect of Judgement

Businesses which may routinely rely on electronic signatures must seek additional proof that the signatory did properly authorise the use of his or her signature for a contract or other document.  The court was so concerned about the outcome that it suggested legislation may be required to overcome the legal issues.

It would therefore be wise for any party relying on electronic signatures to seek an additional email directly from the party whose signature is represented on the document confirming that they have authorised the use of the signature for a particular document.

Share This