Construction documents: to e-sign or not to e-sign? This is the question

There has been an increased number of instances where an electronic signature has been a required or a preferred method of execution of documents in construction projects. What are the issues as a result of COVID-19?

Since the outbreak and the requirement for home-working, executing documents by means of a wet-ink signature has become increasingly difficult. There are many advantages of using electronic signatures, but law is one step behind the technology and there is some uncertainty in this area.

What is an electronic signature?

The term electronic signature is widely defined in the European Union’s regulation and English legislation  to include “an electronic signature incorporated into or logically associated with a particular electronic communication or particular electronic data” (art. 7(1)(a) Electronic Communications Act 2000). In practice, this can include:

• “I accept”/“Confirm order” boxes clicked on the website;
• a typed name and a surname in a document, for example at the bottom of an email;
• a scanned manuscript signature;
• a biodynamic version of a manual signature (similar to the one you make when you sign for a parcel delivered by a courier using a special pen on the screen); or
• a signature made using a cryptographic system (a mathematical scheme which consists of two mutually authenticating keys which are a combination of data and a “secret key” which is only known to a person who signs the document).

The validity of an electronic signature has been tested by the English courts. As long as it is inserted in the correct place in a document with an intention of authenticating it, an electronic signature can satisfy the legal requirement for a signature. In addition, the Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd² case has confirmed that an electronic signature has the same effect and status as a wet-ink signature.

Advantages to using electronic signatures include:

• speed;
• ease;
• convenience; and
• efficient online archiving (given the signed document is online a centralised archiving system would be straight forward to establish, allowing a business’ signed contracts to be located in one easy to reach location).

Of course, the more secure the technology used to create an electronic signature, the more trustworthy it is and the greater its evidential weight.

If an electronic signature is acceptable, why do we still have to sign some documents in wet-ink?

One of the primary concerns is whether a signed document is, in fact, legally binding. In English law, a simple contract to which no statutory formalities apply does not have to be written to be legally binding. A simple text or an email could be enough to constitute a simple contract and evidence its terms. Since there are no prescribed rules and forms, a simple contract may be executed using electronic signatures and English courts have in the past upheld the validity of these contracts.

However, it is not quite as straight forward when contracts need to be executed as deeds. For construction projects it is advisable to have all documents executed as deeds (deeds offer an extended limitation period of 12 years instead of six years and deeds are a preferred type of document by banks, i.e. a simple contract might not be institutionally acceptable to a fund, a purchaser or a tenant), this includes but is not limited to:

• building contracts;
• appointments;
• collateral warranties; and
• guarantees and performance bonds.

Deeds vary from simple contracts by a number of requirements. A deed must be:

• in writing;
• clear from the document that it is meant to take effect as a deed;
• executed as a deed (for example, signed by two directors, two members or a director/member in the presence of a witness attesting the signature); and
• delivered.

In the case of Yuen v Wong First Tier Tribunal (Property Chamber) 2020 (ref 2016/1089), the court found a wet-ink signature made in Hong Kong and witnessed by a video link by a witness who then signed the document in the UK was not valid. This judgment indicates the signatory and the witness must be physically present in the same room for the deed to be validly executed.

From the analysis of the current law, it seems that in principle a deed could be validly executed by an electronic signature as nothing to the contrary has been established, but more importantly, there is no legislation or case law confirming the validity of the deeds signed by an electronic signature. In other words, this area has not been tested yet and there is no confirmation that the courts will uphold the validity of the deed which was “virtually” signed.

What does this mean for construction projects?

We would suggest the following signing methods for deeds (number 1 being the most preferred):

1. Wet ink signature;

2. Signing in accordance with best practice adopted after the Mercury³ case. Although this still involves a wet ink signature, documents can be issued electronically by following a protocol commonly used in the industry; and

3. Electronic signing by secure means: Given the current uncertainty around execution of deeds, the suitability of this option for your specific transaction needs to be assessed on a case by case basis. 

And finally...

To answer the question in the title – yes, to e-sign, as long as the document is a simple contract to which no statutory formalities apply and it is not a deed. Before e-signing (or just signing) any legal document, please ensure you have read it and understood it as the electronic signature will create a legally binding document.

An electronic signature will certainly be something we see more of in the future and, as a result of COVID-19, it might soon become an acceptable way of executing deeds. If the lockdown continues, we are likely to see an increased number of deeds signed electronically, which will most likely be followed by a number of cases on the matter.