Sign of the times16 January 2017 | Directors' & Officers' Liability
- Director's duties.
- Ostensible authority.
With the rise of electronic forms and applications, companies are increasingly reliant on electronic signatures of directors to conduct their day-to-day activities. However, what happens when an electronic signature is used without authority from the relevant director? Is the director bound by the terms of the agreement? The New South Wales Court of Appeal recently considered this issue in the case of Williams Group Australia Pty Ltd v Crocker  NSWCA 265.
Mr Crocker was one of three directors of IDH Modular Pty Ltd (IDH), a manufacturer of prefabricated buildings. Williams Group Australia Pty Ltd (Williams) is a building materials supplier. In July 2010, IDH applied for trade credit from Williams. Relevantly, IDH’s trade credit application included guarantees from its directors, including Mr Crocker (the Guarantee).
The Guarantee was signed using an electronic system known as “HelloFax”, which requires the use of a username and password. Relevantly, another IDH director provided Mr Crocker with his “HelloFax” username and password. Mr Crocker did not change the password.
Between 2012 and 2013, IDH incurred trade credit debts of $889,535. Williams commenced proceedings against IDH and its directors, including Mr Crocker, pursuant to the Guarantee (the Primary Proceedings).
In October 2013, IDH went into liquidation and the Primary Proceedings against IDH were stayed but the proceedings against the IDH directors continued. Mr Crocker successfully defended the Primary Proceedings on the basis that his signature was used without his knowledge or authority.
The Decision on Appeal
Williams appealed the Primary Proceedings (the Appeal) on the basis that the signature was used with Mr Crocker’s ostensible authority, or the signature was ratified by Mr Crocker.
With respect to the law of agency, ostensible authority arises when a principal represents to a third party that an agent has authority to act on his or her behalf and the third party relies on such a representation when entering an agreement. Similarly, ratification occurs when a principal adopts an agent’s unauthorised act.
The Appeal was dismissed because the Court of Appeal found that Mr Crocker did not:
- represent to Williams that an agent was authorised to use his signature. Mr Crocker’s failure to change his password did not constitute a representation or provide an agent with authority to use his signature; and
- ratify the Guarantee as he had no knowledge or notice of the Guarantee, because the “HelloFax” system only recorded the use of the signature in the trade credit application and failed to show that it was also used in the Guarantee.
Implications for you
The decision will be of interest to directors, officers and their insurers and is an example of the sorts of issues which can arise out of the implementation of new technologies and paperless systems in workplaces.