Be wary of director’s personal guarantees signed with electronic signature

By 01/10/2016Contract
Electronic signature

Personal guarantees are commonly required to be given by directors to secure a company’s credit account with a supplier.  But is such a personal guarantee binding when signed using a director’s electronic signature?  The answer is not always, according to a recent decision of the NSW Court of Appeal.  The case is Williams Group Australia Pty Ltd v Crocker [2016] NSWCA 265.

Facts  

Williams Group Australia Pty Ltd (Williams) supplied building materials.  In July 2012 Williams approved a credit application by IDH Modular Pty Ltd (IDH) which bore the electronic signatures of each of IDH’s directors, including Mr Crocker (the defendant).

The credit application was accompanied by an all-moneys guarantee which also bore the electronic signatures of each of IDH’s 3 directors, including Mr Crocker.  Each signature was purportedly witnessed by IDH’s administration manager.

Pursuant to the credit agreement Williams supplied building materials on credit to IDH during 2012 and 2013, following which IDH owed Williams approximately $890,000.  Williams commenced proceedings against IDH and each of IDH’s directors to recover the outstanding debt, however IDH subsequently went into liquidation which resulted in the proceedings against IDH being automatically stayed.

Williams then obtained summary judgment against Mr Crocker’s two co-directors under the guarantees, but Mr Crocker resisted summary judgment on the basis that, unbeknownst to him, until after the claim was made against him under the guarantee, his electronic signature had been placed on the guarantee by an unknown person without his knowledge or authority.

The trial judge made the following relevant findings:

  • IDH established a “Hellofax” system that enabled users to upload their signature which could then be placed electronically on documents;
  • to access the Hellofax system each user was given a username and password;
  • Mr Crocker did not change his password, meaning that anyone who had access to Mr Crocker’s initial password would be able to log in with that password and apply his electronic signature to documents;
  • this is what happened in the case of the credit application and guarantee, even though it appeared that the electronic signature was not one of the two that Mr Crocker uploaded onto the system;
  • Mr Crocker’s electronic signature was placed on the credit application and guarantee without his authority or knowledge;
  • Mr Crocker did not work at IDH’s offices in Murwillimbah, and was not in Murwillimbah on the day on which his electronic signature was placed on the credit application and guarantee;
  • the signature applied to the guarantee was uploaded from Murwillimbah by an unknown person on the same day it was applied to that document;
  • there was no evidence that Mr Crocker had given his actual authority for his electronic signature to be placed on the credit application or guarantee;
  • the evidence did not support any finding of ostensible authority, as Mr Crocker did not make any representation to Williams that others had the authority to bind him contractually;
  • there was no evidence that Mr Crocker had been put on notice regarding the guarantee during the trading relationship between Williams and IDH, or had ratified it;
  • Williams had simply assumed that Mr Crocker’s signature was genuine.

The trial judge held that Mr Crocker was not liable under the guarantee.

The result on appeal

Williams appealed against the trial judge’s conclusions on the question of ostensible authority and ratification.  Williams accepted that Mr Crocker had not given his actual authority for his signature to be placed on the guarantee.

The appeal Court unanimously dismissed Williams’ appeal.

In doing so it observed that:

  1. For Mr Crocker to be liable under the guarantee by way of ostensible authority, it would have been necessary for him to have held out to Williams in some way that whoever placed his electronic signature on the guarantee, and forwarded it to Williams, was authorised to do so.
  1. Such a representation need not have been communicated to Williams directly. In an appropriate case it could have arisen from an omission on Mr Crocker’s part.  However no such representation was made.
  1. It appears that Williams simply assumed that the signature on the document was genuine, in that it had been placed on the document by Mr Crocker himself, and did not consider how it had been placed on the document.  Williams did not rely on any representation by Mr Crocker that someone other than Mr Crocker was authorised to place his electronic signature on the guarantee.
  1. Mr Crocker did not ratify the guarantee because during the trading relationship with Williams he did not have full knowledge of all the material circumstances regarding the placement of his signature on the guarantee. Those circumstances only came to light after Williams sought to enforce the guarantee against Mr Crocker.
  1. The purported witnessing of Mr Crocker’s signature by IDH’s administration manager only conveyed a representation by IDH to Williams, that Mr Crocker’s signature was on the guarantee. Even if Williams relied upon IDH’s representation in extending credit to IDH, Mr Crocker was not bound by that representation because he did not make it or authorise it. Accordingly he was not precluded from denying liability under the guarantee.

Comment

This case demonstrates that in certain circumstances, a director’s personal guarantee (and other documents under which a director assumes personal liability) signed with an electronic signature may not bind the director concerned.  One way to avoid that risk is to make direct inquiries of the director, to verify that his/ her electronic signature has been genuinely applied to the document in question.  Doing nothing to confirm the genuineness of a director’s electronic signature runs the risk of a personal guarantee (and like documents) being unenforceable.

Justice of Appeal Ward (with whom Justices of Appeal Simpson and Payne agreed) was not persuaded by Williams’ “flood gates” argument that guarantees in similar circumstances would be rendered unenforceable:

Williams raises the spectre that, if this appeal is not allowed, the ability of a trade creditor ever to rely on electronic signatures will be in real doubt. Of course, that arguably elides validity with authentication. Moreover, if it is the case that drastic consequences flow from the application of the principles relating to ostensible authority and ratification in the electronic signing context, that may be a matter for the legislature to address. Be that as it may, for the reasons that follow I am of the opinion that the appeal should be dismissed with costs.