Advanced electronic signatures – when are they legally binding?

As business processes become progressively more digitalized, more and more companies are adopting the use of electronic signatures. Workflows that allow users to work efficiently across corporate boundaries without navigating away from their familiar tools and systems have become invaluable.

In this blog post, we team up with Gregor Haidenthaler, partner at the law office Hochleitner Rechtsanwälte, to clarify what kind of contracts are suited for the use of advanced electronic signatures in Austria and Germany, as well as their advantages relative to a handwritten signature.

What is an advanced electronic signature?

The advanced electronic signature (AES) can be used to verify the authenticity and the integrity of the data signed. An AES is uniquely assigned to the signatory, and it’s also linked to the document in such a way that any subsequent change to the data can be detected.

These features make the AES more reliable than a handwritten signature that a third party can easily reproduce or copy onto the document after the fact. Issues involving changes to a document that has already been signed represent another risk that can be mitigated by using AES. Who signed a given document and where and when it was signed are questions that provide endless fodder for litigation and court battles. Thanks to the security component that an AES provides, disputes like these can be completely eliminated.

AES for business applications

These reasons make it wise to focus on software from European manufacturers when implementing digital business process solutions. Alongside flexible editing, verification, and approval processes, they also make use of workflow-supported advanced electronic signatures.

With this in mind, Fabasoft’s digitalization platform Fabasoft Business Process Cloud includes a range of corresponding business applications: Fabasoft Contracts, the contract management solution, and Fabasoft Approve for managing technical data and documents in industrial environments.

The legal position in Austria regarding advanced electronic signatures

The requirement of written form can only be fulfilled using a qualified electronic signature, although in most cases there is no formal obligation for legal transactions.

Nevertheless, for a number of major legal transactions, it’s crucial to protect the signatory from disputes about his or her identity or from entering into an ill-considered contract that could have serious consequences (protection against haste). Such cases require the written form and may even involve the assistance of a notary. In Austria, there are two types of notarial involvement:

1. Notarization:

By notarizing a document, the notary confirms the identity of the signatories by examining their photo identification. This certification is intended to prevent any subsequent change to the content. Notarized contracts are required for transactions such as registration in the land register (real estate purchase agreements, for instance) or for entries in the commercial register (shareholders’ resolutions and sample company drawings).

2. Notarial acts:

A notarial act refers to cases for which, apart from notarial certification (notarization), the entire contract is incorporated into the notarial deed. This constitutes the most stringent formal requirement (nationally) in Austria. Notarial acts are mandatory, for instance, in the case of prenuptial agreements (such as an inheritance contract), company and share assignment agreements for incorporated companies (such as a GmbH or an AG) and, in specific instances, also for contribution agreements.

The formal requirement itself serves to emphasize to the person signing the document the significance of his or her action. Much like a notary’s certification, an AES establishes the identity of the author and protects against subsequent changes to the document, but it does not inherently prevent someone from signing in haste. This implies that, in principle, any contract that doesn’t require notarization can also be entered into and deemed legally binding using an AES. Exceptions to this rule of thumb include contracts in the areas of consumer finance and guarantees, family law, and testamentary dispositions, which can indeed be concluded without involving a notary, but which are not yet eligible for AES use in Austria.

In a contract for commissioned (data) processing (DPA), the data controller engages a service provider to process personal data on its behalf within the meaning of the General Data Protection Regulation. In accordance with Article 28 of the GDPR, the DPA must be recorded in writing. A DPA in electronic format is legally valid, including when signed by means of an AES, according to the prevailing view.

You might come across a blog post in which the author argues that real estate purchase agreements signed with an AES are not legally enforceable. A word of caution here! That is incorrect. As previously mentioned, a notarized version of the contract is required for registration in the land register (acquisition of ownership); however, a real estate purchase contract concluded without notarization is itself deemed to be legally binding. That means that in theory, you can sue someone based on a real estate purchase contract signed by means of AES for the subsequent issuance of a notarial deed that can be recorded in the land register. That’s why it’s fundamentally preferable to draw up a real estate purchase agreement in a form that can be recorded in the land register (notarized) right from the start.

Most contracts in Austria are concluded informally (orally). For evidentiary purposes, however, putting things in writing is strongly recommended. An AES not only affords a greater degree of certainty than a hand-signed document as well as a probative value that is recognized by courts of law, it also delivers advantages in terms of timing and logistics that have become especially evident in the COVID-19 pandemic. Real estate contracts and partnership agreements, for example, are subject to notarization, although in most cases this can already be done electronically.

The AES bears particular importance for invoices that have been digitally transmitted and signed, since the tax authorities recognize them as invoices for the purpose of deducting input tax in accordance with Section 11 of the VAT Act (UStG).

The legal position in Germany regarding advanced electronic signatures

Since electronic signatures are based on a regulation of the European Union, many of the considerations mentioned for Austria apply to the same extent for Germany.

Thus, a qualified electronic signature only takes the place of a written signature for contracts that provide for this by law; however, as in Austria, Germany is generally exempt from formal requirements. In turn, this means that contracts signed using AES – with very few exceptions – are legally binding and carry the corresponding probative force.

Exceptions similar in principle to those in Austria are also applicable in Germany. In addition to those, employment termination notices issued electronically, even with a qualified electronic signature, are still considered invalid.

An AES is all that is required to effectively terminate a lease for commercial space, an open-ended lease, or a lease with a term of less than one year. In other words, a lease signed using an AES that stipulates a term of more than one year is deemed to be legally binding, albeit for an indefinite period of time.

Learn more about the potential for using advanced electronic signatures in your day-to-day business in our on-demand webinar “Expedite your business transactions with digital signatures.

Contact:

Mag. Gregor Haidenthaler, M.B.L.-HSG
Attorney at Law and Partner
Hochleitner Rechtsanwälte GmbH
www.iura.at
gregor.haidenthaler@iura.at