The Covid-19 pandemic may be gone, but it looks like remote working, online meetings and video conferences are here to stay. As a result, the use of technology to sign agreements and other documents remotely has become more widely accepted.
In this edition of the bowers.law Room 228 Newsletter, we examine the two main types of e-signatures, the requirements for their validity and limitations on use, and we share with you our Top Tips when using e-signatures for important legal documents.
Advantages of E-Signatures
Many of the advantages of using e-signatures are obvious, such as the increased practicality, speed and cost savings of not needing to send signed documents around the world by courier. Documents can now be e-signed instantly and securely anywhere where there is internet coverage.
There are also less obvious but equally important advantages of using e-signatures. The use of encryption and authentication gives e-signatures a higher degree of security than traditional, wet ink signatures. The use of e-signatures also reduces the risk of fraud because it should not be possible for a counterparty to make any “last minute changes” to an agreement once it has been sent out for signature. Finally, there are an increasing number of international and domestic laws providing for the validity of e-signatures giving companies increased certainty as to the enforceability of their e-signature agreements.
Our view is that these advantages are so significant that, for any transaction in which e-signatures would be valid, e-signatures should now be the default position. Regrettably, perhaps because they are unsure of the requirements for validity or the permitted types of documents for e-signatures, there are still parties and their lawyers who take an unduly cautious approach by still insisting on wet ink signatures when they are not required legally. Not only does this cause unnecessary cost and delay, but it can also lead to absurd situations. On one occasion during Covid, our client was on a sheep station in the Australian Outback at a time at which there were no flights at all from Australia to Hong Kong and a major global law firm unnecessarily insisted on a wet ink signature which was clearly impossible and so delayed the deal for about 6 months. On another occasion when the lawyers for the party on the other side of a transaction (the same ones who still insist on sending letters by fax) insisted on a wet ink signature, our client was on a remote Greek Island and would have had to have taken a boat to reach the nearest courier’s office.
It has effectively become essential to know the circumstances and manner in which e-signatures can validly be used. The Hong Kong position is summarised below.
Two Main Types of E-signatures
In Hong Kong the Electronic Transactions Ordinance (ETO) provides the legal framework for the use of e-signatures. The ETO recognises two different types of e-signatures, which are (i) electronic signatures and (ii) certificate-based digital signatures. Provided that they satisfy the requirements of the ETO, generally, both are recognised as having the same legal status as a traditional, wet ink signature. Certificate-based digital signatures are given a statutory presumption as to their veracity and authenticity if they are supported by a certificate issued by one of the recognised certification authorities. Currently, there are two recognised certification authorities for purposes of the ETO. These are the Postmaster General and Digi-Sign Certification Services Limited.
Requirements for Validity
For purposes of the ETO, an electronic signature means “…any letters, characters, numbers, or other symbols in digital form attached to or logically associated with an electronic record and executed or adopted for the purpose of authenticating or approving the electronic record”. Examples of when an e-signature can be used include consumer contracts, particularly in online transactions, electronic signatures / typed name at the bottom of emails, and when agreeing to the terms of an online subscription. An electronic signature will be valid and enforceable if it satisfies the following requirements of the ETO:
- the signatory uses a method to attach the electronic signature to, or “logically associate” the electronic signature with, an electronic record for the purpose of identifying himself / herself and indicating his / her authentication or approval of the information contained in the document in the form of the electronic record;
- the method used is reliable and appropriate for the purpose for which the signature is required; and
- the recipient of the signature consents to the use of an electronic signature (which includes implied consent).
For purposes of the ETO, a digital signature is a type of electronic signature “generated by the transformation of the electronic record using an asymmetric cryptosystem and a hash function”. The other party to the transaction can use the initial untransformed electronic record and the signer’s public key to determine:
- whether the transformation was generated using the private key that corresponds to the signer’s public key; and
- whether the initial electronic record has been altered since the transformation was generated.
In this way, a digital signature guarantees the identity of the signer (the signer is confirmed as the signer) and the integrity of the electronic record (the content has not been changed or tampered with since it was digitally signed). An example would be an electronic representation of a person’s handwritten signature that is generated using that person’s private key, which is password protected.
When contracting with Hong Kong government entities, electronic signatures are not sufficient. Only a digital signature is recognised as satisfying any signature requirement. Such a digital signature will only be valid and enforceable if it satisfies the following requirements of the ETO:
- it is supported by a recognised certificate (that is, a digital certificate issued by one of the 2 recognised certification authorities);
- it is generated within the validity of that certificate; and
- it is used in accordance with the terms of that certificate.
The ETO contains quite a long list of more formal documents which still cannot be signed by e-signatures and must be signed with a traditional, wet ink signature in order to be valid. In summary, these are as follows:
- The creation, execution, variation, revocation of wills, trusts and powers of attorney.
- The making, execution or making and execution of any instrument which is required to be stamped under the Stamp Duty Ordinance (other than certain contract notes).
- Government leases, and certain documents referred to in the Land Registration Ordinance including deeds, conveyances and judgments by which any premises in Hong Kong may be affected.
- Any assignment, mortgage or legal charge or any other contract relating to or effecting an interest in real property.
- A document creating a floating charge.
- Court orders, Judgments and warrants issued by a Court or a magistrate.
- Oaths, affidavits and statutory declarations.
- Negotiable instruments (excluding cheques marked “not negotiable”).
Top Tips / Practical Considerations
- When electronically signing documents which are governed by Hong Kong law, consider the type of document (rather than the type of transaction to which the document relates) and check whether the ETO requires the document to be signed with a traditional, wet ink signature to be valid. If it does not, then the parties may consider using an electronic signature to sign the document.
- Consider whether any other restrictions or requirements apply, such as registration or filing requirements and the counterparty’s requirements. The ETO also specifies legal proceedings in relation to which electronic signatures may not be used. These include court proceedings and proceedings before certain tribunals and appeal boards.
- If the document is governed by laws other than Hong Kong law, check whether e-signatures are equally valid and enforceable in the relevant jurisdiction or whether there are different or additional requirements when using technology to sign documents.
- Consider whether the e-signature adequately identifies the signatory and indicates his / her approval of the document to which it relates, as e-signatures must be attached to, or “logically associated” with, the electronic record.
- Agree on procedures in advance and consider whether to include express terms in relevant contracts e.g. the method or system to be used for the e-signature, which party will coordinate signing and issue invitations to the other signatories.
- After signing, maintain a printed and/or soft copy version of the document.
- Most importantly – Don’t insist on wet ink signatures when they aren’t necessary!
This Newsletter is not intended to be and should not be relied on as legal advice. You should seek professional legal advice before taking any action in relation to the subject-matter of this Newsletter.