The increasing use of e-signatures raises several questions about their suitability for legal documents

Adobe recently announced the acquisition of EchoSign, a web-based provider of electronic signatures and signature automation. If ink was used to finalize the deal, it had not even dried yet when RPost, a self-proclaimed pioneer of e-signatures, launched a lawsuit against Adobe and EchoSign for patent infringement.

News coverage of the lawsuit described how millions of individuals and businesses worldwide have been using this technology to remotely automate the entire signature process with the click of a button. This is all fine in theory, but, when parties to a contract are relying on it, will an e-signature hold up in court?

According to the Ontario Electronic Commerce Act (ECA), a legal requirement that a document be signed (with a very few exceptions, such as wills, powers of attorney for individuals, documents for land transfer, and negotiable instruments) is satisfied by an electronic signature. The question then is: what is required to meet the definition of a legally binding e-signature?

The act defines “electronic signature” as “electronic information that a person creates or adopts in order to sign a document and that is in, attached to or associated with the document.”

Similarly, the Personal Information Protection and Electronic Documents Act (PIPEDA) defines “electronic signature” as “a signature that consists of one or more letters, characters, numbers or other symbols in digital form incorporated in, attached to or associated with an electronic document.”

Although it’s possible to digitize handwriting so that it’s displayed as an image, an electronic signature doesn’t need to look like a handwritten signature or even contain the letters of the signatory’s name, as long as it’s “associated with” the document.

There are two basic legal requirements concerning the reliability of an e-signature that must be satisfied. It must be reliable to identify the person, and to associate the e-signature with the relevant electronic document.

So how do services such as EchoSign do that? Essentially, you load the document to be signed on to the EchoSign service, along with the email address of the person who is to sign it. The person identifies themself by logging in to an existing social media account, and clicks to sign the document. The service returns the document, along with details about the signature, including the date, the email account used by the signatory who created the document, where it was sent, who viewed it, how the signatory’s signature was verified, and to whom and when the signed document was returned.

If, for example, the signatory identified themselves with their Twitter account, it includes their Twitter identity and the image they use for their account.

While we may be used to actual handwritten signatures, one has to ask whether this type of process might be more reliable, and less prone to fraud than the traditional method, particularly where the parties are not together when it’s signed.

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Recent outages at Amazon and Sony’s PlayStation Network have left businesses and consumers without service for lengthy periods of time.

The tech press is full of articles suggesting the bloom is off the rose for cloud services and cloud providers are in denial about risks. These articles call on online providers to take financial responsibility and offer more than token services credits.

These outages have done more than just prevented gamers from playing. Services provided by Foursquare, Hootsuite, Discovr, the New York Times and others were affected by the “Amazonpocalypse”. Other businesses using Amazon were barely affected, as they designed their use with disaster prevention in mind.

One reason cloud services are inexpensive is that they come with no guarantees, and no liability on the part of the provider. That’s not meant to suggest online providers aren’t motivated to keep their services running. It’s bad for business if they don’t. But some are better than others, and problems can occur despite provider efforts.

If users expect financial responsibility and compensation for their losses in a failure, they can expect to pay more.

Online service provider user agreements contain limitation clauses that deny liability if the services don’t work. At most, there might be a refund for the cost of their services proportionate to the amount of downtime. If users want more, they can expect to pay for the provider’s insurance to back up the liability. And in practice. most users opt not to pay more for liability protection.

Anyone using online or cloud services needs to first consider how crucial the services are to them. What will the effect be if the service is disrupted for a short or long period of time, or if their online data is lost?

If such disruptions would have serious effects, then the user must take steps to control those risks.

For the risk of losing data, it might be as simple as keeping local backups, or keeping a mirrored copy at a different service provider at a different location.

To keep the service operating continuously, users should take a close look at how the service is provided, and plan their use in a way designed to survive failure.

In other words, assume things will fail, plan around that, and test to ensure the plan works.

Amazon, for example, has several “availability zones”. Amazon customers who were able to switch between them suffered only minor issues.

Another approach is to use multiple service providers based in different locations.

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A UK court ruled it would be unfair to enforce a limitation of liability clause where the buyer relied on the company’s advice

Commercial software purchases can be major investments. If problems arise or the buyer ultimately finds the software is not the right solution, either the buyer or seller must bear the cost of the product, lost profits and additional staffing.

Software companies include limitation of liability clauses in their standard terms and conditions, but this has not stopped courts from awarding damages to buyers in some situations.

The recent United Kingdom court decision of Red Sky v. London Kingsway Hall Hotel suggests that how the sale is conducted may determine which party is liable.

The court said it would be unfair to enforce a limitation of liability clause where the buyer relied on the software company’s advice in deciding to purchase the product and the product was inappropriate for the buyer’s intended use.

The software in question was meant to provide reservations and point-of-sale functions for hotels. After installation, the buyer found it did not meet its needs, and replaced it with other software.

The court also said that standard terms including a limitation of liability clause are predicated on the fact that a prospective customer would investigate the software and make up its own mind whether to purchase based on demonstrations and the operating documents.

UK courts have placed a heavy onus on software companies to provide the buyer with all relevant information if they wish to rely on limitation of liability clauses. What is relevant or sufficient will necessarily vary from case to case.

But it is clear – at least in the UK – that software companies are expected to take steps to ensure that the buyer has a fair chance to assess the product before purchase.

In this case, the court said the limitation of liability clause was unfair under the UK’s Unfair Contract Terms Act, as the software was not fit for its purpose. Basically, the software vendor was not transparent enough to give the buyer enough information to make an informed decision on the suitability of the software for its particular needs.

In the end, the court found the vendor liable for 110,000 pounds in damages for software that it had been paid 50,000 pounds.

Though Canadian courts may not have gone this far based on the same reasoning, Canadian courts have found liability despite limitation clauses where they find them to be unconscionable in the circumstances. Unconscionable means that it has to be more than unfair or unreasonable. Essentially, courts won’t allow vendors or their products to be incompetent, or cavalier in their claims, then hide behind limitation clauses.

Every product vendor, whether it sells software, online services, or other products, clearly wants to market their products in their best possible light. But it is wise to be as transparent as possible about the products, especially when it comes to helping purchasers make buying decisions.

In some ways, it seems odd to discuss notices by email in a time where we talk about service of court documents by facebook and twitter.

But there are some real practical issues to consider when determining when an email is actually or deemed to have been received.  The date and timing can lead to major consequences for things like contract formation or termination.

For example, what if the email gets caught in a spam filter? What if the recipient doesn’t check their email?  What if the email address is no longer in use?  Does it make a difference if the recipient carries a smartphone after business hours?

When entering a contract that has a notice provision – don’t just add email (or facebook or twitter) to the list of acceptable notice requirements without putting some thought into these issues.

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Companies have been sent a clear message — deal with complaints because dispute resolution is too impractical to pursue.

A recent Ontario Court of Appeal ruling confirms an evolving trend to protecting consumers from enforcement of mandatory arbitration clauses in consumer agreements.

The plaintiff in Griffin v. Dell Canada alleged Dell had sold computers with latent defects that made them prone to overheating, power failure, inability to “boot up” and unexpected shutdowns.

Griffin sought certification of the case as a class action. In reply, Dell moved to stay the proceeding in favour of private individual arbitration under the mandatory arbitration clause in each consumer contract. The arbitration clause directed that complaints must be taken to the (now defunct) National Arbitration Forum in Minnesota.

Dell relied on sec. 7(1) of the Ontario Arbitration Act, which requires the court to stay a proceeding where there is a valid mandatory arbitration clause.

A lower court had dismissed Dell’s motion and conditionally certified the case as a class action. The appeal court dismissed Dell’s appeals and refused to stay the class proceeding.

The appeal court relied on provisions of the Consumer Protection Act that invalidate mandatory arbitration clauses in consumer contracts. These provisions took effect in 2005, after the consumer contracts with Dell were entered into. But the court chose to rely on them because damages did not arise until after the provisions took effect.

Interestingly, the court also ensured the rights of non-consumers within the class were protected. The Consumer Protection Act restricts the definition of a “consumer” to an individual who “acts for personal, family or household purposes and does not include a person who is acting for business purposes”. But the court found it unreasonable to separate the claims of consumers and non-consumers.

In applying the consumer protection law, the appeal court made a point of noting that Dell’s mandatory arbitration clauses were simply unfair to Canadian consumers.

Writing for the court, Justice Robert Sharpe said: “In my view, it is clear beyond any serious doubt on this record that staying any claims advanced in the action will not result in any of the stayed claims being arbitrated. I agree with the motion judge that there is a lack of reality to Dell’s argument that the claim should proceed by way of arbitration. There will be no arbitration. The choice is not between arbitration and class proceeding; the real choice is between clothing Dell with immunity from liability for defective goods sold to non-consumers and giving those purchasers the same day in court afforded to consumers by way of the class proceeding.”

The appeal court has sent a clear message that consumer rights must be taken seriously. Large corporations will now have more difficulty avoiding responsibility for addressing consumer complaints by making dispute resolution too impractical to pursue.

[Note: Due to a technical glitch, this column has not yet been posted on the Free Press or Canoe websites]

VERDICT:  A recent Ontario Court of Appeal decision showed that it’s possible to enforce oral contracts under the right circumstances 

Oral contracts can be difficult to enforce. As famed movie producer Samuel Goldwyn once observed: “An oral contract is as good as the paper it’s written on.” 

The absence of written documentation can make it very difficult to prove in court that an actual agreement was reached. The judge is left to decipher the intent of the parties based upon what they claim the arrangement was. This is often to the disadvantage of the person claiming an agreement existed, who may have a hard time showing sufficient evidence to prove it. 

But a recent Ontario Court of Appeal decision may lend strength to those trying to enforce promises made through an oral contract. In UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd. the court found that an oral agreement was sufficient to enforce an agreement to buy shares. 

A representative of the plaintiff, UBS Securities, agreed to an oral contract to buy shares from a representative of the defendant’s company, Sands Brothers Canada. The plaintiff then entered into an agreement to sell the shares to a third party, relying on the oral contract. 

The defendant refused to comply with the terms of the oral contract, claiming that the agreement had not been finalized in writing. The shares remained with Sands Brothers Canada and UBS Securities sued for specific performance to receive the shares for which they contracted. 

The trial judge found in the plaintiff’s favour, deciding that there was a binding and enforceable agreement between the parties. UBS Securities was granted specific performance of the contract, entitling them to the 100,000 shares they were promised. 

Sands Brothers argued UBS Securities was under a duty to mitigate (or reduce their losses) by buying replacement shares at the time of the breach of contract. However, the court found that similar shares were not readily available at the date the contract was breached, leaving them unable to mitigate. 

In addition to the judge finding the plaintiff to be a credible witness, two additional considerations swayed the court in reaching its decision.

First, the plaintiff’s case was enhanced by electronic communications made during the course of the negotiation. The plaintiff produced detailed exchanges, made before the oral contract, outlining specifics of the agreement. The e-mails traced the proposed agreement from its origin until it was nearly completed. 

The use of e-mail resulted in more evidence being available. It resulted in creation of a time-stamped record of interactions that could be used to recreate the intention of the parties. 

Second, the appeal court found that it was common practice in the securities industry to make binding agreements orally. The fast-paced nature of the securities trade makes oral contracts necessary for the market to operate efficiently. In the time necessary to reduce the agreement to writing, the impetus to complete the transaction may have passed. 

So, in some instances, an oral contract is better than the paper it’s written on.

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The Supreme Court of Canada recently rejected a lower court’s decision that you can’t enforce a contract that you’ve demonstrated no intention to comply with.

In Jedfro Investments (U.S.A.) Ltd. vs. Jacyk Estate, the top court actually upheld the outcome of the Ontario Court of Appeal’s decision, but on very different grounds. The Court of Appeal decision was the subject of a column published Nov. 3, 2006 (see canton.elegal.ca/2006/ 11/06/ignoring-written-deals-risky).

In the Jedfro case, three investors entered into a joint-venture agreement to purchase, develop and sell property in the United States.

The investors bought the property using cash and a promissory note. They intended to make payments on the promissory note by selling lots. But when the real estate market plummeted, the investors couldn’t meet their payment obligations, and the noteholder threatened to foreclose.

The joint-venture agreement contained provisions to deal with such a situation by providing a method for one party to buy any of the other parties out.

But instead of this occurring, one of the investors paid off the note on behalf of the other two, with no new agreement as to how he’d be compensated.

One of the other investors agreed to a profit-sharing deal to compensate the investor for paying off the promissory note.

The third investor, however, couldn’t come to terms about what he’d give the payer, so the plaintiff sued the payer of the note, arguing he had breached the original joint-venture agreement under which all were to share proportionally any profits of the joint venture.

The trial judge dismissed the action, holding that none of the parties had relied on the joint- venture agreement and it was therefore inappropriate for the court to force the parties to abide by its terms.

The Court of Appeal upheld the trial judge’s decision, saying that if parties ignore the terms of a deal, they can’t later enforce the ignored terms against the others.

Essentially, the appeal court held that contracting parties can’t ignore an agreement when it doesn’t benefit them, then ask the court to enforce the same agreement when it does benefit them.

The matter was further appealed to the Supreme Court, which upheld the previous decisions but disagreed with the lower courts’ reasoning.

The top court held that there are many ways to discharge a contract, including by performance, agreement, frustration, or by repudiatory or fundamental breach. But unless a contract is discharged by one of these methods, it remains in force and the parties remain bound by it.

Specifically, the Supreme Court held that, “while the parties may have ignored the joint-venture agreement, the obligations under it remained in effect.”

This decision represents a significant effort by the Supreme Court to reel in previous case law and send a clear message that contracts will remain in force and binding on the parties until discharged.

In other words, simply ignoring a written contract will not make the agreement go away.

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For more than fifty years, contract law has been haunted by the spectre of fundamental breach.

From its inception in the law courts of the United Kingdom in the 1950s it was controversial. In essence, it is a way for courts to look beyond a contract, or at least not to enforce limitation of liability clauses contained in a contract, to provide a remedy for very serious contractual breaches.

Regardless of the theory, we simply need to remember that no-one can hide behind a limitation of liability clause in a contract if they don’t perform at all, or fail miserably — even if the limitation clause is a typical one.

In more technical terms, if a party commits a radical breach of a contract — then uses an exculpatory clause to take all the benefits of the contract but none of the burdens — the courts will prohibit that party from relying on that exculpatory clause irrespective of how clearly it is drafted, because to do so would be unfair to the other contracting party.

To this day, legal theorists and even judges are unable to agree exactly what amounts to a fundamental breach of contract, or if such a thing should even exist.

In a recent article in the Canadian Bar Review entitled Return of the undead: fundamental breach disinterred, Richard F. Devlin, Associate Dean at Dalhousie Law School, looks at how the principle seems to stick around despite efforts by some judges to eliminate fundamental breach as a concept of Canadian contract law.

While judges, academics and lawyers struggle with the differences, theories, and appropriateness of the concept of fundamental breach, or alternate concepts such as unconscionability or good faith – the practical effects on the enforcement of contracts are virtually the same.

In one instance the doctrine of fundamental breach was used to prevent a storage company from relying upon a limitation of liability clause. Under questionable circumstances, after the rent on a storage locker fell behind, the storage company sold the goods contained within, valued at $60,000, to an auctioneer for $800. The court held this action amounted to a fundamental breach of the contract.

In another case, a company was hired to move household possessions. They left the moving truck parked on the street overnight without any security or monitoring and the goods were stolen. The court found they could not rely upon their limitation of liability clause as their breach of contract was unconscionable.

As the courts struggle with the concept of fundamental breach and some judges try to get rid of the concept entirely, the reality is that courts will find a way to provide remedies for significant breaches of contract by whatever legal theory is available to them.

Despite the uncertainty provided by the presence of the doctrine of fundamental breach, there is little question that limitation of liability clauses will remain standard fare. In most cases they serve a useful purpose and can be applied quite successfully. In the end, however, no one can safely hide behind a limitation clause in situations where they don’t perform their obligations under a contract at all, or fail miserably to do so.

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Courts seem to be scrutinizing non-solicitation clauses of former employees more closely. Businesses would be wise to take a look at their existing non-solicitation provisions to take this into account.

A non-solicitation clause prevents employees from soliciting customers of their former employer to sell them a competitor’s goods or services.

Conventional legal wisdom was that non-solicitation clauses were easier to enforce than non-competition clauses (which state a former employee can’t work for a competitor). Non-competition clauses must be narrow in scope to be enforced. Recent case law says non-solicitation clauses in employment contracts also will be looked at to ensure they do not go beyond legitimate business protection.

Courts want to ensure the restrictions within the clauses do not overly limit the employee’s ability to find new employment, while still providing protection for proprietary rights of the former employer. The kind of restrictions or limitations the courts used to accept as necessary to protect the integrity of the business are narrowing.

When a court considers non-solicitation clauses, it will not correct deficiencies in the wording. If it is found to be restrictive in one particular aspect, they will deem the entire section to be inoperable.

Two recent decisions of the Ontario Superior Court and the Ontario Court of Appeal indicate that employers are held to a high standard of reasonableness when restricting the future earning potential of former employees.

Often geographical restrictions are too broad. The courts prefer limitations on solicitation of those who that particular employee specifically dealt with or knew of, rather than on all current and prospective clients of the business.

This was the case in a decision called IT/NET Inc versus Cameron, in which a sub-contractor signed a non-solicitation agreement which prevented him from soliciting clients not only at his job site, but in other locations within the company. The clause would have applied whether the contractor knew his target was an IT/Net client or not, and it had no spatial limit, so would apply anywhere in Canada.

The court found it was unreasonable to require such a covenant between the two parties, and that IT/Net did not require that kind of protection.

In Trapeze Software Inc. versus Bryans, the court considered the grounds on which a covenant has to be reasonable.

They include: that the employer actually had a proprietary interest to be protected, that the limitations on geographic work zones, or the duration of the covenant was not too broad to impede the ability of the employee to gain new employment, and that it is not against competition generally.

This means it is permissible to restrict contact between customers and former employees, but it may be necessary to limit that to customers the employee dealt with or was aware of.

These two cases are not a dramatic change, but clarify what has been known for many years; that any restrictive clauses in employment contracts must be reasonable.

Reasonableness is hard to define, but these cases tell us that so long as the former employee is not completely blocked from the industry, and not completely prevented from gainful employment, and so long as the employer has something legitimate to protect, like client lists, or trade secrets, the covenants will stand up to the court’s scrutiny.

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Letters of intent are often used as a starting point to negotiate various arrangements. But they can be risky.

The March decision in the Ontario Superior Court of Justice of Wallace v. Allen et al considered whether a particular letter of intent bound the parties.

The case centered on two friends who had entered into a gentleman’s agreement regarding the sale of Mr. Allen’s business interests. These friends started their agreement with a letter of intent that stated “there was still much legal work to be done,” and they would eventually need to enter into a binding agreement.

These friends negotiated over the span of several months, and the buyer started working alongside the seller to learn the business and meet the clients. Ultimately an agreement was drafted, but never signed. The seller lost his faith in the deal and called it off when the buyer was out of town on the day the deal was to close.

The buyer sued his former friend to enforce the letter of intent, saying it created a binding agreement for the sale of the business. The court found, however, that because of the very clear terms in the letter of intent indicating it was only to be a preliminary document, it wasn’t binding.

The court referred to the fact the letter of intent was drafted before negotiations were completed. This turns out to be a key point: If that same letter had been drafted and accepted after negotiations were complete and after a large majority of the terms of the agreement had been decided, the judge may have found it formed a binding agreement.

What protected the would-be seller from having the letter of intent enforced was that there had never been any indication the letter was to be binding. All parties at all times were aware they still had to draft and sign an agreement, and the letter was just a starting point.

When the plaintiff buyer tried to enforce the letter of intent the court refused, finding there was no meeting of the minds. The friends had never meant for the letter to be the final agreement, and they couldn’t now claim otherwise.

The judge referred to the seller’s unfortunate temper, and his all-consuming pride. In this situation, where an agreement between friends was ready to sign, they had begun to work together and visited with each other socially, one minor delay shouldn’t have caused the whole deal to fall apart. The judge, however, couldn’t read into the letter of intent clauses or terms that were simply not there. The language was clear and unambiguous, and the court had to find there was no binding agreement for the sale of the business.

This case illustrates the importance of carefully worded documents, and making sure the parties’ true intent is reflected. A letter of intent can be a useful tool for negotiation, but should the deal sour, a poorly worded letter of intent could turn into a weapon to be used in future litigation.