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The Danger of Electronic Signatures

Commercial Law, General

Is it good practice to use electronic signatures in company documents? Our advice is – be very careful!

Companies execute contractual documents by having their directors sign and in some cases by also affixing a seal to the document. Other parties have the right to assume such execution is valid and binding on the company if the obligations below appear to have been followed, although they lose the benefit of that assumption if they knew of fraud or forgery by the company’s officers in regard to the execution.

The Corporations Act (“the Act”) states that a company may execute a document by having:

  • Any two Directors;
  • A Director and a Company Secretary;
  • Or a sole Director who is the sole Company Secretary

sign the document or witness the fixing of a company’s seal to the document.

The Act does not specify whether a signature must be handwritten or if electronic signature will do.  An electronic signature could, for example, be created using a digital pen or by scanning a handwritten signature into a document. All company directors should be alive to the risk that their company could incur liabilities and obligations without their knowledge or consent.  The provisions contained in the Act permit you, in your dealings with the company, to rely on a document that appears to have been duly executed by the company even when it has not.  In a recent decision the Court of Appeal, in Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd [2013] NSWCA459, considered those provisions and found that a bank was entitled to rely on a guarantee even though one of the Director’s signatures on the guarantee document was forged.

This case indicates that if where a Director has given consent to other directors to undertake communication and negotiations on behalf of the company that will be sufficient to constitute actual or ostensible authority.  Section 129 of the Act provides that parties dealing with companies are entitled to assume that the company has executed in accordance with section 127, and the company will be bound by the contracts that are executed on their behalf.  Without these assumption provisions, dealing with companies would be a very risky affair.

You should be very cautious to ensure that your signature is not being used without your consent or knowledge to bind your company to agreements you know nothing about. You may need to set clear rules about the use of electronic signatures in your business – or indeed whether they pose too great a risk altogether. For now, the handwritten signature remains the usual and preferred method for companies to sign formal legal documents.