E-signatures in Commercial Contracts
The days when parties to a transaction would have to be physically at the same meeting to sign transaction documents are diminishing. It is now common practice for the lawyers involved to arrange a signing via email. Transactions typically see signatories signing a hard copy document in wet ink, and they then scan and send the document by email. However, as technology evolves, the use of e-signatures has become increasingly common. This article sets out the present position on the scope for use and acceptance of electronic signatures in commercial transactions in the UK.
EU and E-Signatures
In spite of the UK’s decision to bid farewell to the EU, just one week after the referendum, on 1 July 2016, EU Regulation No 910/2014 (eIDAS Regulation) came into force. The eIDAS Regulation has direct effect in the UK and it establishes an EU-wide legal framework for the acceptance of electronic signatures.
Electronic signatures can take a number of different forms, including:
(a) a person typing their name into a contract or into an email containing the terms of a contract;
(b) a person electronically pasting their signature (such as in the form of an image) into an electronic version of the contract next to the relevant party’s signature block;
(c) a person accessing a contract through a web-based e-signature platform and clicking to have his or her name in a typed or handwriting font automatically inserted into the contract next to the relevant party’s signature block; and
(d) a person using a touchscreen to write his or her name electronically with a finger, light pen or stylus, next to the relevant party’s signature block in the contract.
Law Society Guidance
To further affirm this position, we now also have formal guidance on e-signatures from The Law Society Company Law Committee and The City of London Law Society Company Law and Financial Law Committees, as joint working parties (the JWP). This guidance was developed to give assurances to parties and legal advisers who wish to execute commercial contracts using an electronic signature. In their opinion, a contract executed using an e-signature satisfies any statutory requirement that a document should be in writing. This written requirement extends to situations such as: providing a guarantee; contracts for the sale of land; disposition of an equitable interest; or an assignment of copyright.
Deeds and Company Documents Given the inclination of the courts to interpret various statutory requirements for writing to include documents represented on a screen and executed with an electronic signature, this approach would apply in respect of deeds. Section 46 of the Companies Act 2006 (“CA 2006”) provides that a document is validly executed as a deed by a company incorporated under the CA 2006 if it is duly executed and is delivered as a deed. The JWP believe this can be achieved by the authorised signatories signing the deed using an e-signature. The practical means of witnessing different forms of electronic signature will need to be settled on a case-by-case basis, however, in the opinion of Leading Counsel, it is best practice for the witness to be physically present when the signatory signs and if that witness subsequently signs the attestation clause (using an electronic signature or otherwise), that deed will have been validly executed.
It is further accepted that digital signatures will be accepted in minutes of company general meetings and written resolutions, provided the identity of the sender is confirmed by the company.
It remains to be seen what the effect of Brexit will have on EU Regulation but it appears that the acceptance of e-signatures is a feature that is set to remain. Though caution must be applied in witnessing, the digital age is signed sealed and delivered.
Restrictive Covenants – will they make the cut?
In the recent case of Rush Hair Ltd v Gibson-Forbes & Anor  EWHC 2589 (QB), the High Court considered the enforceability of two restrictive covenants contained within a share purchase agreement (SPA).
In March 2015, the claimant, a hairdressing company called Rush Hair Limited (Rush), entered into a share purchase agreement (SPA) with the first defendant Hayley Gibson-Forbes (H), to purchase the share capital of two companies owned by H: Hair (Windsor) Limited and Hair (Maidenhead) Limited (Companies). Rush agreed to pay £25,000 on completion of the SPA, and a further £15,000 (Deferred Consideration) six months after completion provided that H did not breach any of the provisions of the agreement.
The SPA included two restrictions (Restrictive Covenants). The first restrictive covenant prevented her from soliciting or employing three named individuals (LH, CH, and JT) for two years after completion. The second restrictive covenant prohibited H from being directly or indirectly involved in a competing business during that time within two miles of Windsor and Maidenhead. H also entered into a settlement agreement following the termination of her employment with Hair (Windsor) Limited, in which she agreed to be bound by the restrictive covenants contained within the SPA.
H however did set up a competing business and moreover she employed both LH and CH. Consequently Rush did not pay the Deferred Consideration to H on the basis that H had breached the Restrictive Covenants. In July 2016 (after the Deferred Consideration was due but within the two-year non compete period) H set up a new company, opening a salon in Windsor and engaging JT as a consultant. In August 2016, the claimant issued proceedings against H, alleging that she had breached the Restrictive Covenants by setting up a competing business, and employing JT, LH, and CH at various points within the timeframe of the Restrictive Covenants.
It was held that H had breached both restrictions. Although JT was technically engaged as a consultant, the court held that JT had in fact been employed by H, due to the nature of the contractual relationship which existed between them. It was further held that H had breached the non-compete restriction, as the clause was held to be reasonable in scope, duration and geographical extent, and served to protect the legitimate business interests of Rush. However, the court did not accept Rush’s claim that H had deliberately operated through an incorporated company to avoid being caught by the restrictive covenants. Instead, she was deemed to be acting as an agent for the company.
Due to the breach of the first restrictive covenant, Rush was allowed to forgo paying H the Deferred Consideration. Furthermore, H was ordered to cease trading until March 2017 at which point the restrictive covenants would expire.
It is interesting that a two-year restrictive covenant was held to be enforceable in this case and on the basis of comparatively low consideration. It is also interesting that the fixed damages (non payment of the £15,000 deferred consideration) was upheld. Withholding the deferred consideration was not considered unenforceable as a penalty, as Rush had legitimate business interests to protect, namely ensuring it retained its staff and client base both of which added great value to its business. If this is a model for other deals then it would need to be treated with caution if the sums are much larger and if there is a tight geographic limitation as in this case. The test for whether a restrictive covenant in an SPA is enforceable is whether the clause serves to protect a legitimate business interest and whether it is reasonable in geographical scope and duration of time. When dealing with commercial as opposed to employment contracts, the courts tend to allow more widely drafted restrictive covenants, and will also have regard to the commercial context of the agreement. It is notable that the court did not find that H had used her newly created company as a vehicle for deception. The courts will only be willing to look behind a corporate structure (i.e. pierce the corporate veil) in cases where there has been a deliberate and calculated attempt to evade scrutiny.
Catherine Thom Elen Roberts