Following on from our previous e-update on the use of electronic signatures, the recent case of Bendigo and Adelaide Bank Ltd & Ors v Kenneth Ross Pickard & Anor  SASC 123 (the Pickard Case) confirms our earlier comments that it would be preferable for a company to execute a Deed using a wet-ink signature. The fact that two officers of a company affix their electronic signature to an electronic document pursuant to section 127(1) of the Corporations Act 2001 (Cth) (the Act) does not override the requirements in relation to the valid execution of a Deed.
Bendigo and Adelaide Bank Ltd and others (the Plaintiffs) brought an action against Kenneth Ross Pickard and others (the Defendants), claiming that the Defendants were guarantors pursuant to a loan deed, and that moneys were payable to it by the Defendants under the guarantee.
Kenrop Pty Ltd (now in liquidation) (Kenrop) of which the defendants were directors, was the trustee of the K & A Pickard Family Trust, which held investments in various Great Southern Group (GSG) projects. The GSG had marketed and facilitated a number of agribusiness managed investment schemes, and Great Southern Finance Pty Ltd (GSF) and ABL Nominees Pty Ltd (ABL) offered potential investors in the schemes finance. Ultimately, all of the GSG investment schemes failed.
The Plaintiffs claimed moneys from the Defendants as guarantors, under one of the schemes. The Plaintiffs claimed that the Defendants had appointed GSF as their attorney to execute a loan deed, by signing an application for term finance (the Loan Application), and that subsequently, after the moneys had been advanced to Kenrop, GSF as the Defendants’ attorney executed a loan deed on their behalf that guaranteed Kenrop’s liability to ABL and GSF.
The Defendants argued a number of points in their defence. The one relevant to this discussion was whether or not the loan deed had validly been executed as a Deed, and accordingly, could not be enforced (given that the guaranteed moneys had been advanced before the loan deed had been signed).
This invalidity argument was based on the fact that GSF (who was purportedly signing as the defendants’ attorney – the Defendants had also argued that the appointment was invalid, but that argument was not successful) had executed the Loan Deed by inserting the electronic signatures of two of its officers to an electronic copy of the loan deed. The Defendants argued that in doing so, their purported attorney had not properly signed the document as a Deed, and so it could not take effect as a Deed.
The question therefore, was whether the legal requirements for valid execution of a Deed had been met. The common law requirements for execution of a Deed are that:
There also needs to be an objective intention of the parties for the instrument to take effect as a Deed.
The Plaintiffs argued that the loan deed had been executed by GSF (as attorney for the Defendants) pursuant to s 127 of the Corporations Act 2001 (Cth) (Corporations Act), and that s 127 overrides all other requirements for a Deed, including the paper requirement. They submit that the common law paper requirement has been extinguished or at least modified by statute.
The Court held that:
The next question that came before the Court was whether the loan deed still took effect as a binding contract, despite the irregularities in its signing. The answer to this question was that it did not, as it failed for want of consideration. The Court emphasised that “where an instrument purporting to be a Deed, but which is unenforceable as a Deed because of a failure to execute the instrument in accordance with the requirements of a Deed, is held to be enforceable as a contract, its terms should also be strictly construed”.
As the guarantee in the document was intended to secure a debt that had already been incurred, and there were no further mutual promises provided, the guarantee could not be enforced against the Defendants as a contract.
This case reinforces the need for parties to ensure that they clearly understand the relevant laws, regulations and policies for signing documents electronically, to avoid the situation where a document could be argued as being invalid.
In particular, Deeds should be signed with “wet ink” signatures, and not electronically. This includes guarantees, deeds of assignment, and non-disclosure deeds.
Alternatively, the document should be expressed in such a way that proper consideration (mutual benefits or promises to give benefits) passes between the contracting parties under the document, to allow it to be enforced as a contract if it cannot be enforced as a Deed. So-called “past consideration” is not sufficient, and so a promise to a lender to guarantee the payment of a debt by a borrower may not be sufficient if the lender has already advanced the loan to the borrower.
Antoine Pace, Partner
Cassandra Krylov, Lawyer