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Focus: Clarification of electronic signature requirements

22 October 2010

In brief: The rules of contract formation in electronic commerce have been clarified by new NSW legislation. Partner Niranjan Arasaratnam (view CV) and Lawyer Penny Harris report on the proposed amendments and also discuss a recent Federal Court case concerning the requirements for electronic signatures.

How does it affect you?

  • The Electronic Transactions Amendment Act 2010 (NSW), passed by the NSW Parliament on 28 September 2010, changes the Electronic Transactions Act 1999 (NSW) (the Act) to broaden the types of electronic signatures that are valid, moving the focus away from the reliability of the method used to create a signature to any electronic signature that identifies a person. Because any method will be permitted, it is increasingly important for parties to agree up-front what communication methods will be relied on in a given arrangement.
  • The scope of 'transactions' covered by the Act will be expanded to include statements, declarations, demands, notices and requests. This means there will be a broader range of transactions that will receive the benefit of the Act and there may be cost savings in moving your processes online to take advantage of the broader scope of the Act.
  • Under the proposed new rules, if you use an automated message system you need to offer customers an opportunity to correct input errors made when using that system; otherwise customers will have a right to challenge communications – such as offers and acceptances – that were made in error.
  • An electronic signature is valid if it is equivalent to other methods already accepted by parties for the exchange of signatures. If you already allow communication by fax or email of scanned PDFs of a JPEG file, it will be difficult to deny communications using signature tools such as digital pens.

Background

In May 2010, the Standing Committee of Attorneys General agreed to enact the Electronic Transactions Amendment Bill 2010 (the Bill) at both state and federal levels. The purpose of the Bill was to implement the UN Convention on the Use of Electronic Communications in International Contracts 2005 and to clarify the rules of contract formation in electronic commerce. Possibly the most significant aspect of the Bill is the change to the test of what constitutes a valid electronic signature. Under the current Act, an electronic signature is valid if a method is used to identify the person and to indicate the person's approval of the information communicated, and that method was appropriately reliable for the purposes for which the information was communicated. By contrast, under the Bill an electronic signature will be sufficient if either the method:

  • used for recording the signature was appropriately reliable for the purpose for which the electronic communication was generated; or
  • was proven in fact to have identified the person and indicated their approval of the electronic communication.

This change relaxes the requirement in the Act that an electronic signature be in a reliable form, to include a lower threshold to allow an electronic signature if it identifies the person and can be proven to do so. This amendment will broaden the circumstances in which electronic signatures are valid beyond simply where the method used to record the electronic signature is reliable.

It is debatable, however, if the proposed changes are a positive development in the law, as they do not provide any certainty about what form of electronic signature will be acceptable. In addition, the proposed change to section 10(1)(b) does not eliminate the possibility of challenging an electronic signature as invalid, as the method for delivering the signature needs to be 'proven in fact' for it to be accepted. This requirement may, therefore, simply add another step to the process for organisations looking to rely on electronic signatures.

Recent case development

A recent Federal Court case highlighted the uncertainty around the current test of what constitutes reliability for an electronic signature to be valid. In Getup Ltd v Electoral Commissioner1, the applicant, Getup Ltd, maintained a website allowing voters to enrol online with the Australian Electoral Commission (the AEC). The enrolment application utilised a 'signature tool' by which users could apply their signature electronically, either using a digital pen, their finger, or a mouse applied to the trackpad of a laptop. The second applicant, Ms Trevitt, utilised the website and signature tool to enrol electronically with the AEC. A delegate of the Electoral Commissioner rejected the enrolment application, on the basis that the electronic signature was not sufficient to validly sign the enrolment form. The two applicants challenged this decision.

The decision

The Federal Court accepted the applicant's argument that the electronic signature was sufficient to validly sign the enrolment form. The court noted it was a requirement that the enrolment form be signed by the applicant and that what constitutes a signature for the purposes of enrolment must be considered in the context of the Act. Under the current Act, transactions – which include those of a non-commercial nature – are not invalid merely because they took place wholly or partly by electronic means. The court stated that the requirement to provide a signature is met in relation to an electronic communication if it is delivered via a method that was appropriately reliable for the purposes for which the information was communicated. The court observed that as an electronic signature was clearly a 'method' under the Act, the issue in dispute was whether it was appropriately reliable for the purposes for which the information was communicated.

The court highlighted two concerns the Electoral Commissioner raised in relation to the reliability of the electronic signature, that it:

  • consisted of 'broken lines (or dots and dashes)'; and
  • could be very precisely and repeatedly varied or modified by a user, giving rise to a risk that signatures could be fraudulently affixed using the signature tool.

The court dismissed the first of these arguments, on the basis that the pixilation of the signature, though noticeable, was no worse than that of a signature that had been faxed or sent via email as a scanned PDF of a JPEG file, both of which the Commissioner had accepted as valid methods for providing a signature for the purposes of enrolment. In relation to the risk of fraud, the court noted that, while the signature tool could permit a signature to be forged, the scanned PDFs the Commissioner accepted were also open to manipulation and fraud, through the use of tools such as Photoshop. The court concluded that as long as the Commissioner accepted that enrolment forms submitted by fax or by email in the form of a JPEG file satisfied the requirements of reliability under the Act, the website and signature tool would likewise satisfy those requirements.

Implications

The Federal Court's finding that electronic signatures were valid was made in a context where the Electoral Commissioner already accepted signatures in forms that were open to manipulation, such as scanned PDFs of JPEG files. As such, the decision does not shed much light on when a method for creating electronic signatures is considered 'reliable' and therefore valid. However, the judgment does establish an important principle: a method used to create an electronic signature will not be held to a higher standard of reliability than similar non-electronic methods of signing remotely, such as scanned PDF signatures.

Other proposed amendments

In addition to amending the law in relation to electronic signatures, the Bill:

  • broadens the definition of 'transaction' to include any statement, declaration, demand, notice or request, including offers and acceptances of offers, that parties are required to make or choose to make in connection with the formation or performance of a contract;
  • amends the rules relating to the time of despatch of electronic communications to be when the electronic communication leaves an information system under the control of the sender of the communication, rather than when it enters the information system of the addressee;
  • amends the rules relating to time of receipt of electronic communications to be the time when the electronic communication becomes capable of being retrieved by the addressee at an electronic address designated by the addressee, rather than the time when the electronic communication enters the relevant information system;
  • creates presumptions relating to the location of the parties, such that the place of despatch or receipt of an electronic communication will be the place of business of either relevant party. The place of business will be the location the party indicates as their place of business but, if no place is nominated, it will be presumed that the place of business is either their ordinary place of business or, if there is more than one place of business, the place of business with the closest relationship to the transaction in question. If the party is a natural person with no place of business, the party's place of business is the party's habitual residence;
  • creates the presumption that, unless clearly indicated to the contrary, an electronic proposal to form a contract is to be considered an invitation to make offers rather than an obligation to be bound. Thus, the advertising of goods and services by online retailers will not be considered to be a binding offer and vendors will still be able to accept or reject orders from customers;
  • clarifies that the use of an automated message system for contract formation is valid; and
  • provides for a natural person to correct an 'input error' they have made in relation to an automated message system received from another party when the system itself does not provide the opportunity to correct the error. This is a consumer protection type measure that effectively allows consumers who have entered into contracts via an automated message system to alter those contracts if they have made an error in entering the contract. The implication of this change is that the owner of a website making use of automatic message systems should ensure their automatic message systems are designed to offer opportunities to correct errors made prior to the contract being formed.

What next?

The Bill is intended to be adopted at both federal and state/territory levels, ensuring nationally consistent laws with respect to electronic commerce. The Federal, State and Territory governments will be seeking to amend each of their respective Electronic Transactions Acts in the next 12 months. New South Wales assented to the Bill on 28 September 2010, Tasmania has introduced a Bill into their Parliament reflecting the above changes, and the Federal Government is also set to introduce a Bill in the near future. The other states have not yet announced their intentions in relation to the Bill; however, as it was agreed at the Standing Committee of Attorneys-General in May, it is likely to become law in all jurisdictions in the near future.

Footnote
  1. 268 ALR 797 [2010]

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