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Electronic execution of documents confirmed
In our Briefing 12 months ago we reported on the August 2018 Consultation paper issued by the Law Commission on the law relating to the electronic execution of documents, which suggested that the Law Commission was sympathetic to moves to allow all contracts and other documents to be completed electronically, particularly in the commercial context.
On 4 September 2019 the Law Commission published its final report setting out its analysis of the current law together with recommendations for reform.
Before considering that Report and questions relating to the electronic execution of documents, it may be helpful to set out the main principles governing execution of documents in general in the context of invoice finance.
Documents executed as Deeds
Firstly, it is necessary to distinguish between contracts which are normally executed as Deeds and other contracts which do not require that degree of formality.
Invoice finance agreements should always contain a Power of Attorney which gives the financier authority to take action in the name of the client, for example where this may be necessary on the demise of the client in relation to raising invoices. This is one of the categories of contract which must be created by Deed, so it is necessary for the client to execute the invoice finance agreement as a Deed.
Guarantees (whether given by individuals or by limited companies) are not strictly required to be made by Deed, but in practice they usually are to avoid any problems arising from the doctrine of consideration. This doctrine essentially provides that the financier must give something in return for the security it is receiving, and since this is normally the act of entering into the invoice finance agreement this requirement would not be met if the agreement had already been entered into when the security was signed – in those circumstances the law would regard consideration given by the financier as “past” and ineffective.
For this reason guarantees should be expressed to be made by way of Deed, which has the consequence that the law does not require consideration to have been provided by the financier.
Execution of Deeds and other documents by an individual
The normal method of execution of a Deed by an individual or a member of a partnership (other than a Limited Liability Partnership – as to which see below) is prescribed by section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 (“LP(MA)A”) by the individual signing the Deed in the presence of a witness who attests the individual’s signature.
There are no particular formalities for execution of other contracts by individuals (save in relation to land).
Execution of Deeds and other documents by a limited company
This is governed by section 44 of the Companies Act 2006 which provides that documents are normally executed by a company by the signature on behalf the company of either: –
(1) two authorised signatories (normally a director or company secretary); or
(2) a director of the company in the presence of a witness who attests the director’s signature.
Execution of Deeds and other documents by Limited Liability Partnerships
The formalities for the execution of Deeds and other documents by an LLP are largely the same as those for limited companies, subject to certain modifications inserting appropriate references to members of the LLP.
Execution by an attorney
Section 47 of the Companies Act 2006 permits a company to appoint a person as its attorney to execute Deeds or documents on its behalf. A number of invoice financiers have adopted this practice to simplify its execution of documents, though if a client wishes to use this procedure itself it should be required to demonstrate the lawfulness of the original appointment of the attorney, which must itself have been made by Deed.
Execution by an attorney is then subject to the particular requirements applicable to the status of that person, so normally the attorney will be an individual rather than a corporate entity which means that signature of a Deed would require to be witnessed.
Documents which require to be witnessed
Many of the above methods for executing documents involve witnesses. There is no statutory requirement for the witness to the independent or disinterested, and there is no prohibition on a signatory’s spouse, cohabitee or civil partner from acting as a witness.
It is also generally acceptable for an employee or director of a party to witness that party’s signature.
However, given that the purpose of requiring a party’s signature to be witnessed so as to provide, if necessary, unbiased evidence of what was signed, by whom and when, independent witnessing should always be required as a matter of best practice.
Must the witness be physically present?
It is a statutory requirement both under section 1(3) of the LP(MP)A 1989 and section 44(2)(b) of the Companies Act 2006 that the maker of a Deed executes it in the presence of the witness. It is generally considered that these provisions require the physical presence of a witness when the Deed is signed.
This position is supported by paragraph (8) of the statement of law set out in the Law Commission’s 2019 report on the electronic execution of documents (as to which see below), which expresses the view that:
“… the requirement under the current law that a Deed must be signed “in the presence of a witness” requires the physical presence of that witness. This is the case even where both the person executing the Deed and the witness are executing / attesting the document using an electronic signature.”
However, there is case law to the effect that a party may be estopped from denying the validity of a Deed that appears to be, and is held out to have been, validly executed where the witness was not present when the executing party signed the Deed (Shah v Shah [2001] EWCA Civ 527).
Bilateral contracts and unilateral contracts
Most contracts are bilateral in the sense that they impose obligations on two or more parties, but some contracts are unilateral in that they create obligations solely by one party in favour of another. Examples are Guarantees, Charges and other security documents and although in practice these are sometimes also signed by the invoice financier, as a matter of law there is no such requirement and it is perfectly acceptable for unilateral contracts to be executed only by the other party.
Electronic execution of documents
Although legislation has been gradually moving towards facilitating the electronic execution of all documents since the introduction of the Electronic Communications Act 2000, progress has been somewhat piecemeal and uncertainty has arisen in practice concerning the validity of electronic signatures in Deeds and other formal documents.
Readers who recall the tortuous path of the Regulations relating to bans on assignment may remember the frequent interjections of the City of London Law Society (“CLLS”) in that process, but in fairness they did do a great deal of good work in relation to the practical aspects of adopting electronic signatures in the commercial context. There have been instances in which the pace of progress in the decisions of the courts have not kept up with commercial expediency, and the CLLS with the assistance of specialist Counsel produced comprehensive Working Papers and other material arguing for a much more progressive approach.
Law Commission Report on electronic execution of documents
That progressive approach has been adopted in the Law Commission’s final report, Law Com No386, Electronic Execution of Documents.
The report incorporates a statement of law setting out the Law Commission’s high-level conclusions regarding the validity of electronic signatures, based upon current EU and domestic legislation, as well as case law in this area (together with reasonable inferences that can be properly drawn from such case law). This statement includes the key propositions that:
- An electronic signature is capable in law of being used to execute a document (including a Deed) provided that the person signing the document intends to authenticate the document and any relevant formalities relating to the execution of that document (whether required by statute or laid down in contract or other private law instrument) are satisfied. Examples of such formalities that might be required include that the signature be witnessed or that the signature be in a specified form (such as being handwritten).
- Unless relevant legislation, contractual arrangements or case law specific to the document in question provides for or leads to a contrary conclusion, common law adopts a pragmatic approach and does not prescribe any particular form or type of signature. In determining whether the method of signature adopted demonstrates an authenticating intention the courts adopt an objective approach considering the surrounding circumstances. Courts are likely to recognise the validity of electronic equivalents of various non-electronic forms that have previously been held to constitute valid signatures. For example the courts have considered electronic signatures on a number of occasions and have accepted electronic forms of signatures including a name typed at the bottom of an email or clicking an “I accept” tick box on a website.
- The requirement under current law that a Deed must be signed “in the presence of a witness” requires the physical presence of that witness. This is the case even where both the person executing the Deed and the witness are executing or attesting the document using an electronic signature.
Although the Law Commission considers that current law already provides for electronic signatures, it suggests that Government may wish to consider codifying the law on electronic signatures in order to improve the accessibility of the law. Any legislative provision should have broad application, and further consultation would be required. The government should also consider whether the power to exclude certain types of documents from being signed electronically should be used to exclude anything for which electronic execution is not considered appropriate.
The report also makes several recommendations to Government aimed at addressing some of the practicalities of electronic execution and the rules for executing Deeds, including:
- Industry working group. Establishing an industry working group of interdisciplinary membership (including, amongst others, lawyers, technology experts, insurers and businesses) to consider practical and technical issues associated with the electronic execution of documents, including:
- how different technologies can help provide evidence of identity and intention to authenticate when documents are executed electronically;
- the security and reliability of different technologies used to execute documents electronically;
- producing best practice guidance for the use of electronic signatures in different commercial transactions, focusing on procedural steps to be followed, evidence, security and reliability where documents are executed electronically;
- producing best practice guidance for the use of electronic signatures where individuals, in particular vulnerable individuals, execute documents electronically
- Witnessing by video link. Requiring the industry working group to consider potential solutions to the practical and technical obstacles to video witnessing of electronic signatures on Deeds and attestation, and how these solutions can protect against fraud, following which Government should, if appropriate, consider legislative reform to allow for video witnessing.
- Review of general law governing Deeds. Asking the Law Commission to carry out a wider review of the law of Deeds to consider whether the concept remains fit for purpose. This should look at both Deeds executed electronically and those in traditional paper form, and should include:
- consideration of whether the witnessing and attestation requirement in relation to electronically executed Deeds should be replaced with an approach based on a specific type of technology, such as Public Key Infrastructure;
- consideration of the potential for the introduction of a concept of acknowledgement, for both paper and electronic Deeds;
- an examination of the statutory requirement for delivery, including a consideration of whether it should be amended or removed, for both paper and electronic Deeds;
- further consideration of whether the implications of the High Court decision in R (on the Application of Mercury Tax Group Limited and another) v HMRC [2008] EWHC 2721 (Admin) should be codified, for both paper and electronic Deeds;
- consideration of whether there should be different requirements for Deeds executed in a commercial context and those executed by individuals; and
- consideration of whether Deeds should be abolished or limited to certain types of documents.
These proposals are welcome and no doubt UK Finance will wish to make appropriate representations on behalf of invoice financiers in due course should the reform project be adopted by Government.