The Validity of Electronic Contracts and Signatures in Hong Kong

The adoption of electronic contracts and signatures has become increasingly commonplace around the world. Despite the greater uptake of these electronic practices that had traditionally been executed offline, doubt has often been cast on their legal validity, especially their admissibility and evidential weight assigned to them by courts. In our previous article entitled “A Guide to Signing Electronic Employment Contracts in Mainland China”, we discussed how the legal effect of employment contracts inked by a “reliable” electronic signature in Mainland China has been reaffirmed by recent guidance issued by the Ministry of Human Resources and Social Security.

In Hong Kong, the legal infrastructure to facilitate the development of a progressively digitalised economy and the handling of electronic transactions is underpinned by the Electronic Transactions Ordinance (Cap. 553) (“ETO”), which came into force in January 2000 and was updated in June 2004. The ETO confers equal legal effect on electronic records and signatures as their paper counterparts. Section 17(2) provides that “where an electronic record is used in the formation of a contract, that contract shall not be denied validity or enforceability on the sole ground that an electronic record was used for that purpose.” Furthermore, the admissibility of electronic records as evidence in legal proceedings is affirmed in Section 9.

E-contract formation

While the ETO regulates the use of electronic records and signatures in the formation of contracts, there are no specific statutory provisions governing electronic contracting activities per se. Contracting online is subject to the same requirements as contracting offline, which means that all the elements of a valid contract must be present in order for an e-contract to be legally binding:

1. Offer: There must be an expression of willingness to enter into an agreement on specific terms, which should be made with the intention that it will become binding should the offer be accepted.
2. Acceptance: There must be an agreement to all the terms of the offer. A partial acceptance of the terms does not constitute a valid acceptance but rather a counter-offer that displaces the original offer.
3. Consideration: An agreement must be sealed by consideration, which is most commonly in monetary form; however, it need not be so. It can take the form of a benefit to the party making the promise, or the form of a detriment to the party to whom the promise is made.
4. Intention to create legal relations: All parties must intend to enter into a legally binding agreement in which rights and obligations are enforceable.

Offer versus invitation to treat

The presence of consideration is usually evident in most online contracts where a good or service is supplied in exchange for a customer’s payment. Similarly, intention to create legal relations is presumed in online transactions in light of their commercial nature. Sometimes, the difficulty lies, however, in establishing what constitutes an offer and acceptance on the internet. An online storefront is akin to a “shop window”, and the display of a good or service for sale on a website amounts not to an offer but merely to an invitation to treat, i.e., an invitation to make an offer. An offer is made only when a customer expresses his or her willingness to purchase a good or service from the website, i.e., when the customer places an order. At this point, the seller still has the liberty to either accept or reject the offer. If the advertisement was an actual offer and the order an acceptance, the seller would be legally bound even in the event of a pricing error or the product being out of stock. Therefore, to remove any ambiguity and room for doubt, it should be clearly set out in the terms and conditions that the display of goods or services for sale is only an invitation to treat.

When does acceptance take place?

Since the online transaction process is automated unlike in brick-and-mortar stores, there may be a lack of clarity as to when acceptance occurs. The fundamental rule is that acceptance must be communicated for it to be effective. Usually, an online seller would communicate acceptance by way of an email confirmation, a message displayed on the website itself, or a despatch note. The danger inherent in automating email confirmations is that, as mentioned above, the seller would be legally bound even if there was no possibility of fulfilling the order. In addition to specifying the precise point at which acceptance takes place, the seller is well advised to state explicitly in the terms and conditions that the automated email confirmation, which immediately follows the submission of an order, is simply an acknowledgement and not an acceptance.

How to properly incorporate terms

Another important point to consider when contracting online is the manner in which terms and conditions are incorporated into the contract, i.e., included in the contract. They must be sufficiently brought to the customer’s attention either before or at the time of contracting; simply displaying them on a website does not suffice. Best practice dictates that the terms and conditions should be contained on a separate webpage, as well as requiring the customer to scroll down to the bottom of the page and acknowledge he or she has read and agreed to them, e.g., by clicking an “Accept” or “Agree” button before placing an order. Wording such as “I have read and understood the terms and conditions” should be avoided as customers would be led to make false undertakings, since they may tick the box without reading or understanding the terms.

E-signatures

The use of electronic signatures also falls under the remit of the ETO. According to Section 2 of the ETO, an e-signature is 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.” Given the wide scope of what constitutes an e-signature, considerable discretion is left to signatories to decide on the exact form and format of signatures. In addition, the ETO affords recognition to digital signatures as e-signatures. In respect of an electronic record, a digital signature refers to an electronic signature of the signer, which is generated by the alteration of an electronic record using an asymmetric cryptosystem* and a hash function** so that the party holding the original electronic record and the signatory’s public key can ascertain whether:

1. The alteration was made using the private key that matches the signatory’s public key; and
2. The original electronic record has been tampered with since the generation of the digital signature.

*An asymmetric cryptosystem refers to a system that can generate a secure key pair: a private key for creating a digital signature and a corresponding public key for verification purposes.

** A hash function is a type of algorithm mapping used to ensure data integrity, such that the same input produces the same output every time, and that it is not feasible for two electronic records to yield the identical output, nor is it possible to reconstitute or derive an electronic record from the output.

Requirements for a valid e-signature

According to Section 6 of the ETO, an e-signature is deemed valid if it meets the following requirements:

1. It is attached to or logically associated with an electronic record for the purpose of identifying the signatory and indicating the signatory’s authentication or approval of the content in the electronic record;
2. The method used to attach the electronic signature is reliable and appropriate for the purpose of the communication;
3. The recipient consents to the use of an e-signature by the signatory.

In respect of contracts involving government entities, signatories shall use digital signatures supported by a recognised certificate issued by a certification authority.

Applicability of e-signatures

Subject to the provisions of the ETO, e-signatures in most contractual documents will be considered legally binding, except in the following cases where a wet-ink signature is mandatory:

• Testamentary documents such as wills or codicils;
• Documents relating to trusts (bar resulting, implied or constructive trusts);
• Documents relating to powers of attorney;
• Documents that need to be stamped or endorsed under the Stamp Duty Ordinance;
• Government conditions in respect of grants and leases of land;
• Documents relating to land and property transactions;
• Oaths and affidavits;
• Judgments or court orders;
• Warrants issued by a court or magistrate; and
• Negotiable instruments (bar cheques with the words “not negotiable”).

On a separate note, the use of e-signatures in employment contracts is permissible except in those entered into by an employee in Hong Kong and an employer who is not in Hong Kong and not carrying on a business in Hong Kong, and where the contract is to be performed, either wholly or partially, outside Hong Kong (Contracts for Employment Outside Hong Kong Ordinance).  Additionally, the employee is not a crew member of a ship or aircraft, migrating from Hong Kong for employment on a permanent basis, or not performing primarily manual work and whose monthly wages exceed HKD 20,000.

Cross-border implications

Lastly, apart from taking into account the above limitations on the scope and applicability of e-signatures, one should bear in mind the possibility of being placed in a disadvantageous position by virtue of electronic execution – if one envisages dealings with a party from another jurisdiction, especially where less evidential value is ascribed to electronic documents. For example, in Belgium, an e-signature is not afforded the same evidential credibility as a traditional wet-ink signature. Therefore, it would be sensible to undertake thorough research into the respective jurisdiction’s position towards e-signatures and consult a professional to assess the legal implications arising from a cross-border contractual arrangement executed electronically.