Beware of Electronic Signatures on Directors Guarantees

Businesses that rely on personal guarantees to secure credit accounts for the supply of goods should take caution. They should not always assume that a director will be bound by his or her electronic signature.

The recent New South Wales Court of Appeal case of Williams Group Australia Pty Ltd v Crocker [2016] NSWCA 265 serves as a  warning to all businesses that follow this practice.

The Supreme Court in NSW’s decided at first instance that a director was not bound by a guarantee with his electronic signature.  Williams Group Australia appealed the decision.

The Story

Williams Group Australia Pty Ltd (Williams) is a supplier of building materials. They received a credit application by fax from IDH Modular Pty Ltd (IDH) for the supply of building materials on credit valued at $889,5345.35.

Williams approved the credit application and supplied the building materials. IDH had sent an all-moneys guarantee by each of the three directors of the company including Mr Crocker who is a builder and one of the directors of IDH.

The administration manager witnessed the electronic signatures on the credit application by the guarantees. IDH, a company established to supply building modules for specific projects then went into liquidation.

Williams then obtained summary judgements against two directors but Mr Crocker defended the proceedings to enforce the guarantee.

Electronic signatures – who affixed it?

Although Mr Crocker worked out of the Brisbane office, the credit application was faxed from IDH’s office in Murwillumbah. IDH uses the HelloFax electronic system to affix electronic signatures to documents. This system allows users to upload their signature and then electronically apply it to documents.

One of the co-directors gave Mr Crocker his username and password to use the HelloFax system but Mr Crocker did not change his password. Accordingly, it would be possible for someone using his password to affix the electronic signature without Mr Crocker’s knowledge.

The Outcome

No Authority from Director

Mr Crocker denied that he had any knowledge of the Williams credit application and accompanying all-moneys guarantee.  He argued that the electronic signature had been affixed without his knowledge or authority.

Williams appealed and challenged the Court at first instance finding that IDH’s administration manager did not have ostensible authority to affix the electronic signature and that Mr Crocker did not ratify the use of the electronic signature.  Williams sought to maintain its claim on appeal based on estoppels.

What about Ostensible Authority?

Applying the reasoning of the High Court in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 the Court of Appeal found that in order to successfully rely on the principle of ostensible authority, Williams had to establish that Mr Crocker in some way held out or represented that whoever placed his electronic signature on the relevant documents  (and provided the documents to Williams ) was authorised by Mr Crocker to do so.

It is important to note that the representation as to authority must be made by Mr Crocker and not by the person affixing the electronic signature (in this case an unknown person).

No Ratification

Williams also attempted to argue that Mr Crocker ratified the use of his signature by subsequently logging into the systems as he would have seen a list of documents previously completed using the system.  The ratification argument was rejected by the Court of Appeal.  The facts did not establish that Mr Crocker ignored the obvious because the list would only have referred to a credit application and not the “guarantee”.

No Estoppel

Williams argued that Mr Crocker should be estopped from denying that he is liable under the guarantee. This is in circumstances where Williams relied on the electronic signature, Mr Crocker registered as a user on the HelloFax system and Mr Crocker’s authorisation of the administration manager or another employee of IDH to affix his signature by allowing them access to his password.

The Court of Appeal made an obiter finding that estoppels did not arise because the evidence did not establish any representation by Mr Crocker to Williams as to the authenticity of his signature on the guarantee or his authorisation to anyone to place his signature on the guarantee. The mere witnessing of an electronic signature by the administration manager did not give rise to estoppel.

Lessons for Credit Managers

This is a lesson for Credit Managers and business owners not to assume that a person affixing an electronic signature of a director on a personal guarantee has authority to do so. They should always confirm and get the director’s authority. In this case a simple email from Williams to Mr Crocker confirming that he authorised the administration manager to use his electronic signature for the specific guarantee may have avoided the dispute about liability under the guarantee.

Have a query regarding electronic signatures as Directors Guarantees?

Contact us. Our client engagement team can make an appointment with one of our Litigation lawyers to assist you in your matter. Contact us on 07 3252 0011.

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