As we explained in a recent blog, the decision as to which particular type of electronic signature should be used can depend on the nature of the contract or document, the risk of challenge to the validity of the signature and the consequences of a successful challenge.
A risk assessment of these factors has driven the standard banking practice of having all Scots law security documents, including guarantees, signed so they have self-proving status. This is market practice whether the security documents are signed electronically or in wet ink.
What does self-proving mean?
Self-proving means that the document is presumed to have been signed by the signatory. If a document is self-proving the burden of proof is on the party disputing that a signatory signed the document. It is for the challenger to prove the contract was not validly executed.
How are electronic documents made self-proving?
Under Scots law for a document to be self-proving it must be signed by a qualified electronic signature (QES). A QES uses cryptography and involves the signatory's identity being verified by a qualified trust service provider before the signatory is issued with a QES.
A QES requires no witnessing. Unlike English law, witnessing of electronic documents is not recognised in Scots law.
When using counterparts, one counterparty can sign by QES and another counterparty in wet ink, and different counterparties' QES signatures can be made using different platforms.
Why is it banking practice to have Scots law security documents as self-proving?
The Requirements of Writing (Scotland) Act 1995 requires agreements which must be registered in the Land Register (for example a Standard Security) to be self proving, but there is no such legal requirement on other forms of security.
However, signing the security documents in a self-proving way protects the lender against the expense and practical problems of having to prove the document was signed by the contracting party whose signature is disputed. The security may be enforced many years after it was signed, when the paper trail and other evidence of proper execution is no longer available and/or traceable.
Banking transactions are typically high value and the security document(s) crucial to a lender's ability to enforce the debt and recover monies owed to it. The ultimate risk to a lender is that the security is found to be unenforceable, leaving the lender ranking as an unsecured creditor in the insolvency of the borrower.
While producing evidence of proper signature may be difficult, especially many years down the line after execution, demonstrating intention to be bound by a security document through performance of the parties is also inherently difficult in relation to security documents which typically do not contain ongoing obligations beyond payment. In addition, the terms of security documents tend only to be revisited with a view to enforcement. At that stage and in those circumstances there is arguably an increased risk of a contracting party (or third party creditor) seeking to dispute the signature(s).
Signing a Scots law security document so it is self-proving effectively puts the lender in the best position possible, in terms of robustness of execution, should enforcement or the terms of the security be disputed.
How Brodies can help
We are highly experienced in multi-jurisdictional banking transactions. Just as the laws on the execution of traditional wet ink documents differ from jurisdiction to jurisdiction, so too do the laws on electronic authentication. If you have any queries about electronic signatures in banking transactions please get in touch with Bruce Stephen or Alan Knowles.