Not my guarantee! Trade creditor faces consequences for accepting electronic signature at face value - Contracts and Commercial Law

This week's TGIF considers a recent judgment of the NSW Court of Appeal which held that a company director was not personally liable as a guarantor in circumstances where his electronic signature had been affixed to the guarantee without his knowledge.

WHAT HAPPENED?

In March 2010, a supplier of building materials (the Supplier) approved a credit application from a commercial customer (the Customer) which bore the electronic signatures of the Customer's three directors.

The credit application was accompanied by an all-moneys guarantee, which similarly bore the electronic signatures of the directors, as guarantors.

In May 2013, the Supplier commenced proceedings against the Customer, and against the three directors as guarantors, to recover almost $900,000 owed for the supplied materials.

In October 2013, the Customer went into liquidation and the proceedings against it were automatically stayed. Summary judgment was subsequently obtained against two of the directors, however, the third director successfully defended the claim against him on the basis that his electronic signature had been placed on the application and guarantee by an unknown person, without his knowledge or authority.

ISSUES ON APPEAL

The Supplier challenged the conclusions of the primary judge, namely on the questions of ostensible authority and ratification. It argued that if the appeal was not allowed, the ability of a trade creditor to ever rely on electronic signatures would be in real doubt.

Notwithstanding this, the decision at first instance was upheld for the reasons which follow.

Ostensible Authority

The Supplier submitted that the establishment of an electronic signature system by the Customer, which the director participated in, amounted to a "holding out" to trade creditors that electronically signed documents had been authorised by the relevant signatories.

The Court of Appeal rejected this contention and held that a finding of ostensible authority required the Supplier to prove the director had made a representation to it, albeit indirectly, that whoever placed his signature on the personal guarantee was authorised by him to do so.

The Court observed that, whilst the signature of a person who appeared to be an officer of the company may amount to a representation that the officer is authorised to bind the company, in this instance, the mere use by the director of such a system was not enough to attribute a representation by him to the Supplier of his authorisation to some other person to affix his electronic signature to documents so as to bind him personally.

The Supplier further argued that whoever affixed the director's signature on the guarantee had been cloaked with ostensible authority to do so by the director's failure to take "proper safeguards" to ensure that he alone had access to a unique password with which to apply his signature to documents.

Whilst the Court accepted that this failure meant that others were enabled to access the system, it did not constitute a representation of authority by the director to the Supplier.

Ratification

In the alternative, the Supplier submitted the director had ratified the guarantee and it was sufficient to establish, on the evidence, that an email was sent to the director asking him to sign the document (and then telling him that it had been signed). It was argued that there should have been a finding that the director had "closed his eyes" to the obvious such that the requirement for knowledge on a case for ratification had been satisfied.

The Court of Appeal held the primary judge did not err in applying the test of knowledge when considering the case based on ratification in that there needed to be "full knowledge of the material circumstances" for ratification to exist.

Having regard to the facts, the Court of Appeal stated that in order to fix the director with notice of the guarantee, it would be necessary to do more than establish the listing of the credit application on an email attachment.

The facts could not sustain a claim that the director had so shut his eyes as there was no reference in the email, or the attachment, to a "guarantee"; simply to the credit application.

COMMENT

With the increasing prevalence of electronic signature systems, this case is a cautionary tale in placing reliance on documents which are purported to have been signed electronically.

Whereas historically the focus on signatures has been on the question of forgery, this decision suggests that a new line of enquiry may need to be undertaken before accepting an electronic signature at face value.

This includes a careful consideration of the systems, controls and procedures in place for the company you are transacting with and the circumstances upon which documents, particularly those which personally guarantee corporate obligations, have been executed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.