Note: This article was drafted before the global COVID-19 outbreak, which has been accompanied by the widespread implementation of emergency business continuity plans for commercial banks allowing employees and clients to work remotely and, often involving adoption of e-signature processes.[1] It is now more timely than ever given its focus on legal risks for commercial banks to consider when using e-signature to execute commercial lending agreements.[2]
In today’s digital economy, lenders are eager to implement innovative technological solutions to service clients’ needs faster and more efficiently while reducing costs. E-signature is one such potential solution that is currently receiving significant attention within the commercial banking industry. Replacing wet ink signature with electronic signature in a paperless process can save time and money for both lenders and their customers, reducing document handling time and expense, as well as the need for post-closing re-execution of loan documents to correct mistakes made when originally signing and dating the documentation. Although e-signature usage is widespread by online retail and small business lenders, it has not yet been widely adopted by commercial banks for larger transactions despite its time- and money-saving advantages. In this article, we discuss e-signature laws in a few key markets and highlight some important legal risks for commercial banks to consider before implementing e-signature for larger domestic and cross-border bilateral deals.
Many countries have enacted laws and regulations governing the enforceability of e-signed documents, establishing a predictable framework for local transacting parties to use e-signature when executing contracts. Although e-signed contracts are generally enforceable in most modern countries, there is no uniform global standard, and laws vary across geographic boundaries and regions. In evaluating the risks of using e-signature for bilateral commercial lending documents in any jurisdiction, one of the first questions lenders should ask is whether e-signed contracts have the same legal effect as wet ink-signed contracts. When e-signature has the same legal effect as wet ink signature, it typically carries a presumption of validity. If a borrower were to challenge the validity of such an e-signature in court, the borrower would have the burden of disproving the validity of such e-signature. In contrast, when e-signature has a lesser legal effect than wet ink signature, it would not typically carry a presumption of validity. If a borrower were to challenge the validity of such an e-signature in court, the lender would have the burden of proving its validity.
In addition to questioning the legal effect, lenders should ask several more questions. First, are additional criteria or technologies required under applicable law for bilateral e-signed loan documents to have the same legal effect as wet ink signature? Second, does local law exclude any key lending documents?[3] Third, do local security registries accept e-signed collateral agreements or filing or registration to perfect a secured lender’s rights against third parties? Fourth, is the lender engaged in cross-border activity? Cross-border lending creates additional challenges and legal risks for monitoring compliance in multiple jurisdictions and are discussed in more detail below.
Certain jurisdictions, such as the U.S., Canada, and England, have broadly permissive laws recognizing the enforceability of e-signature without specifying technical requirements, creating a predictable e-signature framework for transacting parties. As a general rule, in the United States, through a combination of federal and state law (Electronic Signatures in Global and National Commerce Act 2000 [ESIGN]), Uniform Electronic Transactions Act [UETA] [recommended to states in 1999]), e-signature is generally recognized as having the same legal effect as wet ink signature so long as the transacting parties have consented to its use and all legal requirements for a contract are met. [4] The laws are technologically neutral. Common practice is to include an express consent provision in the body of an e-signed agreement, although it is not specifically required. However, lenders should also be aware of exceptions to the general rule, carving out specific document types from the generally permissive framework by law or practice. For example, wet ink signatures should be required for promissory notes and notarized documents.[5] In addition, wet ink signatures should also be required for collateral documents, such as mortgages, deeds of trust, and other agreements that are perfected by filing with governmental registries. Although e-signed collateral documents are typically enforceable under the law between contracting parties to the same extent as wet ink signed agreements, many governmental registries have not kept pace with the law and do not accept e-signed collateral documents for recordation. If a collateral agreement requiring filing for perfection purposes is not filed by a registry, then the agreement would be enforceable only between contracting parties but not enforceable against third parties, creating a risk for the secured party against challenge by a third party creditor or bankruptcy trustee.
Likewise, Canadian federal and provincial law (Bank Act [Canada] [BA], e.g. Electronic Commerce Act, 2000 [Ontario][6] and the equivalent legislation in other Canadian common law provinces), are generally permissive in relation to the use of e-signature so long as the e-signature technology used is reliable and meets the basic characteristics of an enforceable e-signature (i.e. (1) the electronic signature is reliable for the purpose of identifying the person; and (2) the association of the electronic signature with the relevant electronic document is reliable). The laws are technologically neutral, and market practice is to include explicit consent provisions in e-signed contracts (as previously mentioned), although such provisions are not specifically required. However, lenders should also be aware of exceptions to the general rule. Wet ink signatures should be required for certain documents, including promissory notes, personal guarantees, notarized mortgage documents, and security registered with the Bank of Canada.[7]
Similarly, under English law, through a combination of legislation, case law, and common law principles, e-signature is broadly recognized as having the same legal effect as wet ink signature so long as the transacting parties intend to authenticate the document and have adhered to all formalities relating to execution (Electronic Communications Act 2000 [ECA 2000]).[8] The law does not specify the technology required for enforceability and does not require express consent provisions; however, market practice is to include express consent provisions in e-signed contracts. Like in the U.S. and Canada, the generally permissive legal framework in England is subject to certain exceptions. For example, wet ink signatures should be obtained for guarantees and other documents created in the form of a deed requiring witnessing. English law does not recognize remote witnessing of deeds. A witness must be in the physical presence of the signer when a deed is executed, making e-signature of such deeds impractical. As in the U.S., not all English security registries accept e-signed collateral documents for filing. Lenders should either be assured in advance of the policies of a particular registry or, for ease of monitoring, adopt a blanket policy of requiring wet ink signatures for all collateral documents to be filed with security registries.
In order to create a predictable framework for e-signature use by transacting parties across borders in EU member countries, the Council of the European Union adopted an e-signature regulation (Regulation [EU] No. 010/2014 [eIDAS Regulation]) applicable to all EU members. Similar to local law in the U.S., Canada, and England, the EU regulation provides that among member countries, e-signature cannot be denied legal effect simply because it is in electronic form. However, unlike the law in the U.S., Canada, and England, in order for e-signature to have the same legal effect as wet ink signature, the e-signature must meet the heightened criteria of a “qualified electronic signature (QES).” The QES criteria focus on verifying the identify and authenticity of the signer and require, among other things, the use of a “qualified electronic signature creation device” such as a configured USB token or smart card when creating the e-signature, and e-signature certification by a “qualified trust service provider.” a pre-approved commercial or governmental authority. QES has been slow to gain acceptance among commercial parties outside of a few regulated industries due to the impracticalities of complying with the eIDAS requirements. Before implementing e-signature, lenders in EU member countries should consider whether their commercial clients are willing to comply with the QES requirements in order to deliver e-signed loan documents with the same legal effect as wet ink signature.
Outside the EU, there is little harmony across geographic regions or country borders with respect to e-signature requirements and laws. Like in the EU, many countries also require the use of heightened digital technology and/or certification by governmental authorities for e-signed loan agreements to have the same legal effect as wet ink signature. In certain Latin American countries, key credit and lending documents are expressly excluded from protection under e-signature statutes, while in some Middle Eastern countries, courts have been known to reject e-signed lending agreements despite legislation recognizing their enforceability. The lack of global uniformity is significant for commercial cross-border lending transactions where the jurisdiction of the documents’ governing law, as well as the jurisdiction of formation for each borrower and guarantor, must be taken into account in order to avoid potential challenges to enforceability by borrowers or guarantors under the applicable law of their own jurisdiction of formation, in addition to the jurisdiction of the documents’ governing law. For lenders engaged in cross-border lending activity, monitoring compliance with the laws of multiple jurisdictions can be unwieldy, time consuming, and expensive, creating new challenges and legal risks to be weighed against the benefits of using new technology to streamline processes, improve customer experience, and reduce internal costs.
Commercial banks seeking to implement e-signature solutions should evaluate the risks described above. We suggest creating an internal working group of stakeholders and risk stewards from across business products and functions to develop an integrated and iterative approach for using e-signature for each of the various types of documentation involved in a commercial lending transaction. As an additional step, we suggest piloting the proposed solution with a small team of bankers and their clients. In the course of the pilot and wider roll-out, the working group should continue to address new challenges and risks as they arise.
[1] This article is a summary of the CLE Program Panel entitled “What’s Ink Got to Do With It: Enforceability of Electronic And Technology-Based Commercial Loan Documentation,” presented in September 2019 at the Business Law Section’s Annual meeting. Special thanks to our co-panelists, Linda Filardi, Elizabeth Leckie, Charles Morgan, and Steve Weise. Program materials and audio can be accessed by Section members at https://www.americanbar.org/groups/business_law/resources/materials/2019/annual_materials/whats_ink/; a video summary is also available at American Bar Association, Business Law Today, “Program Spotlight: Jon Rubens Interviews Kiriakoula Hatzikiriakos and Tracy Springer on Digital Signatures,” https://businesslawtoday.org/video/program-spotlight-jon-rubens-interviews-kiriakoula-hatzikiriakos-tracy-springer-digital-signatures/ (14-11-2019).
[2] The views and opinions expressed in this article are solely those of Tracy Springer and Kiriakoula Hatzikiriakos in their personal capacities and do not represent those of their respective employers.
[3] The discussion in this article is limited to bilateral commercial lending agreements, and, as a result, we do not discuss other types of documents that typically require wet ink signatures under the laws of many jurisdictions. In addition, the exceptions discussed are examples only and are not intended to be an exhaustive or comprehensive list. Lenders should always engage counsel for legal advice in connection with implementing an e-signature program.
[4] The Tribar Opinion Committee published its “Comment concerning use of electronic signatures and third-party opinion letters” on March 24, 2020, available at https://www.americanbar.org/content/dam/aba/administrative/business_law/opinions/tribar/materials/esignatures.pdf.
[5] Please note that in order to accommodate a workforce largely working from home due to COVID-19, by Executive Order No. 202.7 on March 19, 2020, Gov. Andrew Cuomo temporarily permitted notarial acts under New York State law to be performed using audio-video technology provided certain conditions are met.
[6] SO 2000, c 17, https://www.canlii.org/en/on/laws/stat/so-2000-c-17/latest/so-2000-c-17.html.
[7] See e.g. Guarantees Acknowledgment Act (Alberta), RSA 2000, c. G-li s. 3; Alberta Regulation 66/2003, Schedule; Farm Security Act (Saskatchewan), SS 1998, c. S-171, s. 31(1) (applies to guarantees to farmland or other assets used in farming). In Quebec, the Chamber of Notaries of Quebec announced that certain measures will be taken as of April 1, 2020 to allow for technological solutions for passing notarial deeds, see www.cnq.org.
[8] In 2016, the U.K. Law Society published a practice note on the execution of a document using an electronic signature, see www.lawsociety.org/uk/support-services/advice/practice-notes/execution-of-a-document-using-an-electronic-signature/. The U.K. Law Commission confirmed the validity of electronic signature in September 2019, see www. https://www.lawcom.gov.uk/electronic-signatures-are-valid-confirms-law-commission/.