Litig8: Contracts: Risks associated with electronic contract formation

Each month as a part of Mills Oakley’s Litig8, we bring to you snapshots of eight key cases, legislative changes or other legal events. The summaries are not comprehensive and do not constitute legal advice. You should seek professional advice before taking any action based on the content of this email.

Part 5 of the May edition of Litig8

The decision of Williams Group Australia Pty Ltd v Crocker [2015] NSWSC 1907 highlights issues that can arise with electronic contract formation.

Williams Group Australia Pty Ltd (Creditor), brought proceedings against IDH Modular Pty Ltd (Debtor) and its three directors, Mr Brooks, Mr Walsh and Mr Crocker, seeking among other things, the enforcement of a principal debt pursuant to a commercial credit application and a deed of guarantee and indemnity (Contract Documents).

During the course of the proceedings, a liquidator was appointed to the Debtor, and the Creditor subsequently sought summary judgment against all three directors of the Debtor pursuant to the guarantee.

The Creditor was successful in obtaining summary judgment against both Mr Brooks and Mr Walsh, however, failed against Mr Crocker in circumstances whereby Mr Crocker’s signature had been electronically affixed to the Contract Documents without his knowledge, or authority.

Notably, prior to the execution of the Contract Documents, Mr Brooks had set up an electronic signing system so that each of the directors of the Debtor had the ability to sign documents electronically when it was not convenient for them to sign in person.  Naturally, by doing so, Mr Brooks had knowledge of, and access to, Mr Crocker’s user name and password.  Mr Crocker did not change his password at any time.  Mr Brooks’ knowledge of same provided him with an ability to upload Mr Crocker’s electronic signature to any document.

Justice McCallum held that, for various factual reasons, the claims brought by the Creditor must fail, and that Mr Crocker’s failure to change his password was not sufficient to establish an authority, either actual or ostensible, for another director or employee of the Debtor to place Mr Crocker’s signature on any document, in particular the guarantee in that case.  There was no intention by him to be bound by that guarantee.

The commercial risks associated with electronic signatures and the potential exposure to liability in circumstances where an electronic signature, uploaded and applied to a document by a third party, may bind that party to an agreement are exposed by this decision.  Clear systems need to be put in place regarding the use of such signature, and the circumstances in which they may be used by others ought be limited and carefully managed.

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