It is often the case that contracts are executed by signing the final form of whatever document contains the terms agreed between the parties. Doing so offers all parties involved certainty, validity and enforceability of each other’s obligations. Signing also gives strong evidence in respect of a fundamental part of contract formation – the intention to be bound by the contract.
Traditionally, “wet-ink” signatures were common practice when entering into commercial contracts. Now however, a substantial number of day-to-day business contracts are executed electronically, and the Covid-19 pandemic has only served to increase this practice. There are a few points which should be considered when electronically executing contracts.
Counterparts clauses allow parties to a contract to each execute their own copy and is particularly useful where no one copy of a contract is signed by all parties to it. Each party then exchanges their signed copy for the other’s.
As a matter of course, we advise our clients to ensure that there is a sufficient counterparts clause in their substantial contracts so as to leave no doubt as to that contract’s validity when it has been executed. Such a clause is also efficient and cost effective where the signatories are not all physically in one place and is generally preferable to holding a traditional “signing meeting”.
On a recent matter, our suitably drafted counterparts clause allowed us to conclude the sale of our client’s business to an American buyer based in New York. Documents were electronically signed by all parties and exchanged, and the sale completed without the buyer and the seller ever having to meet or each sign the same document.
Electronic signatures are nothing new. In fact, the legislative framework for e-signatures has been in place for some 20 years and the law continues to change regularly – for example, the judge in the case of Neocleous & Another v Rees  EWHC 2462 (Ch) held that automatic email signatures/footers can be sufficient to bind parties to a contract in certain circumstances.
E-signatures can be as simple as a scan of a “wet-ink” signature or as complex as a dedicated third-party platform. For directors of companies, the articles of association should be checked to see whether there are any restrictions on the way business is conducted.
Separate advice should also be sought when executing documents which require particular formalities to be followed, such as deeds, as well as documents which require registration with HMRC, Companies House or other public body.
When it comes to witnessing signatures, such as when executing a deed, it is important to note that laws have not changed due to the pandemic and it is still necessary that a witness (who is not a party to the document and who should ideally be independent) be physically present. Failure to follow to correct formalities will result in the deed being invalid. For guidance on execution formalities, please seek legal advice.
Where e-signatures are used, each party must ensure that it has the final form of the agreement signed by all parties. Failure to do so can lead to significant issues, such as those briefly discussed below.
As mentioned above, in some circumstances the lack of a counterparts clause can raise issues and allow parties to challenge a contract’s validity if more than one copy is executed.
In addition, failure to have a copy of the contract executed by all parties (electronically or otherwise) can lead to questions over which form of the contract is the “final agreed form”, where one party has signed a contract before some last-minute amendments are made. The other party signs the amended “final” version but fails to have the same executed by the first party.
In extreme cases, our experience shows that this lack of certainty as to the terms of a contract, due to a failure of lacking a copy contract executed by all other parties, can lead to disputes and subsequent litigation costing millions.
The above article should not be taken as legal advice on any issue. For further information please contact the Company Commercial team. This article was written by Krishan Patel, a Solicitor in our Company Commercial practice