Signing paperwork is so closely connected with the practice of law that people often assume it is a firm legal requirement. But the reasons people still sign contracts with a pen on paper today are partly tradition, partly inertia and partly because it still feels like the right ceremony to conclude an agreement. Businesses wishing to move to a more efficient way of handling standard business contracts are legally free to do so.
It has always been possible to agree contracts without signatures. Agreeing contracts with a click online is now something we do on a daily basis. There is no reason why many standard business agreements cannot be agreed in the same way. Even for special types of contracts like deeds (where signatures are required), the law empowers you to use electronic signatures in a flexible and technology neutral way.
There are a wide range of products and services which enable electronic signing. They can already be used to deliver a more efficient process or higher levels of security. As electronic signing becomes more common, these services will begin to evolve away from replicating digital signatures to take advantage of what is possible in a new medium.
The law part 1: Agreeing to a contract
There are two key parts to a legal analysis of signing contracts electronically. First, the general rules of contract formation and what is required for a valid contract. Second, whether any specific legislative requirements for signature apply to a situation and override the general position.
The law of contract has never required signatures. You have always been able to agree a contract in other ways. For example, verbally - this is what happens when you walk into the supermarket and exchange money for the contents of your trolley. You can also agree contracts by actions rather than words (the classic example being taking a ticket in a parking building - provided the terms are available before the ticket is taken). The courts had little trouble applying these principles to contracts on the internet as electronic commerce took off in the 90’s. Today hundreds and thousands of contracts are agreed every day by clicking an “I agree” button to accept terms and conditions, or purchase something on Amazon.
Instead of signatures, the common law rules require a clear offer, acceptance of that offer, consideration and an intention to create legal relations. The focus here is often on reasonable notice of the terms and unambiguous assent to those particular terms. A written contract provided by one party (an offer) which is signed by the other (acceptance) is one clear way of meeting those requirements. But clicking an "I agree" button on a website to a set of contractual terms is no less clear.
The primary historic reason that many contracts were written on paper and signed was a practical one. Enforcement is easier when you have clear evidence of what was agreed - the signed paper can be dug out and referred to later. Pen and paper was a great technology for providing this evidence, but there are now alternatives that can do it just as well, while providing many other benefits.
The law part 2: Signature required by legislation
While in general contracts do not need to be signed, some laws require signatures in specific situations. The most common ones a business will encounter are deeds. These must be signed in a specific way to be effective. However, for deeds and most other situations where signatures are required, the law expressly confirms that an electronic signature can be equally valid. It may be a little more complicated to use electronic signing for deeds than other contracts, but this is possible and expressly permitted by legislation.
A number of countries enacted similar laws to facilitate electronic commerce in the late 90's and early 2000's. In New Zealand, the legislation was originally the Electronic Transaction Act 2002, which has now been incorporated into Part 4 of the Contracts and Commercial Law Act 2017 (CCLA). It enables the use of electronic signatures to satisfy any legislative requirement for a signature (with a small number of exceptions, for things like wills). The key provision states:
a legal requirement for a signature ... is met by means of an electronic signature if the electronic signature—
(a) adequately identifies the signatory and adequately indicates the signatory’s approval of the information to which the signature relates; and
(b) is as reliable as is appropriate given the purpose for which, and the circumstances in which, the signature is required.
There are no specific encryption requirements you need to satisfy. The rules are technology neutral and principles based. The technology just has to adequately identify the signatory and adequately indicate their approval of the information to which the information relates. It has to be as reliable as appropriate for those purposes. Some further principles are provided in the Act about when an electronic signature is presumed to be reliable - but even these are very high level. Things like the means of creating the electronic signature is linked to to the signatory and no other person and that alterations after the signature are detectable.
To use an electronic signature to sign a deed, you need to vary your normal electronic signing process. In the same way as you need to vary your normal paper process for a deed. A deed is a binding commitment that can be made by one party along (like when you are changing your name) and without exchange of consideration. For New Zealand companies, signing a deed generally requires the signature of two directors. However, if permitted by the company's constitution, deeds can be signed by just one director or other authorised signatory, provided that signature is witnessed. If you are signing a deed with an individual, that individual’s signature needs to be witnessed.
If your company signs a deed with two directors, those directors can sign using either electronic or regular signatures in the ordinary way. But if you add a witness, this adds an additional layer of complexity. The witness will need to observe the first person signing electronically and then sign electronically themselves. This might involve two people awkwardly huddling over the same computer, but is still do-able.
It is worth noting that the CCLA is enabling legislation. So use of electronic signatures for deeds and in other scenarios where signatures are required does need the consent of all concerned. The person you are sending the deed to could in theory refuse to accept an electronic signature and require you to sign on paper. However, because of the benefits of electronic signing to all involved, someone holding you hostage in this way is very unlikely in practice.
Choosing an electronic signature solution for your business
In practice most business transactions other than property contracts are documented as regular agreements, subject only to the rules of contract. The electronic signature provisions of the CCLA do not apply and you are free to agree to terms however you like. It is important not to focus too closely on rare situations like deeds at the expense of a easy solution for all your other contracts. Solving your standard contracts first and retaining a workaround manual process for deeds is a great interim step that still delivers significant value.
There are plenty of stand-alone signing solutions to choose from, including DocuSign, HelloSign, Adobe Sign, Secured Signing. You can also use simpler “click to accept” processes that power the rest of the internet, adapted to apply to contract terms, like Haggle has introduced.
Organisations looking to move away from paper signing should implement a solution consistent with their motivations for making the change. That is, the problem you are trying to solve. If you are looking to reduce delay and administrative burden, then you should choose a solution optimised for this. If you are seeking a higher level of technical validation that the party signing is actually who they claim to be, then you should focus on cryptographic digital signatures. Different goals will lead you in quite different directions, so it is important to prioritise. For example, some digital signatures that deliver greater technical security can be more administratively burdensome than just signing paper.
In making this assessment for simple B2B contracts (like NDAs, independent contractor agreements, services agreements, distribution agreements, IP licences, asset purchase agreements, customer agreements etc), technical security is unlikely to be a critical factor. Impersonation of a signatory or denial that a document was in fact agreed is very rarely an issue in B2B transactions.
Simpler, easy to use electronic signatures can be criticised as insecure because of the level of verification they provide about who applied the signature and subsequent alteration of the document. These are valid critiques. However, for standard business contracts, asking whether an electronic signing solution will deliver 100% security is the wrong question. A far better question is whether it is more or less secure than what you are doing currently.
Not only is impersonation of signatories or denial of signed contracts rare in B2B transactions, the wider context of these deals provides a host of additional evidence to support the signature. A B2B commercial contract involves usually a number of people on each side who know each other in real life and have ample tangible evidence that the counter-party represents the organisation they claim. This is established and confirmed throughout a host of dealings (in person, over phone and over email) related to the contract, its terms and its performance, each of which creates a paper trail of interactions, that will often refer to the contract itself. Fraud is always still possible, but it is likely to require quite a lengthy and elaborate fraud.
It is then important to realistically examine whether electronic signing would be less likely to detect this fraud than your current approach. How often do you examine the other party's signature on a paper document, compare it to a sample of their handwriting and other documents they have signed before accepting the signature as valid? I have never seen this happen in 14 year practising law.
The most common situation today is a halfway house, which doesn't even provide any validation of handwriting. The two parties sign on paper in different locations and then email each other scanned pdfs (sometimes with just the signature page!). The two pdfs are stored as evidence of the signed agreement. Not only do you not check the signature against a sample to verify it, but you have no idea at all whether it was just a picture of a signature added by a different person. There is no other substantive verification going on other than control of an email address.
The halfway house has arisen as a concession to practicality. Getting many important people in the same place to sign physical copies is difficult and seems crazy in today's technology environment. Despite reducing the verification of signatures and integrity of documents, it has not given rise to significant forgery or impersonation issues. Businesses routinely sign multi million dollar deals in this way without a second thought. This is the security baseline you should assess an electronic signing solution against.
Future of electronic signatures
Most electronic signing services work by replicating paper signatures in a digital way. For example by inserting a picture of a handwritten signature into an electronic document, after some sort of online account authorisation (varying from basic account log-in, click through from an email, to more secure encryption). Because this replicates traditional signing so closely, adopting these services may be an easy transition to make. However, hand written signatures have always just been one way of agreeing to a contract (that was helpful in verifying who is agreeing and what is being agreed). Agreeing contracts electronically does not need to be constrained to providing paper signatures without the paper. Adding an image made to look like handwriting makes no real sense.
Once you move off paper, you have the freedom to develop an entirely new experience that truly takes advantage of the medium. There is no reason signing a commercial contract cannot be as easy as ordering a book on amazon (one click!) or as personalised as your facebook feed (instead of a handwritten signature, why not a photo or video?).
Electronic signing today can be a big process improvement and step forward for organisations. As it continues to spread and develop there is an even bigger opportunity to re-imagine electronic contract acceptance for a digital world. This is where the industry will begin to un-lock significant value.