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With the rise of the digital era and advances in technology, we have seen and will continue to see growth in the use of electronic contracts to conclude legal agreements between parties. While there are advantages in terms of speed and remote access, there are also security risks. So, do the advantages outweigh the disadvantages? And can you use them for all your legal needs?
‘Electronic contracts have become an integral part of contract negotiations in some sectors,’ according to Matthew Cowan, a partner in the corporate and commercial team with Bracher Rawlins LLP. ‘However, it is important to consider if they are a good option for your business and if they meet your legal needs. There are still circumstances where traditional paper contracts are required and where electronic contracts may not suffice.’
What is an electronic contract?
Electronic contracts are, under English law, recognised as legally binding contracts that create binding obligations between parties and which are concluded digitally. Such contracts can, with the consent of both parties, be created, signed, and stored electronically too.
Sometimes the contracts are generated electronically using specialist software where you can edit clauses online, and negotiate with your clients or customers online, before proceeding to have the contract signed electronically too.
While an electronic contract may rely on technology, like software and cloud-based storage solutions, they still need to properly capture the intentions of each party to enter into a legally binding arrangement. It needs valid signatures for binding the contract, and it must abide by the basic premise of contract law: offer and acceptance of terms.
Advantages and disadvantages of electronic contracts
Compared to traditional paper-based contracts and in-person requirements for negotiation and signing of contracts, the benefits of using electronic contracts for your business may include that:
- they are fast and efficient to send, particularly at a time when postal services are not always reliable or speedy;
- they are easier to receive, negotiate and sign, especially for international deals as this can all be done remotely with a secure internet connection; and
- printing may not be required.
However, electronic contracts do come with some disadvantages, such as:
- a reduction in the need for in-person meetings for negotiations and signing, where relationship building can take place;
- electronic contracts do not work with every single area of law (discussed below) and so traditional contracts will still have their place; and
- in the event of a security breach of any sort, the electronic contract could be tampered with, destroyed with no back up, or used for fraudulent purposes.
The latter two risks are discussed in more detail below.
How secure is secure?
Electronic contracts are deemed more secure than traditional contracts given the different ways security can be enhanced digitally – that is until there is a security breach!
The main security risks are invalid signatures and a breach in secure online storage.
Invalid signatures
When not using electronic contracts, traditional in-person or ink signing provides a secure way of verifying that the parties entering into the contract are indeed who they say they are. However, electronic contracts do not always provide this assurance.
Electronic contracts can be signed in one of two ways usually:
- printing off the electronic document, physically signing and then uploading again onto a shared drive, or via email; or
- through the use of software where a mark is used instead.
Notwithstanding the use of signature software which may have security features, unless the software is set up to somehow track that the person logging in to sign the document is in fact the correct person, there could be no way of knowing if the signature or mark put on the electronic contract is indeed valid. This is an area where our team of experts can help you analyse and review the terms and conditions of the software providers to see how these concerns are addressed, if at all, and to ultimately help you decide what method of contract execution is best for your business.
Security breach
If there is a leak or breach of security with the cloud storage platform, the parties run the risk of non-authorised persons gaining access to your confidential contracts and also any personal data within them.
Again, working with reputable providers can help with this but, in order to mitigate against the risk of a breach, it is advisable to set up preventative protocols such as retaining copies as a backup and always choosing encryption and secure authentication features. Of course, choosing a suitable software partner for these services will be key and appropriate legal due diligence will be a prudent step in ensuring the risks discussed here are mitigated as early as possible. This is another area on which our legal team would be happy to advise, to ensure you have as comprehensive advice as possible with respect to the use of electronic contracts in your business.
Where electronic contracts may not be the best choice
As the law around the use of electronic contracts continues to evolve, it is advisable to seek guidance and advice on where your business could benefit from the use of electronic contracts, and where it is more prudent to stick with the use of traditional contracts.
For example, it is generally advisable to complete in paper form deeds, wills, and financial instrument documents such as leases, guarantees, loans and documents associated with a more complex transaction which is either high value or considered a high fraud risk.
On the other hand, for example for a service-based business, electronic terms and conditions, supply, or manufacturing contracts, may benefit from the use of electronic contracts for ease.
How we can help
As more business is done digitally, we will see a greater use of electronic contracts, either on an exclusive basis or as a hybrid with traditional hard copy contracts.
We can assist you in making the right choice for your business by helping you understand how electronic contracts work, the pros and cons, as well as providing advice on protective protocols which you can implement.
For further information, please contact Matthew Cowan in the corporate and commercial team on +44 (0)20 7400 1533 or email matthew.cowan@bracherrawlins.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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