Legal Tech: What are ‘Digital’ Contracts?
Digital contracts might be what you think about when you hear the term ‘smart contract’. Although smart contracts are digital, the term ‘digital contract’ refers to contracts that have been presented and signed online, rather than printed and signed by hand.
What are digital contracts?
A digital contract is a contract that is created, negotiated and executed online, usually through a tick box or e-signature. A digital contract, to use a simple example, is a way of agreeing to terms and conditions online. For instance, when you order something from many of the online suppliers we now do, by clicking you accept the terms and conditions (and most likely never read them) you are effectively signing a digital contract. This same process happens when you might download and install a new piece of software on your computer or a new app on your smart phone.
As well as reading a digital contract, ‘signing’ of that digital contract is a key consideration and there are three ways to do it. A contract does not necessarily need to be signed in order to be valid (although we recommend you do), but signing is the best way to show that you approve the terms of the contract. Traditionally, most legal documents have been ‘wet-signed’, meaning a pen is used to sign on a hard copy (paper) contract (remember pens ??!!). As technology advances, we are seeing the legal industry is innovating and accepting new ways to create contracts including digital and smart contracts (click here to read our smart contracts blog).
The terms ‘electrical’ and ‘digital’ are often used interchangeably when talking about signatures, but there are very significant differences between the two, and a lesser-known third category of signature is also available. The three are listed below:
- Simple – scanned or tick box (sometimes called an electronic signature)
- Advanced – uniquely linked to an identifiable signatory and irrevocable (a digital signature)
- Qualified – an advanced signature created on a qualified platform and based on a qualified certificate (trusted digital).
Typing your name or initials into a document and clicking it is not generally considered to be a valid electronic signature. However recent case law suggests uncertainty as to where this point stands with the advent of these new technological activities. In the case of Neocleous & Anor v Rees 2019 EWHC 2462 (Cn), the Court held that an automatically generated email footer constituted a valid signature.
Currently, most documents are suitable for digital signatures except for wills, land registry documents or HMRC paperwork which is still required to be wet-signed. The Law Commission recently stated that major businesses are stuck in the ‘Victorian Era’ and that digital document should have the same legal powers as paper ones.
Why digital contracts?
Digital contracts can be simple to create, and will safeguard your business in the same way that hard copy contracts do – without the fuss! The traditional signature process often requires digital documents to become physical documents for signature; shared over email, printed, signed, scanned and then returned by email. If there are errors along the way the process has to be repeated, therefore incurring more time and fees. Digital contracts are more collaborative, allowing the documents to be drafted, negotiated and signed all online.
Signing digital contacts can actually be safer than signing with pen and paper. Unlike ‘wet’ signatures, some digital signatures also come with an electronic record that serves as an audit trail and proof of the transaction. More detailed certificates of completion can include specific details about each signer on the document, including the signer’s disclosure indicating the signer agreed to use e-signature, the signature image, key event timestamps and the signer’s IP address and other identifying information.
Problems with ‘clicking’ so quickly
How many times have clicked to accept terms and conditions and not really thought about it? Some reports suggest that no more than a few seconds are spent between seeing the ‘click to accept’ button and clicking it. It is unlikely anyone really knows what they are agreeing to and this can cause issues.
The Guardian reported that only 7% of people online read the entire terms and conditions document. At the same time, 20% of people have suffered in one way or another by not reading it. It does sometimes appear as though the author of the Terms and Conditions doesn’t want you to read through the document with lots of legal jargon and small fonts however, any lawyer will strongly advise you to make sure that you read the document even when it is a simple ‘tick a box’ format. If a dispute reaches court, judges will likely recognise this as a legally binding contract with the tick box showing your asset to the terms and conditions.
should you use digital contracts for your business?
We are increasingly seeing businesses utilise digital contracts in day to day business life. We believe digital contracts are here to stay and can Proelium Law can help your business by providing legal and technical advice on digital contracts and e-signatures.
Get in touch by calling us at 020 3875 7422 or through email email@example.com.
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