Did you know that electronic signatures are valid in Ontario?
They are and have been for quite some time!
If it is legal, why do many institutions remain hesitant to accept documents executed digitally? Using e-signatures can pose issues with ID verification, capacity to be bound to contracts, authority to execute documents, and duress, among others. Further, they are not legal in all circumstances. However, if handled with care, the use of e-signatures is both legal and efficient, especially in this ever-changing world.
This article provides a general overview of some of the risks and recommendations for businesses who use or are considering using e-documents and more specifically, e-signatures for commercial client offerings.
Overview of the Electronic Commerce Act (the “Act”)
In 2000, the Ontario Government enacted the Electronic Commerce Act, S.O., 2000 to modernize commerce and legitimize electronic commerce. Essentially, the Act gives electronic contracts the same legal status as documents signed on paper.
Under the Act, electronic signatures can include documents signed with an electronically formed signature, as well as pushbuttons, i.e., “Accept” or “I agree.” There is no legal requirement that the electronic signature actually look like the individual’s hand-written signature.
The Act does not specify a requirement to accept the use of electronic signatures. If someone uses a system that requires an e-signature, their consent is inferred, and they cannot after the fact refuse to abide to an agreement simply because it was electronic. However, at the outset, prior to moving forward, someone can refuse the use of e-signatures. It is for this reason that it is generally recommended to obtain consent from the other party before drafting documentation, so everyone agrees in advance of the signing stage.
Some legislation requires documents to be “in writing” to be considered legal (i.e. commercial leases, etc.). The Act provides that an electronic document can satisfy the requirement for a document to be “in writing” so long as the electronic document is both:
- accessible by the other person so it can be used for subsequent reference; and,
- capable of being retained.
In other words, a readable/usable saved version of the executed document must be provided to all parties for it to be considered “in writing”.
The Act also provides that electronic documents can be considered “originals.” To be considered an original, documents must be accessible and usable for subsequent reference and there must be assurance that the information contained in the electronic document has been unaltered. Essentially, if there is evidence of an electronic document’s alteration, it will not be considered an “original.”
Exclusions under the Act
The Act has effectively legitimized many forms of electronic commerce but it also specifies several exclusions that businesses should be aware of. Under subsection 31(1) of the Act, the following documents are not acceptable in electronic form:
- Wills and Codicils;
- Trusts created by wills or codicils;
- Powers of attorney, to the extent that they are in respect of an individual’s financial affairs or personal care;
- Negotiable instruments, including promissory notes, cheques and bank drafts, among others; and
- Documents that are prescribed or belong to a prescribed class.
The Act, at subsection 8(4), also limits the use of electronic documents when dealing with chattel papers and the Personal Property Security Act, R.S.O. 1990, c. P.10 (the “PPSA”). A chattel paper is a document “that evidences both a monetary obligation and a security interest in or a lease of specific goods”. This is particularly important in the leasing and financing business. Effectively, this means that any document evidencing a loan with a security interest that was done electronically, would not be protected under the PPSA.
However, on May 29, 2019, the PPSA was revised by adding the term “electronic chattel paper.” Electronic chattel paper is defined as “chattel paper created, recorded, transmitted or stored in digital form or other intangible form by electronic, magnetic or optical means.” Essentially, the PPSA is providing the opportunity to secure electronically signed security interests in a similar manner as wet-ink signed documents. To be considered valid, an electronic chattel paper will have to meet strict guidelines also set out in the PPSA. For more information on this, please review the PPSA (or contact our office).
Issues with Electronic Documents
The Act states that a document is not invalid or unenforceable by reason only of being in electronic form. In other words, except for the above noted exceptions, an otherwise legal document that is in electronic form would still be legal, despite being electronic.
If this is the case, if this legislation has been in place for over 20 years, then why are electronic signatures not more widely used? The two biggest issues that most institutions have with e-signatures are:
First, the potential for fraudulent transactions increases with electronic commerce in the following ways, among others:
- The removal of face-to-face interactions impacts the ability to determine relevant facts such as mental capacity and understanding;
- There may be an increased risk of identity theft; and
- There is a reduced ability to confirm identification.
Though there are higher risks of fraud with electronic commerce, there are also steps businesses can take to mitigate the increased risk. The following methods, among others, could be used to assist in reducing fraud:
- The use of specialized electronic commerce systems that have built in security features;
- Increased computer security;
- Additional training for employees to recognize potential issues/red flags of fraud; and,
- Multi-step processes for document approvals.
While these methods certainly assist in reducing the risk of fraud, an analysis of the benefits of electronic commerce should be undertaken to determine if they outweigh the risks of fraud and the costs of protecting against it.
Concerns Based on Contract Law
Second, the fact that a contract is done online or electronically does not remove the general requirements of contract law. The standard contract elements still apply, and it remains necessary to satisfy them for the electronic document to be considered a legal and binding contract. Here are some considerations:
- Accuracy of the Parties Listed: It is important in contract law to know who you are contracting with and organizations should ensure practices are in place to confirm that the person executing the document is the person named.
- Capacity of the Parties:
- Lack of Capacity to Understand: A contract may not be enforceable if a party is incapable of understanding what they are agreeing to. This risk is increased if there is less face-to-face interaction to ascertain an individual’s mental capacity.
- Duress: Duress is illegal pressure or coercion put on another person to force them to sign a document against their will. Although videoconferencing can alleviate some concern, without in-person meetings, there is increased risk that an individual may be influenced by a third-party to execute a document against his or her will.
- Unequal Bargaining Power: Situations may arise where an individual argues that they did not understand what they were signing, because it was too complicated, or too lengthy and no one reviewed it with them. With the use of e-documents, it is more difficult to confirm that a client has had an opportunity to review the information and ask questions to ensure they understand what they are signing. Some options to reduce this risk are again; the use of video-conferencing calls, and online prompts that bring important aspects of the agreement to the user’s attention.
- Timing of Acceptance: If offers are time-sensitive, the signatures representing their acceptance are crucial. Under the Act, acceptance occurs when the document is sent back to the offeror. A document is considered “sent” when it enters a system outside of the sender’s control or, if using the same system, when it becomes capable of being retrieved by the other party.
In summary, despite not being universally used, electronic signatures are legal in Ontario, with limited exceptions. The most obvious reasons behind the aversion to electronic signatures are the exceptions to the Act, the risk of fraud, and the potential complications with contract law. Further, there may be additional costs associated with an electronic signature platform. While there are methods that can be used to limit the issues with electronic signatures, the risks cannot be eliminated. As is the case for most business decisions, an analysis of the benefits versus the risks of electronic signatures should be undertaken. It may be worthwhile to investigate how use of electronic signatures can be implemented in your organization.