This paper will discuss the difference between eContracts and traditional forms of contracts, examine and analyse the key element of what binds a contract and discuss how eContracts have challenged and impacted the legal system since their introduction. Further discussing what the legal system has identified and introduced into contract compliance to allow safer and secure use of eContracts. Regardless, eContract or otherwise, a contract is primarily concerned with limiting the overall risks to each party entering into a contractual relationship.
One key concept of contract law is the L’Estrange Rule. Once a contract has been signed, you are legally bound by the terms and conditions of that contract regardless as to whether or not you have read and understood the contract. However, if the signature on the contract was obtained by fraud or the contract had not been seen by the signing party, the signature is not binding and the contract is not a contract.
Is there a difference between what is referred to as wet ink signatures and eSignatures, in reference to Australian law? What are the various types of eSignatures?
It has been twenty years since the introduction of the Electronic Transaction Act of 1999 which enabled a legislative framework defining the use of electronic signatures. There are many industries and companies, both globally and locally, which use technology to gain a market advantage. One such industry, at the forefront of utilising technology to create platforms to better drive their competitive market advantage, is the banking industry. The banking industry has been using a myriad of different contract types for hundreds of years to transact. For example, if one farmer makes an offer to buy another farmers land, and the offer is accepted, a contract of sale would be negotiated. The terms and conditions would be discussed between the two parties and eventually an agreement, in this case to purchase said property, would be reached.
What happens next in the transaction process for the land to be exchanged between the two farmers? In this example the buyer arranges a loan to purchase the neighbours farm. The buyer enters into a contract with the bank, a mortgage contract. In order for this transaction to take place, the banks representative together with the farmers representative, arranges settlement of the property. The ‘wet ink signatures’ from both parties would be exchanged. This has always been carried out by a representative of the buyers bank and the sellers legal representative. This transaction is called a settlement.
Since the introduction of the internet and associated technologies, software and server farms delivering business platforms over the internet referred to as ‘the cloud’, has created many new market opportunities for banks to further their competitive advantage in the marketplace. Property Exchange Australia (PEXA) is one such platform. PEXA was founded by Australia’s banking industry and was developed to improve the settlement of real property transactions, for example real estate settlements.
Is this new way of settlements the ‘night in shining armour’ the banking industry desired; or is it the ‘trojan horse’ about to cause havoc for the banking industry? What are the impacts for the bank’s stakeholders using PEXA for the settlement process? One such domain of concern is fraud.
“With a gentleman I am always a gentleman and a half, and with a fraud I try to be a fraud and a half.” Otto von Bismarck
The main differences between a contract and eContract is the jurisdiction of that contract, and whether that contract can be enforced. Otto von Bismarck’s quote polarises several aspects relating to contracts and eContracts. Prior to the introduction of eContracts, face to face engagements occurred between two parties, where each party would be identified by producing physical identification such as a passport, a birth certificate and/or a drivers license. This proof of identification could be witnessed by another party. Once all documentation had been sighted, witnessed and terms of the contracts agreed, a wet signature would be used to bind the contracts into their agreement. “With a gentleman, I’m always a gentleman and half”…
With the introduction of eContracts flexibility and convenience is provided as technology is utilised for obtaining eSignatures for eContracts. For example, email signatures, using eContract software, or scanning and emailing a copy of your signature on a printed paper contract, just to name a few. These are all classified as forms of authorising an eContract with an eSignature. In these transactions no face to face meeting, or wet ink signing in front of a lawyer who validates your identification is required. Seemingly with eCommerce it’s easier to commit fraud; “and with a fraud I try to be a fraud and a half”.
Real estate dealings have always required contracts, terms and conditions, identification, proof of identification and signatures. Prior to changes of the Conveyancing Act 1919 (NSW) on 22 November 2018, legislation and dealings in land were only accepted in writing. These are contract formalities. Changes to the Electronic Transaction Act and the Conveyancing Act 1919 (NSW), allowed for dealings in land (NSW) to be signed electronically.
The Electronic Transactions Act 2000, number 8, part 2 ‘9 Signatures’, refers to the provisions for what legitimises an eSignature in contracts, for example as reliable as appropriate for the purpose for which the electronic communication was generated or communicated, in the light of all the circumstances, including any relevant agreement. This is an exert from the Electronic Transactions Act.
(1) If, under a law of this jurisdiction, the signature of a person is required, that requirement is taken to have been met in relation to an electronic communication if:
(a) a method is used to identify the person and to indicate the person’s intention in respect of the information communicated, and
(b) the method used was either:
(i) as reliable as appropriate for the purpose for which the electronic communication was generated or communicated, in the light of all the circumstances, including any relevant agreement, or
(ii) proven in fact to have fulfilled the functions described in paragraph (a), by itself or together with further evidence, and
(c) the person to whom the signature is required to be given consents to that requirement being met by way of the use of the method mentioned in paragraph (a).
Below is an example from case law which examines reliability and has been tested in our court system.
Williams Group Australia Pty Ltd v Crocker  NSWCA 265- Background to the case
The Williams Group Pty Ltd versus Crocker examines the fraudulent use of a director’s eSignature. The case involved several directors in a building company. One of the partners arranged a credit facility to obtain building products. The Williams Group Pty Ltd required signed personal guarantees from all the building companies’ directors.
The building business experienced hardship and as a result was unable to repay its credit facility which was in excess of $850,000. The Williams Group Pty Ltd commenced court proceedings to recover the outstanding monies. All the directors from the building company had apparently used a software platform which enabled the building company directors to apply an eSignature to its commercial documents. The software used a standard user interface to operate its software. A password was entered into the system to enable authentication of the user. Crocker, one of the directors, claimed he had never signed the personal guarantee form. His signature which was utilised in this transaction, was obtained without his knowledge. His defence lawyer argued that Crocker had never changed his password that he had originally been provided. He argued that anybody within the office, whom had knowledge of this, could have applied Crocker’s eSignature. The court’s judgement ruled in Crocker’s favour.
Below is an example from IT News newspaper; “Risks Raised for years”, which examines recent fraud in the PEXA ecosystem.
“The changes came after a Melbourne family lost $250,000 from the sale of their home.
Hackers gained access to a conveyancer’s email account, reset the password, and then set themselves up as an additional user on the conveyancer’s PEXA account.
From there they were able to edit the settlement details on the property sale, rerouting the payment to their own account.
The edits were not detected by the conveyancer before the payment was digitally re-signed using a physical USB key and unique PIN.
The case highlighted weaknesses both in the way PEXA’s infrastructure has been set up, and in the conveyancer running their own checks.”
IT News Risks Raised for years July 2018, by Ry Crozier
Who has access to the systems for example PEXA credential process? how is their identity authenticated? How does process and procedure of the system limit risk to identify theft?
One of the key elements of any contract which finalises a transaction and binds the contract, is a signature. The challenge for the legal system is each fraudulent case needs to be examined and reviewed individually. However minimal the legislation was about the use of eSignatures in eContracts, common law still provided a legal framework to deal with the treatment of signature and contract fraud. For example the judgement with Stuart vs Hishon.
Once the Conveyancing Act and Electronic Transaction Act were updated, a more descriptive guide was provided outlining what could be regarded as a better practise when transacting dealings within the real estate market using eCommerce platforms, for example eSignatures.
There is still inherit risks in transacting electronically. In the case of fraud being committed with the Melbourne couple who lost their $250,000, it was a weakness in the email systems of the conveyancing company. Hackers broke into an email server by committing identity fraud. Pretending they had access rights to the email server. Effectively a back door to access the conveyances client information. These hackers did not attack PEXA’s system, rather, identified a weakness in the business process between stakeholders of PEXA and the settlement process.
Is using PEXA’s platform safer than using the old wet ink paper based exchange platform? Both PEXA and the NSW Registrar General, agree to disagree. Both siting statistics that present their own facts to substantiate their claims. One fact is certain, the changes to the Conveyancing, real estate Acts, and the advent of the Electronic Transaction Act certainly provide more information to all stakeholders using these platforms and technologies to finalise their deals in transacting real estate.
As more and more property transactions take place using eCommerce platforms the risks will remain. However one can limit the risk by adopting clever business practise and utilising smart legal procedures. For example for an individual and a commercial enterprise could both benefit by using the options outlined below.
Utilising smart legal advise for property transactions. When purchasing property seek out a law firm that specialise in Property Transactions. These legal practises have developed mature models of operating successful domains in property transactions and understanding PEXA and how eContracts relate to the varying acts. Therefore, it is advised not to seek advise from a general practise law firm.
In a business situation, for example a property development business, you would seek a property transactions law firm for advise on property transactions. Furthermore you would analyse and reengineer your business process model. If running a property development business one would develop a best practise of systems and procedures to be followed before signing eContracts or using eSignatures. If you were engaged in a partnership business structure, you may add conditions to your partnership agreement stipulating procedures which clearly articulate the use of such ecommerce best practise. For example, you might seek specialist advise from IT experts and legal experts who deal in these specialised information areas. Then write up your procedure based upon outcomes with those specialists.
Finally, the more informed you are about e-contracts or contracts, the higher the probability one can limit their risk. Which is the underlying concept of the formation of any contract.
“Any informed borrower is simply less vulnerable to fraud and abuse”. Alan Greenspan