Electronic Signatures – Regulations and Best Practices

Regardless of the industry or the company, business owners and managers often handle and sign a substantial number of documents on a day-to-day basis. These documents may include supplier contracts, employee agreements, financing and banking documents, minute book documents and various correspondences. Given the significant amount of paper involved, the cumbersome and time-consuming task of organizing, executing and delivering documents (whether by courier or via email) inevitably leads to delays, inefficiencies and increased costs. One promising solution addressing these issues is the use of electronic signatures. However, this option is often not adopted or even considered for several reasons ranging from unfamiliarity and inertia to concerns in respect of invalidity and fraud. This article provides an overview of both the legal framework governing electronic signatures and the technology that enables them. Hopefully the information below affords some assurance to business owners, managers and legal professionals that electronic signatures can be a convenient and cost-effective way to transact business.

What is a ‘signature’?

Although the colloquial understanding of a signature (which generally consists of the name of a person written in a distinctive way with his or her own hand) is decidedly narrow, the legal concept of signatures is both broad and flexible. Specifically, the courts have defined a ‘signature’, in as early as 1976, to mean “the writing or otherwise affixing, a person’s name, or a mark to represent his name, by himself, or by his authority, with the intention of authenticating a document as being that of, or as binding on, the person whose name or mark is so written or affixed.” In other words, the key consideration for whether or not a ‘signature’ would be legally effectual is the intent which underlies the ‘signature’ as opposed to the ‘signature’ itself.  Consequently, if a ‘signature’ is found to have the necessary intent (which usually communicates approval of and willingness to be bound by the associated document), then it is likely that the ‘signature’ will be binding.  

Electronic Signatures

Based on the common law interpretation of ‘signature’, it is clear that if an electronic signature communicates the necessary intent, it would be found binding in the same way that a traditional hand-written signature would. However, given the concerns surrounding the use of electronic signatures (the most concerning of which is the commonly held perception of a heightened risk of fraud), the Ontario provincial legislature passed the Electronic Commerce Act, 2000 (the “ECA”). (Various e-commerce acts have been passed in the other provinces in Canada and although there are some differences between such acts, they are generally minor.) The ECA sets out the rules for conducting business transactions electronically (in Ontario) and it is a voluntary and enabling statute which enables electronic business transactions while ensuring that parties who do not want to engage in business electronically have the option to refuse to do so. Consequently, before documents with electronic signatures are exchanged and considered binding, all parties involved must have consented to conducting business electronically.

Pursuant to the ECA, ‘electronic signatures’ are defined as “electronic information that a person creates or adopts in order to sign a document and that is in, attached to or associated with the documents.” Further, the ECA provides that an electronic signature can satisfy (barring exceptional circumstances) any legal requirement that a document be signed insofar as the electronic signature is 1) reliable for the purposes of identifying the person, and 2) the association between the electronic signature and the relevant electronic document is reliable. As such, a typed name at the end of an email or the click of an “I accept” or “sign” button on a website or any other electronic platform are often sufficient to create a binding relationship.

Electronic Signature Technology and Audit Trails

The oft-heard argument that electronic signatures are not as “certain” as ink and paper signatures reveals itself to be baseless once one understands how the technology operates. In fact, electronic signatures may rightly be considered the preferred method of authenticating a document. Electronic signature technology uses email as a way of notifying the signator(ies) that specific documents require signatures. Behind every electronic signature is a digital audit trail, a collection of meta data cataloguing all the steps from when a request for an electronic signature is sent out to when the signed document is returned.

Electronic signature technologies generally track the following information as part of the audit:

  • When was a request for an electronic signature sent out;
  • To whom was the request sent out;
  • When was the email opened;
  • When was the document signed and returned;
  • Precise details about the computer or device used to sign the document (type of computer, IP address etc…).

The audit trail is safely stored and can be verified in cases where the validity of a signature is questioned. In truth, it is far easier, cheaper and more conclusive to verify an audit trail than to hire experts to verify whether ink squiggles directly correspond to a given individual. Audit trails dramatically increase the technical challenge of faking a signature, and they prevent tampering with documents after they have been signed.  Many electronic signature systems ensure trust in the process by employing a document identification number (“DIN”) or a cryptographic hash, both serving to uniquely provide an independent verifiable trail.

Exceptions and Special Requirements

Certain classes of documents are held to a higher validation standard and in these cases, an electronic signature can only satisfy the legal requirement if the electronic signature meets certain prescribed requirements and information technology standards in addition to the two requirements listed above. Some documents that may require a higher validation standard include, but are not limited to, statutory documents (that are to be submitted to the government), statements made under oath, statements declaring the truth and sealed documents. For any such documents, it is recommended that business owners and managers consult their legal counsel before moving forward with the use of electronic documents and signatures.  It is also important to recognize that, although most electronic signatures are governed by provincial legislation (such as the ECA), there are certain documents which would not fall within jurisdiction of the province and therefore must abide by the federal Personal Information Protection and Electronic Documents Act or other federal legislation in order to be valid and binding.

In addition, although electronic signatures are widely accepted, for public policy reasons, certain documents continue to require a hand-written signature by the signatory in order to be enforceable. In Ontario, these documents include wills and codicils, trusts created by wills or codicils, powers of attorney, and negotiable instruments.

Best Practices

Given the above, the validity of electronic signatures can be broken down into four components: 1) consent, 2) intent, 3) reliable association between the electronic signature and the signatory, and 4) reliable association between the electronic signature and the relevant electronic document. First, as set out in the ECA, for electronic signatures to be valid, that all parties involved in the exchange of electronic documents and signatures must have consented to such. Consequently, it is imperative that all parties keep a written record of the consents before transacting business electronically.

Second, as determined by common law, the means in which an electronic signature is applied must clearly indicate that the signatory is ‘signing’ the electronic document and intends to be bound by it. As such, use of the words ‘sign here’ and a confirmatory statement (such as “By clicking on this button, you are agreeing to be bound by the terms of this electronic document”) which requires the signatory to confirm again (often by clicking ‘yes’) would be useful in ensuring that intent is captured.

Third, there needs to be a reliable association between the signatory and the electronic signature. Often, this association can be evidenced by requesting the electronic signature through a portal that is uniquely linked to the signatory (such as an email address).

Finally, the electronic document and the electronic signature need to be reliably associated. In essence, the electronic signature should be captured such that it clearly applies to each page of the associated document. This association circumvents the concern that any portion of the electronic document was changed or modified after the electronic signature was provided – in which case, the electronic signature would not rightly apply to the pages which were later modified or changed. To satisfy this last requirement, it is best to use an electronic signature software which carries with it an electronic audit trail whereby each document that is signed is issued a DIN.

Conclusion

Electronic signatures are increasingly utilized in every day business and management and provide value to both those collecting signatures as well as the signatories. They provide a solution to the inadvertent inefficiencies and high costs that often come from the tedious and mundane tasks of collecting signatures from different parties. However, it is important that users research the different tools available on the market and choose the one that best services their specific needs. As trust and understanding of the benefits of electronic signatures grow, and their benefits become widespread, disputes over signatures and document tampering may become a relic of the past.

About Loopstra Nixon LLP

Loopstra Nixon is a full-service Canadian business and public law firm dedicated to serving clients involved in business and finance, litigation and dispute resolution, municipal, land use planning and development, and commercial real estate. Major financial institutions, insurance companies, municipal governments, and real estate developers along with corporate organizations and individuals are among the wide range of clients we are proud to serve.

About MinuteBox Inc.

MinuteBox is a cloud-based AI powered tool to support law firms that store and maintain corporate minute books for their clients. It is an online repository where law clerks, lawyers and clients can access and share minute book information safely and securely. Combined with document automation, filing and e-signature features, MinuteBox is quickly becoming the preferred entity management platform for innovative law firms nation-wide.

The foregoing has been prepared for clients of Loopstra Nixon LLP and MinuteBox Inc. While every effort has been made to ensure accuracy, the information contained herein should not be relied on as legal advice; specific advice should be obtained in each individual case. No responsibility for any loss occasioned to any person acting or refraining from action as a result of material herein is accepted by the authors, Loopstra Nixon LLP or MinuteBox Inc. If advice concerning specific circumstances is required, we would be pleased to be of assistance.

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