September 13, 2019

What’s Ink Got to Do With It:  Enforceability of Electronic And Technology-Based Commercial Loan Documentation

In our digitally connected world, parties want to benefit from easy, efficient and convenient ways to transact. The physical closings where all contracting parties with their counsel gather around a table covered with multiple copies of agreements have been replaced in great part with online exchanges of signed documents. This is particularly true in cross-border transactions where parties are located in various jurisdictions.

Electronic contracting can take various forms, such as exchanging signature pages of a contract through scan and email or accessing a contract through a web-based application that allows the signatory party to sign electronically as directed by the platform. Email exchanges between two parties on contract terms can also result in the formation of a contract.

While using technology to facilitate transactions seems relatively easy, it does present legal and practical challenges. Many countries have established legislation dealing with the use, validity and legality of electronic signatures. Such laws are generally permissive as to the use of electronic methods for executing a contract. For example, in the United States, the Uniform Electronic Transactions Act (UEAT) and the federal Electronic Signatures in Global and National Commerce Act (ESIGN) are “enabling statutes that place electronic records and signatures on a legal par with their paper and ink counterparts”.[1]

In Canada, all provinces and territories have adopted e-commerce legislation. An electronic signature is valid and enforceable so long as the electronic signature is reliable for the purpose of identifying the person and the association of the electronic signature with the relevant electronic document is reliable.

In Europe, the Regulation (EU) No 910/2014 (the eIDAS Regulation) applies to EU Member States from 1 July, 2016 and “establishes an EU-wide legal framework for electronic signatures (as well as for electronic seals, electronic time stamps, electronic registered delivery services and website authentication).”[2] Articles 25(2) and (3) of the eIDAS Regulation “provide that a qualified electronic signature shall have the equivalent legal effect of a handwritten signature and that a qualified electronic signature based on a qualified certificate issued in one Member State shall be recognised as a qualified electronic signature in all other Member States.”[3]

In the United Kingdom, the “Electronic Communications Act 2000 (the ECA 2000) provides a statutory framework for the admissibility of electronic signatures in England and Wales. Section 7(1) of the ECA 2000 provides that in any legal proceedings (a) an electronic signature incorporated into or logically associated with a particular electronic communication or particular electronic data, and (b) the certification by any person of such a signature, shall each be admissible in evidence in relation to any question as to the authenticity or integrity of the communication or data. Although the ECA 2000 deals with the admissibility of electronic signatures, it does not deal with the validity of electronic signatures.”[4]

Beyond the general principles of admissibility of electronic signatures for agreements, there can be statutory exclusions in the sphere of commercial transactions – and those are not necessarily the same from one jurisdiction to the another. In the United States, for example, the UETA and E-Sign do not apply to the Uniform Commercial Code (except for articles 2 and 2A).[5] The definition of “signing” under article 1 and “authenticate” under article 9 “anticipate the use of electronic signatures”.[6] Note however that article 3 requires a writing, so electronic signatures on promissory notes in a commercial loan transaction would not be possible.

In Canada, the law can differ from one province to another. For example, in Alberta, a guarantee given by an individual by written agreement must be signed before a lawyer, the guarantor acknowledging the guarantee obligation and signing a certificate in the prescribed statutory form. The same process applies in Saskatchewan for a guarantee relating to farmland or other assets in farming. Given the statutory requirements in these provinces, e-signature solutions cannot be used for such types of guarantees.

Beyond creating valid agreements signed and exchanged via email or using an e-signature process, ensuring their enforceability and non-repudiation in a litigious context brings into play evidentiary principles. How does one preserve the integrity and authenticity of the agreement so as to make it admissible in court proceedings? Is it sufficient to simply exchange scanned copies of agreements signed in “wet ink” via email? How can the lender prove that the party who signed the loan agreement was in fact the authorized representative of the borrower? The rules of the different jurisdictions relating to a transaction must be examined.

Another important practical consideration is for legal counsel working with financial institutions to understand their client’s internal processes and help them develop best practices for mitigating the various risks throughout the life cycle of a document, from creation to destruction.

 

 

[1] Juliet M. Moringiello & Steve Weise, Electronic Contracts and E-Signatures, July 2019 (powerpoint), p. 5 (see Annex A of this paper).

[2] The Law Society Company Law Committee and The City of London Law Society Company Law and Financial Law Committees, Note on the Execution of a Document using an electronic signature, July 2016, online:  <http://www.citysolicitors.org.uk/attachments/category/114/LSEW%20%20CLLS%20Joint%20Working%20Party%20-%20Note%20on%20the%20Execution%20of%20a%20Document%20Using%20an%20Electronic%20Signature.pdf>,  p. 2 (see Annex A of this paper).

 

[3] Ibid.

[4] Ibid.

[5] Juliet M. Moringiello & Steve Weise, Electronic Contracts and E-Signatures, July 2019 (powerpoint), see fn. 1 above, p. 10.

[6] Ibid.

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