Executing contracts: do we really need pen and paper?

As more and more consumers buy their everyday products and services online, it is also increasingly common for parties to execute their more formal business contracts – loan agreements, distribution agreements, share purchase agreements etc. – electronically. Either by signing printed copies in counterparts and exchanging scans by email, through special online document execution applications or by simply pasting a digital image of a signature into a document on the mobile device. In today’s world, it is simply not feasible to meet face-to-face to sign every business contract. But what is the legal status of these practices? How do you make sure that your contract is valid and enforceable?

Jan Willem Möller from the Corporate and Commercial practice group of Tanner De Witt sets out the basics.

What are the formalities for entering into a contract?

Different legal systems have developed slightly different ways of defining contracts, but a contract can generally be described as an agreement which gives rise to enforceable obligations. The key ingredients of an agreement are (i) an offer by one party, (ii) the acceptance of that offer by another party, (iii) consideration (that is money or a promise to do or not do something) and (iv) the intention of the parties to create legal obligations.

A contract does not necessarily have to be in writing. If Ian offers Mark to sell him his car for $100,000 and Mark accepts that offer and Ian and Mark shake hands to acknowledge their deal, they have an agreement and can, in principle, enforce it against each other. Buying a car is not much different in this respect from signing up to a music streaming service or entering into a tenancy agreement. The starting point is the presence of the four key ingredients mentioned above and only if there is a specific statutory requirement to this effect does the agreement have to be in writing (and sometimes signed) to be enforceable. Under the Money Lenders Ordinance, for example, certain types of loan agreements between professional money lenders and borrowers are not enforceable unless they are in writing and signed by the borrower before the loan is made. Another example is a contract for the sale of an interest in land; the Conveyancing and Property Ordinance requires this to be in writing and signed by the counterparty in order to be able to sue on it.

But even if not strictly required by law, there are of course benefits to setting out the terms of a contract in writing and having that document signed by the parties. A signed contract provides evidence of the existence of the contract and its exact terms and is therefore a useful tool in case of a misunderstanding, disagreement or other difficulties between the parties. Putting a contract in writing and having it signed also stimulates the parties to think about the terms of the contract (including termination or the consequences of a breach) in more detail, thereby discouraging hasty or unwise transactions. So, when entering into contracts of any significant importance, it is good practice to spell out the terms and have the contract signed by the parties, as confirmation of their intention to be bound by it.

Electronic contracts and signatures

Entering into a contract online or by email is typically already done in writing (as opposed to orally) because the communication of the offer and the acceptance of the offer is typically expressed in written language. But does this generally qualify as writing in the eyes of the law or are there further requirements as to the specific form? And how does signing such digital documents work?

The principles of general contract law apply equally to electronic contracts, but given the relatively recent emergence of this phenomenon, there is some uncertainty as to the treatment of electronic records and signatures in the traditional legal framework. In order to address this uncertainty, Hong Kong adopted the Electronic Transactions Ordinance (“ETO“). The ETO provides for the following rather helpful clarifications:

• if the law requires something to be in writing, the use of electronic records satisfies this requirement;
• in respect of a contract between private parties, if the law requires a signature of a person, an electronic signature satisfies this requirement; and
• in the context of the formation of a contract, unless the parties agree otherwise, the offer and the acceptance of the offer may be expressed by means of electronic records.

Electronic records are defined in the ETO as records generated in digital form by an information system, which can be (a) transmitted within an information system or from one information system to another and (b) stored in an information system or other medium. Electronic signatures are defined as any letters, characters, numbers or other symbols in digital form attached to or logically associated with an electronic record, and executed or adopted for the purpose of authenticating or approving the electronic record.

So, subject to some notable exceptions described further below, if the key ingredients for a contract are present, the terms of the contract are recorded and signed for agreement by the contract parties electronically, and the records and signatures fall within the above descriptions, the parties have created a signed written contract without the involvement of any paper or pen. There is nothing wrong with, for example, a contract embodied in a PDF file exchanged by email and signed for agreement by the parties with a digital signature.

Exceptions and Deeds

The ETO explicitly does not apply to certain types of instruments which are considered to be too solemn for ‘simple’ execution and/or for which there are other practical reasons not to allow for electronic execution at this point in time. Examples are wills, powers of attorney, legal charges over land, floating charges and statutory declarations. Because of the particular formalities for the execution of these types of instruments (such as the requirement of a witness) and sometimes also stamping and/or registration requirements, these types of instruments typically require the involvement of specialist advisors and should generally not be executed electronically.

Finally, a few words on the execution of deeds. The common law distinguishes between simple contracts (or contracts under hand) and specialty contracts (or contracts under seal). Specialty contracts are executed as deeds, and a deed is traditionally an instrument in writing which is sealed and delivered by the person bound by it. Sometimes the law requires an instrument to be executed as a deed (such as a legal charge over land) and other times parties choose to execute an instrument as a deed because of certain legal benefits (A deed does not require consideration to be enforceable, which is helpful for one-sided instruments such as guarantees. Another advantage is that the statutory limitation period for specialty contracts is 12 years instead of 6 years for simple contracts.)

Over the years, the legislator has adapted the traditional common law requirements for sealing and delivering deeds to the needs of modern-day business practices. The requirement of sealing has been abolished for companies all-together and for deeds executed by individuals an instrument is by law deemed to be sealed if it is signed and (a) describes itself as a deed or (b) states that it has been sealed or (c) bears any mark, impression or addition intended to be or to represent a seal or the position of a seal. Finally, the additional statutory presumptions as to the deemed delivery of deeds when they are duly executed have taken away most of the concerns regarding delivery. 

On the basis of the ETO and the various other statutory amendments to the common law regime (most crucially, under the Conveyancing and Property Ordinance and the Companies Ordinance), it should be possible for parties to enter into and execute deeds without any pen (or seal) or paper being involved (unless the relevant instrument is specifically exempt from the ETO – see above). However, due to some remaining uncertainties as to the treatment of deeds under these ordinances and the serious potential consequences of improper execution (that is not being able to sue on it), the common practice in respect of deeds is still to print the final document on paper and to have it signed with an old-fashioned pen and/or sealed. The good news is, that it is widely accepted that this can be done in counterparts (preferably on the basis of a clause in the instrument explicitly allowing for this) followed by the exchange of scans of the signed documents (preferably not just the signature pages but the whole document) and a compiled fully executed PDF copy between the parties by email – so no need to travel unless you are in need of a printer or a pen (or an internet connection).

In summary:

• most contracts do not have to be in writing or signed to be enforceable;
• for material contracts it is nevertheless recommended to have the contract in writing and signed by the parties;
• if the contract has to be in writing, except for certain specific formal types of contracts, it can be written and signed electronically; and
• in case of contracts (or other instruments) in the form of deeds, it is recommended to print the entire document, sign it with a pen and either exchange original copies with your counterparty or exchange scanned fully executed copies by email.

Jan Willem Möller

Disclaimer: This article is meant to provide helpful but general guidance only. It should not be taken as legal advice. Please seek professional advice when you are contemplating entering into any material contract.