Keeping up with the Commission: The validity of electronic signatures
The construction industry sets the rules of the game. Our industry is a shining example of how the law should react to changes in society and technology, from the TCC piloting the notion of costs budgets to making BIM work in construction contracts.
Yet why is it that we are afraid to embrace electronic signatures as a way of getting a deal over the line quickly, especially when so much of what we do is programme driven, and when the completion of a contract can often trigger the all-important first payment?
It's because no one has told us we can actually do it.
Well now they have.
On 21 August 2018 the Law Commission, the Government's independent legal experts, published guidance aiming to sweep away uncertainty as to the validity of electronically signing legal documents.
Stephen Lewis, on behalf of the Law Commission said:
“Contract law in the UK is flexible, but some businesses are still unsure if electronic signatures would satisfy legal requirements. We can confirm that they do, potentially paving the way for much quicker transactions for businesses and consumers."
The benefits of adopting electronic signatures to help achieve a painless contract close are clear. What is important is how is this going to work in practice? And how can the law be developed in the future to further accommodate the modern way in which we as an industry do business?
The Law Commission uses the term "electronic signatures" broadly and it is clear from a practical point of view this covers scanned manuscript signatures, an 'electronic ink' signature such as that which can be achieved on a tablet or trackpad or an "I accept" button.
What is fundamental is that there must be a link to an identifiable person and a clear and unequivocal intention to be legally bound by the electronic signature. There is of course the issue of ensuring that the person electronically signing has the requisite authority to do so and the Law Commission notes that businesses should satisfy themselves that whatever system for electronically signing they have adopted will "have sufficient evidential weight" in order to prove (on a balance of probabilities) compliance with these requirements.
But what about Deeds?
Many of the construction contracts and ancillary documents we use in the construction industry are in the form of a Deed. This is because as standard a Deed carries a limitation period of 12 years during which a claim under the Deed can be bought. Collateral warranties and parent company guarantees are also often signed as Deeds to stave off any consideration the warranty/guarantee is void because it's nothing more than a free promise, lacking mutually enforceable obligations of a normal commercial contract.
Section 44 of the Companies Act 2006 states that a document may be executed as a Deed in two ways:
(1) By affixing the company's common seal; or
(2) By the signatures of:
(a) two of the company's authorised signatories; or
(b) a director of the company in the presence of a witness.
Taking the above rules, from a practical point of view, it's probably going to be quite easy to achieve (1) and (2)(a) using an electronic signature. Where it gets really interesting is when you look at how a valid electronic signature can be achieved in circumstances where a witness is required to attest a director's signature.
In order to comply with the requirements of Section 44(2)(b) of the Companies Act 2006, it is clear that a witness must physically be present to observe and attest the electronic signature of a director. Clearly, this is not an issue where the system adopted by the signing party allows for a witness to provide an electronic attestation simultaneously with the director's signature, but this might not always be practical if a director is, say, travelling alone at contract close.
It has been mooted that the requirement of a physically present witness should be scrapped, or at least made more flexible, to allow for witnessing by video link and this is an idea the Law Commission are committed to exploring further. Another suggestion is that multiple levels of security encryption and PIN codes that would be unique to a company's signatories should be enough to satisfy any challenge as to the intention of the signing party.
We should no longer be afraid about using electronic signatures across our industry, and their wider use is to be welcomed, especially as we now have conclusive backing from the Law Commission as to their validity.
Now we can continue to focus on how construction law can continue to develop to accommodate the innovations we are as an industry making every year.
This article is taken from Building Interest - Autumn 2018.