Dangers in using and relying upon directors’ electronic signatures

Recently the New South Wales Court of Appeal considered whether a director was liable under a guarantee in a credit application where his electronic signature had been affixed to the guarantee without his knowledge.

The facts

In Williams Group Australia Pty Ltd v Crocker [2016] NSCWCA 265, a trade supplier sought to rely upon the personal guarantee of a director contained in a customer’s credit application.

The credit application bore the electronic signatures of the customer’s three directors as well as on the guarantee.

However, the director, Crocker argued that he was not liable under the guarantee because he had not placed his electronic signature on the guarantee and he had not authorised any person to place his electronic signature on the guarantee.

Crocker’s electronic signature had purportedly been witnessed by the customer’s administrative manager. However, one of the customer’s employees had used Crocker’s login credentials to place the electronic signature on the credit application and guarantee. Crocker was not in the office at the time the electronic signature was applied and he had not changed his login credentials since they were issued by another director of the customer.

The creditor’s arguments

Although the creditor eventually accepted that Crocker had not placed his electronic signature on the guarantee it relied upon three arguments to enforce the guarantee:

• Actual authority: Crocker had implicitly given actual authority to any person who had access to his login credentials that would enable them to use his electronic signature.
• Ostensible authority: Crocker held out any employees or directors of the customer as having authority to affix his electronic signature.
• Ratification: Crocker had retrospectively authorised the employee’s use of his electronic signature by failing to take any steps despite being aware of the signed credit application.

The director’s lucky escape

Actual authority

Crocker had not given actual authority to any person to affix his electronic signature. The evidence established that when Crocker’s electronic signature was required, he would apply it himself.

The mere failure of Crocker to change his login credentials, did not lead to a conclusion that he had authorised any person to apply his signature using those credentials.

Ostensible authority

To be successful on this argument, the creditor had to show that Crocker had held out to the creditor that some other person had his authority to apply his electronic signature.

There was no evidence that Crocker had made any sort of positive representation to the creditor that they could rely on an electronic signature placed by someone else. Crocker’s failure to change his login credentials did not amount to a representation that any person who used his login credentials had authority to bind him contractually.

Ratification

Ratification is a legal mechanism that allows a principal to retrospectively authorise an agent’s act where the principal has full knowledge of all the relevant circumstances.

To be successful the creditor had to prove that Crocker had notice that his agent had signed the credit agreement and the director’s guarantee on his behalf.

The creditor argued that Crocker would have been notified that the credit application had been approved and that his failure to do anything meant that the credit agreement and guarantee were ratified.

However, the Court said that Crocker would had to have been made aware that the credit agreement contained a personal guarantee for the guarantee to have been ratified. The evidence showed that he received no such notice and also it was not common practice for all directors to give personal guarantees to secure credit agreements.

Comments

This decision provides timely reminders for not only directors but any person in business using, or seeking to rely upon, an electronic signature.

For the signatory:

• You should protect the login credentials for your electronic signature.
• You should put in place systems and controls for the use of electronic signatures including a register detailing when the electronic signature has been applied.
• If relevant, communicate the systems and controls relating to the use of electronic signatures to companies that you are transacting with.

For the recipient:

• If you receive contract documents with an electronic signature you should take steps to ensure they have been authorised.
• Confirm who placed the electronic signature on the document.
• Check the systems and controls that a company has in place for the use of electronic signatures.
• Send a copy of the document purportedly signed by electronic signature to that person, so that he or she has notice.

If you would like more information about these issues please contact Graham Roberts on +61 7 3231 2404, Clare McDonald on +61 7 3231 2475 or a member of our litigation and dispute resolution team.