The convenience of executing legal documentation with electronic signatures must be carefully weighed against issues of enforceability and security. In this update, we explain the decision Williams Group Australia Pty Ltd v Crocker [2015] NSWSC 1907, in which the Supreme Court of New South Wales ruled that a company director was not bound by a guarantee that (apparently) bore his electronic signature.

The key messages from this case are:

• An executor – being the person who physically or electronically applies a signature – is not implicitly authorised to use another person’s electronic signature if it was applied without that person’s knowledge or consent. This is similar to the situation where an executor forges another person’s handwritten signature.
• In this case, a director was not liable in circumstances where his failure to change a default password enabled another person to access and supposedly apply his electronic signature. However, it is possible that a person could demonstrate an intention to authorise another to apply their electronic signature if they took active steps to permit access to the means of applying that electronic signature (by, for example, circulating their password).
• Accordingly, where a contract is to be executed by an individual using an electronic signature, the accepting party can mitigate risk by considering whether additional steps should be taken to verify that the individual consented to their signature being applied. For example, in addition to having the execution witnessed, the individual could be required to confirm their execution by email.
• Courts will be unwilling to find that an unauthorised execution was ratified unless there is clear evidence that the person purportedly bound saw the document, appreciated its salient features, and then failed to take any remedial action. In this case, the court was sympathetic to the view that a person should not have to read each and every email and attachment in their inbox.

Background

Williams Group Australia Pty Ltd (Lender) sold building materials to IDH Modular Pty Ltd (Borrower) under the terms of a trading credit agreement that incorporated a director’s guarantee and indemnity. The document was seemingly executed by the Borrower’s three directors, including Mr Crocker (Guarantor), and witnessed by one of the Borrower’s employees.

In the months before execution, one of the Borrower’s directors (Brooks) set up a HelloFax electronic signature account that enabled the directors to remotely upload and apply their signatures to documents. Each time a director’s signature was applied, that director would receive a confirmation email attaching the executed document. The Guarantor, who worked interstate, received his login details for the account directly from Brooks and never changed his password. He soon uploaded his signature to the account.

When the Lender attempted to enforce the guarantee in the amount of nearly $890,000, the Guarantor claimed he had not executed nor authorised the guarantee’s execution on his behalf, nor had he any knowledge that he had been signed up to such a substantial liability. At trial, the parties accepted that the Guarantor had not executed the document himself – rather, an unidentified third person using his account had uploaded and applied their own signature purporting to be the Guarantor’s.

The Lender, whom at the time had no knowledge of these circumstances, argued that the guarantee should be enforced on two bases:

• By failing to change his default password, the Guarantor had impliedly authorised Brooks or any other person who received the login details from Brooks to execute the document on the Guarantor’s behalf (actual authorisation). Alternatively, even if there was not actual authorisation, the Guarantor had represented such authority to the Lender (ostensible authorisation).
• Even if the Guarantor did not actually authorise or represent authorisation, a number of circumstances (principally being sent a confirmation email) indicated that he had ratified the execution.

Decision

McCallum J of the Supreme Court of New South Wales J ruled in the Guarantor’s favour. We summarise the judgment’s key points below.

Authority

McCallum J acknowledged that an implied agency relationship could arise if the Guarantor placed another person in the situation where, by ‘the ordinary uses of mankind’, it could be understood that the person signing represented and acted for the Guarantor. However, the Guarantor’s mere omission to change his password did not demonstrate an intention to authorise anyone else to operate the account on his behalf. Such use would be a misuse – not an ‘ordinary use’ capable of amounting to implied authorisation. This conclusion was further bolstered by the fact that the Guarantor was never actually advised by the Lender, Borrower or other directors that he was required to provide a guarantee under the borrowing arrangement (even when the Borrower had previously provided a similar guarantee to the Lender).

The Court also rejected analogies to the situation in Pacific Carriers Limited v BNP Paribas [2004] HCA 35, in which the High Court found that a bank was bound by letters of indemnity that its officer had executed without the bank’s authority. In that case:

The representation of authority came from a combination of features of [the bank officer’s] presentation to the outside world, all attributable to the fact that Pacific was dealing with a bank, with all its institutional trappings.

Not only was the Lender here dealing with an individual lacking the ‘institutional trappings’ of a large company, the Guarantor had made no representations that another person was authorised or ‘held out’ as being able to bind him to the guarantee because, in the Lender’s mind, the Guarantor himself had signed it.

Ratification

Instead, the critical factor was whether the Guarantor had notice that he had been personally committed to the guarantee. The Lender’s principal submission was that the Guarantor received a confirmation email attaching the document after it was executed. However, Justice McCallum considered that this was a ‘slender basis’ to prove ratification because:

• While it was accepted that the confirmation email was sent to the Guarantor’s email address, the Lender failed to prove that the Guarantor had received and read the email, opened the attached document, and made himself aware of its salient features.
• It was not clear on its face that the attached document contained a guarantee because it was labelled ‘credit application’.

The Lender was ordered to pay the Guarantor’s costs.

For further information contact:

Natasha Toholka, Partner, Melbourne (03) 9603 3151
natasha.toholka@hallandwilcox.com.au

David Dickens, Senior Associate, Melbourne, +61 3 9603 3651
david.dickens@hallandwilcox.com.au

Mark Colautti, Lawyer, Melbourne, +61 3 9603 3146
mark.colautti@hallandwilcox.com.au