Covid-19 and the Digital Transformation of Business Dealings: Binding Electronic Execution of Contracts

Introductory remarks

The Coronavirus (officially called “Covid-19”) outbreak has undoubtedly created an unprecedented list of new challenges to the global business community including the business community of Cyprus. There is no doubt that social distancing measures implemented to tackle the pandemic have an immediate impact on companies’ business operations and that as a result a substantial disruption is occurring at almost all levels. In particular, isolation has made the signing and execution of agreements more difficult than ever before and there is no doubt that traditional methods used to execute documents are under an urgent need to adapt to the new digital era. Thus, companies that seek to continue their business operations and remain competitive in this emerging digital business chessboard (which will definitely continue even after the end of the pandemic) will have to absorb and incorporate e-business knowledge which includes also the digital execution of legally binding contracts.

This briefing note sets out the EU and Cyprus legal framework on the binding electronic execution of agreements and provides a list of key related considerations for companies of any size.

The legal framework of electronic execution of contracts

Fortunately, the legal framework for such practices has long existed within the European Union and thus EU businesses are already in possession of electronic signature solutions (even though such solutions were not commonly used up until today).  In particular, the EU has adopted a Regulation (“Regulation No 910/2014 on the electronic identification and trust services for electronic transactions in the internal market”) (hereinafter the “Regulation”) which has established, amongst others, a comprehensive legal framework for e-signatures and e-execution of contracts. Being an EU Regulation, its provisions are directly applicable in all EU Member States without any need of being transposed into national law (compared to the previous repealed Directive on Electronic Signatures (1999/93/EC)). Hence, its implementation plays a direct effect in Cyprus which has nevertheless adopted a related specific Cyprus legislation i.e. Law 55(I)/2018 (hereinafter the “Cyprus Legislation”).

Different types of electronic signatures and their legal effects

When companies consider adopting techniques for the electronic execution of contracts, the following key issues must be taken into account as not all types of electronic signatures are equal in the eyes of the law.

The Regulation as well as the Cyprus Legislation makes a distinction between the following three types of electronic signatures:

1. Standard electronic signatures (also known as “SES”) which are defined as “data in electronic form which are attached to, or logically associated with, other electronic data, which are used by the signatory to sign”. In a nutshell, this type of e-signature refers to the average e-mail signature; a photo or scan of a handwritten signature that is attached and/or otherwise uploaded to a PDF format of a contract.
2. Advanced electronic signatures (also known as “AES”) which are defined as signatures “uniquely linked to the signatory, capable of identifying the signatory, and created using e-signature creation data that the signatory can, with a high level of confidence, use under his sole control”. In simple terms, an AES is an SES with a number of additional guarantees regarding the identification of the signatory and the immutability of the signed content.
3. Qualified electronic signatures (also known as “QES”) which are defined as “advanced electronic signatures created by a qualified electronic signature creation device”. This type of signature is based on a qualified certificate for electronic signatures, which is issued by a qualified trust service provider at a Member State level. A QES is thus an AES with even more guarantees, such as the involvement of a trusted third party, a certification authority to reinforce the link between the signature and a natural person.

Important Note: Importantly, pursuant to the provisions of the Regulation and the Cyprus Legislation, a SES shall not be denied legal effect and admissibility as evidence in legal proceedings solely on the grounds that it is in an electronic form or that it does not meet the requirements for QES. Furthermore, a QES automatically has the same legal effect as a handwritten signature and a qualified certificate issued in one Member State shall be recognised in all other Member States. It is therefore a great way to sign contracts if the signatories all have a QES at their disposal.

Esignatures on new contracts in Cyprus

Unfortunately, there is still a large gap in this area of law as many EU countries (and even more countries worldwide) do not have their own state – sponsored QES methods. As a result, for many documents or contracts, companies cannot rely on QES methods alone. 

In Cyprus, under the relevant Cyprus Legislation, the Department of Electronic Communications of the Ministry of Transport, Communications and Works is the responsible authority for the implementation of the framework of electronic signatures and supervises and oversees the provision and work of QES.

All sound too complex? – A practical guide and key takeaway for companies

The general principle is that, except for specific limited situations, no rules prevent companies from simply using SES in their contractual arrangements i.e embedding a scanned signature into a PDF version of the agreement, or even confirming in an e-mail chain that both parties agree. However, as mentioned above, the enforceability of that agreement (but not necessarily its admissibility as evidence in legal proceedings) could be brought into question, and in such cases companies may be required to use various means of evidence to prove that the other party actually signed that specific agreement.

Thus, where no QES is available, the best practice for the execution of agreements is through wet-ink signatures, on the same page, with all the pages initialed and witnessed in the presence of an appropriately qualified person. Clearly however, with the isolation imposed to combat the spread of Covid-19 pandemic and its aftermath, this may not always be feasible. 

What follows is a summary checklist of practical steps (which are by no means exhaustive) for companies in order to ensure, to the best degree possible, the enforceability of electronically executed agreements without the use of a QES:

• Strict express terms: Strict, express terms may need to be included in the agreements to ensure that only particular individuals can incorporate their esignatures in the agreement in order to minimise the possibility of any ambiguities as to who might have embedded the signature in the document. Similarly, strict express terms shall be included in agreements prohibiting delegation of the aforementioned signing authority.

Such terms may also require parties to provide written statements at the time of exchange of drafts that the arrangement is entered in reliance on the assurances that: 

• • • • the signatory has the appropriate authority to enter the binding arrangement;
      • the signatory has affixed their own electronic signature; and
      • neither party will challenge the validity of the arrangement by virtue only of the remote electronic signing of the document.

• Security measures: Companies may also need to ensure that electronic signatures are securely locked and accessible only by the signatory by using appropriate software and by providing evidence of such security measures to the other party.

• Caution when exchanging the agreements:

• • • • When exchanging the execution versions of the agreements via email, agreements may need to be in a PDF version that is locked and not editable.

• • • • In case only the signing page is executed, the email shall also include the whole document (even if it is the unsigned version) so there is no ambiguity about the terms agreed.

• Due diligence: Pre-transactional due diligences shall also include a confirmation that the counterparty has the authority to execute contracts in such a way and that all the internal documentation providing such an authority are in place.

• Witnessing: Although traditional forms of witnessing the execution might not be available, alternative ways of remote witnessing may be applied such as having an independent third party witnessing remotely over a video camera.
  
  
• Wet-ink hard copies: For strategic and important contracts companies may also proceed with the exchange of a hardcopy version at the first available opportunity or share scans of signed documents.

Although the above are some key points for consideration, at the end of the day and in the absence of a QES, everything boils down to the mutual trust between the relevant parties.

Concluding remarks

The exponential spreading of Covid-19 generates a number of challenges for companies around the world including those based and operating in Cyprus. Understandably, companies are grappling to address legal and other issues presented by the current unprecedented circumstances. Therefore, it is more important than ever to allow sufficient time for appropriate arrangements to be made for a document to be signed, whichever method the parties choose to use. Our firm is closely monitoring the relevant developments and can provide legal advice on either the way to obtain an EU qualified QES or on the steps to be followed to ensure enforceability of electronically executed agreements even after the pandemic is over. For further information please do not hesitate to contact us.

Disclaimer: This note serves as a general overview of the relevant Cyprus legislation and the information set out shall not be considered as a legal advice nor shall be relied upon by any natural or legal person. G.C. Hadjikyprianou & Associates LLC shall not be liable for any damages incurred by any person who relied solely on the information provided herein. For the avoidance of any doubt, this note is merely intended to highlight key issues and not to be comprehensive and no party shall re-produce and/or use the same without our prior written consent. Use of the information provided herein is subject to our Terms of Use.