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Investor Hub Jan 23, 2020 6 min read

Are electronic signatures legally binding? How SeedLegals complies with UK law

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Rob Winspear

In this article we will explain why electronic signatures, in light of the recent Law Commission Report on the use of electronic signatures, are a valid alternative to written signatures and why and how SeedLegals uses electronic signatures for our documents.

We decided to write this article as we are frequently asked by our customers about this issue. This is understandable, because the law on electronic signatures, until 2019, was not as clear as it could be. 

Prior to the Law Commission Report on the issue produced in September 2019, the only guidance lawyers had was a less-than-forceful Law Society Practice Note, published in 2016, which endorsed the practice of using electronic signatures on legal documents. 

Because this was the only authority on the topic that was available, it led to reasonable disagreement among legal professionals about whether or not electronic signatures could or should be used.

However, in light of the comprehensive Law Commission Report on electronic signatures, which corroborated the Law Society’s view, it can now be said with complete confidence that electronic signatures can validly be used on legal documentation.

Did the Law commission conclude that electronic signatures are legally binding?

The Report recognised that there was no single source of law that sets out the current position on electronic signatures, but a review of all the relevant legal cases which considered the issue led the Law Commission to conclude:

  • The general purpose of a signature and the function of a signatory on a document is to demonstrate an intention of that party to authenticate the contents of the document he attached his signature to, and demonstrate his intention to be bound by that document.
  • Because the function of a signature is solely for authentication and proof of intention purposes, written signatures (in the traditional sense of it being a unique scribble of a particular person) carry no ‘special’ status that means they should be regarded as inherently ‘better’ than any other form of signature, electronic or non-electronic.
  • Previous cases regarding non-electronic signatures have held signing with an “x”; initials; a mere mark; a printed name; or a stamp of a handwritten signature can constitute a valid, non-electronic signature, leading the Commission to conclude that therefore, electronic equivalents of these accepted forms are also likely to be recognised by the courts as valid. 
  • To support the above conclusion, the Commission also reviewed cases which have already approved the use of electronic signatures. They found that courts have already previously held that: a name typed at the bottom of an email; clicking an “I accept” button; or the header of a SWIFT message have been found to act as valid signatures.
  • As such, theoretically, electronic signatures can be used for all legal documentation, whether or not that document is a deed, as they can provide the same authentication and proof of intention purposes that a written/non-electronic signature can provide.

Ultimately, the Report stated that the underlying concerns for any signature, electronic or non-electronic are:

  1. How can one be confident that it was in fact the intended person who signed the document and not another person pretending to be the intended person. (the “Identity Problem”)
  2. Does that intended person have capacity and authority to sign the document either for themselves or for their principal (e.g. on behalf of a company) (the “Authority Problem”)
  3. What is the document that is being signed (e.g. are there additional conditions/formalities a person has to comply with in addition to simply provided a signature, such as when signing a deed) (the “Formalities Problem”)

Or, in other words, although all signatures, electronic and non-electronic are legally valid, how can we ensure the signature in question has enough evidential weight to demonstrate that signatory intended to authenticate the contents of the document and intended to be bound by the legal obligations created by that document.

How we ensure that our signatures carry enough evidential weight and comply with UK law

The Identity Problem

This problem is avoided by us requiring you to create an account in order to use the Platform. Each account is unique to the account-creator and we require you to create a secure password that you should not share with anyone once it has been created. We also request that you log out of your account after each session to ensure no-one can access your account masquerading as you.

Further, we do not retain or process password data of our Users so you can be sure we have not signed anything using your account because we cannot access it ourselves!

The outcome is that we, and you can be confident that only the person who created their account will be the one who can use it, so when you apply an e-signature using that account, everyone can be confident it was applied by the real owner of the account.

The Authority Problem

We overcome the Authority Problem by giving our Users the ability to assign “roles” to each profile that is attached to a particular company. These roles determine the level of access a particular user has to the company they are attached to generally, but importantly also whether or not a particular user has authority to sign documents on behalf of the company, as you can assign a particular user “signatory” or “director” roles. Having either of these roles tells the platform that the user has the appropriate authority to act for the company and anyone without these roles will have no ability to sign anything other than in their own name.

Only a User with “admin” access to a particular company can assign “signatory” and “director” roles to other Users attached to that company, so there is no risk a User could unilaterally give themselves the ability to sign company documents on the company’s behalf and risk that a company document was signed by someone without the requisite authority.

Therefore, provided the “admin” of the company only assigns “director/signatory” roles to the people with the requisite authority, only those with the requisite authority will be able to sign on behalf of the company.

The Formalities Problem

For the purposes of SeedLegals, most of our documents do not require additional formalities and so compliance with problems 1 and 2 is all that needs to be done.

However, some documents on the platform require additional formalities to be complied with before that document has been validly executed. Mainly, they are share certificates, types of deed (deeds of adherence, deed of subscription, options grants etc), or the stock transfer form needing to be filled in for share transfers.

For deeds / share certificates:

The law states that the general rule for valid execution of a deed (for the purposes of executing share certificates the rule is the same) is that it must be signed “in the presence of a witness who attests the signature as delivered as a deed”. 

The Companies Act adds that, for companies, there is a slight exception where, if the company has two authorised signatories (e.g. director or company secretary) then they can both sign the deed instead of needing a witness. Otherwise the general rule applies.

We have set up the platform so that it recognises when the company has at least two people with both the “director” and “signatory” role attached to the company, and when those conditions exist, the signature blocks on our deeds will relate to those two individuals with those roles, and will make no reference to the requirement of having a witness attest the signatory of the company agent.

If the company has only one director, then the platform will automatically change the signature block so that it asks for a witness to affix his signature on the deed instead. Then, to give the individual you have chosen as your witness the ability to sign the document in question in his capacity as a witness, you temporarily assign him the “signatory” role but not the “director” role, and then when he opens the particular document and applies his electronic signature it will be added into the witness signature block. Once that signature has been applied should remove the signature role you provided to that individual.

The other thing to note, related to witnessing deeds, is that because the witness’ signature must be affixed at the time of execution, the Law Commision concluded that “in the presence of a witness” most likely means in the physical presence of that witness.

Therefore, our practical advice when needing a deed to be witnessed on SeedLegals, is to have the person you have chosen as witness stand over your shoulder as you affix your e-signature, and then once you have done that, log out, allow that witness to log in with his account, and get him to apply his witness signature immediately after.

For the stock transfer form (J30 form):

The stock transfer form is the only exception to the general rule that electronic signatures can act as a substitute for non-electronic signatures. 

This is because the Law Commission concluded that where the law asks for a “wet-ink” signature, the legislators intention was to clearly exclude the possibility of using electronic signature, so a written signature (on the original version of the document) is the only acceptable form of signature.

This exception is only applicable to the stock transfer form on our platform, and we emphasise the fact that a different rule applies in the hint text we provide accompanying the share transfer product you can take advantage of on the platform, to make sure our Users remember that for this specific instance, you cannot e-sign that document.

Do we need an authentication certificate to go with our e-signature?

We will also sometimes see investor’s or founder’s lawyers insist that for an e-signature to be valid it must be accompanied with an authentication certificate to show when the e-signatures were added. This is simply a misconception and is not a legal requirement for a valid electronic signature.

Admittedly, it may provide additional evidential weight to the electronic signature in question, but here at SeedLegals we are confident that the systems we have put in place to ensure our electronic signatures have sufficient evidential weight already.

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