Electronic Signatures – Binding or Not? Part 2

Last week we talked about different methods of electronic signatures and why the process is important for binding agreements. This time we round off the discussion about how best to achieve the signing by law

What are the obvious legal risks?

There is a risk that the identity of the person using the private key is not accurate, or at least may be subject to a legal challenge. This would be similar to a situation where a handwritten signature is required and a person fraudulently signs the contract.

There is no practical way to verify the person’s identity with one hundred percent certainty using digital signature tools. Arguably the biggest failing with digital signatures and public-key cryptography generally, is that they are dependent on the private key being kept secret. If the private key is exposed, it is open for someone to dispute that they were indeed the person who “digitally signed” a document. If a targeted cyber-attack or data breach exposed a private key, then it would have a cascading effect on the enforceability of digitally signed documents which depend upon that key.

Accordingly, some may argue that this is also true for more traditional methods of signing, although there is certainly still a commonly held belief that wet ink signing trumps digital signatures in security – this is largely due to the fact that a wet ink signing can be witnessed and verified by another person also signing by a wet ink signing.

To help reduce this risk, there have been a number of additional verification and authentication techniques made available to users. Most digital signature software products incorporate a range of additional security measures into the signing process which can usually be configured by the user. These include the use of biometric authentication, chain of custody features, timestamps, and email and IP address tracking. Most importantly, software that generates digital signatures encourages the verification of the signor’s identity through a certification authority (CA). CAs are usually secure online databases that can be accessed by subscribed users. Here, users confirm their identity by providing certain information to the CA and are issued a digital signature certificate –or a unique ID – that is stored online. The recipient of the digital signature can then find a person’s digital signature certificate and compare the public key specified on it to the one they received, thus verifying the signor’s identity.

To ensure the security of transactions, it is therefore encouraged that parties have both the digital signature and digital signature certificate systems in place. Also, it is imperative that private keys are not readily accessible on company databases and are instead held by the person named on the digital signature individually.

Another issue to be aware of is the software’s archiving capabilities. It is imperative that the digital signature software you choose has an effective archiving system which makes retrieving data as easy as possible. This becomes important when a dispute arises with regards to whether an agreement was signed months or years after the fact.

The sophistication of your contracts and the individuals signing of these contracts will have a large impact on whether you find these tools useful.

Practical problems arise when using digital signature products for smaller contracts such as employment contracts as they will not have a certified authentication.

What about overseas?

How frequently you have dealings with other countries may affect whether you decide to use digital signature technology to sign important documents. While the UN Electronic Communications Hague Convention dictates that electronic signatures are to be treated in the same way as handwritten signatures, not all countries have ratified the Convention. Some international agreements where parties are in a country that did not verify the Convention, will still require handwritten signatures before being satisfied that a transaction is valid.

It is also important to note that most companies developing and licensing this sort of software are based in the USA. While most premium products currently comply with Australian and international law, their main concern will be complying with USA law. The laws in the USA and Australia will develop differently and changes to local legislation may become an issue. There has been no definitive case law in Australia confirming the validity of digital signature software, although it is important to note that cases have been won in the USA based on evidence retained by premium digital signature software.

Data retention and the Privacy Act

Just when you thought it was easy, there may be information privacy laws and data ownership issues to consider. Where personal information is disclosed overseas, potentially this is in contravention of information privacy laws in the the Privacy Act.

Certain information collected in connection with the digital signature process might be “personal information”. This would mean that copies of the background data, auditing and archiving information, as well as the agreements themselves may be disclosed outside of Australia. Most products allow users to save any documents that are signed through electronic means locally, however if a cloud storage is being utilised there may be room to negotiate data jurisdiction with the provider of your choice to eliminate this risk.

What are the conclusions?

We should all be mindful of the need to prove the validity of a digital signature if challenged. The key is ensuring that you and the parties you deal with, will register digital signatures with a CA and have access to an effective auditing system. Ideally these features should be easy to subscribe to in conjunction with using your digital signature software. Most commercially available products have built-in auditing systems which are easily accessible to trace the progress of each digital signature. Ultimately, you will need to make sure that you are satisfied with both your verification practices and the other party’s.

Good digital signature products will have more than the bare essential verification and authentication features. A product that is constantly updated to reflect this progress is desirable. You should consider carefully the particular needs of your company, training of your employees, and compatibility with existing internal electronic infrastructure. This is no easy task but certainly worthwhile if it means you can enforce the Agreement and get paid and avoid unintended claims made by another party overseas.

Make sure you check the procedures you have adopted as well as the software and give us a call if you want a review of these procedures. In the end you do need the agreement to be binding and not open to challenge, especially if it represents a large amount of money for your business.

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