The Right Signing Standards for Corporate Contracts

For companies that want to optimize their contract processes, it is important to understand the various signing standards and their sub-categories. Each method has its own benefits, legal considerations, and optimal use cases, which depend on the type of contract and the parties involved.

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1. Electronic signatures (eSignatures)

Electronic signatures, commonly known as e-signatures, are a digital method of signing documents that has revolutionized the way companies process agreements and contracts. Unlike traditional handwritten signatures, electronic signatures allow individuals to sign documents electronically, streamlining the signing process and making it more efficient. E-signatures range from simple methods such as typing in a name or clicking an “I agree” button to more sophisticated techniques that include digital certificates and encryption to verify the identity of the signer.

The convenience of electronic signatures has made them very popular in various industries as they enable faster contract processing and reduce reliance on physical paperwork. eSignatures are legally recognized in many countries, including due to regulations such as the ESIGN Act and UETA in the United States and eIDAS in the European Union. These laws provide a framework that gives electronic signatures the same legal status as traditional handwritten signatures, provided that certain conditions are met. However, not all e-signatures are the same. The level of security and legal enforceability can vary depending on the type of electronic signature used, from simple electronic signatures (SES) to more advanced options such as qualified electronic signatures (QES), which provide a higher level of security and compliance. Understanding the differences between these types is critical for companies to ensure that their contracts are both secure and legally binding.

2. Types of electronic signatures

1. Simple electronic signature (SES):

• Description: SES is the simplest form of electronic signature. It can be as simple as a typed name at the end of an email, a scanned image of a handwritten signature, or clicking a check box to signal approval.
• Use case:
  • Low-risk internal agreements: Routine approvals, confirmations, or internal endorsements where the risk of disputes is minimal.
  • Non-binding agreements: Letters of intent, preliminary negotiations or informal agreements.
• Right of action:
  • EU: Recognized within the framework of eIDAS, but offers the lowest level of legal certainty.
  • USA: Generally acceptable under the ESIGN Act and UETA, but enforceability depends on context and jurisdiction.
• Advantages:
  • Easy to implement and widely available.
  • Quick and convenient for low-risk situations.
• Disadvantages:
  • Low security and easy to counterfeit.
  • Limited legal enforceability, particularly in the event of disputes.

2. Advanced electronic signature (AES):

• Description: AES offers a higher level of security than SES. It must be uniquely linked to the signer, be able to identify the signatory, and be created with electronic signature creation data that the signer can use under its sole control.
• Use case:
  • Medium-risk contracts: Contracts that require a higher level of certainty and security, such as confidentiality agreements (NDA), employment contracts, and medium-value commercial contracts.
  • Contracts that require audit trails: When tracking and verifying the identity of the signatory is critical.
• Right of action:
  • EU: Legally binding under eIDAS, offers more legal certainty than SES but less than QES.
  • USA: Permitted under the ESIGN Act and UETA, is often used in areas such as finance where stronger identity verification is required.
• Advantages:
  • Increased security and better legal enforceability.
  • Provides an audit trail that makes it easy to prove authenticity.
• Disadvantages:
  • It's more complex to set up and manage.
  • Requires additional authentication measures that can slow down the process.

‍3. Qualified electronic signature (QES):

• Description: QES is the most secure and legally binding form of electronic signature. It is created using a qualified electronic signature creation device and is based on a qualified certificate issued by a trusted certification authority (CA). In the EU, QES has the same legal value as a handwritten signature.
• Use case:
  • High-risk contracts: High-value contracts, cross-border agreements, and contracts in regulated industries such as banking, healthcare, or public procurement.
  • Legal agreements that require the highest level of security: When strict proof of the identity and will of the signatory is required.
• Right of action:
  • EU: Fully compliant with eIDAS and offers maximum legal security, equivalent to a handwritten signature.
  • USA: Although there is no legal category in the USA, QES procedures can be used on contracts that require strict security and authentication measures.
• Advantages:
  • Maximum security and legal enforceability.
  • Meets the most stringent regulatory requirements and is therefore ideal for high-risk environments.
• Disadvantages:
  • Requires extensive infrastructure, including qualified signature creation devices and certification from a trusted CA.
  • Implementation can be costly and complex, particularly for smaller companies.

4. Public electronic signature (PES):

• Description: PES usually refers to a signature that has been verified by the Public Key Infrastructure (PKI) without necessarily being bound to a qualified certificate. It is a broad category that may overlap with AES and QES, depending on the level of certification and associated security.
• Use case:
  • General business contracts: Suitable for commercial contracts that require a certain level of identity verification, but not as strict as QES.
  • Public sector contracts: When government agencies require verifiable signatures, but not at the highest level of security.
• Right of action:
  • EU: Recognized under eIDAS, but enforceable differently depending on specific implementation and local regulations.
  • USA: Accepted under ESIGN and UETA, but depends on the specific use case and jurisdiction.
• Advantages:
  • It provides a good balance between security and ease of use.
  • Widely used in many sectors.
• Disadvantages:
  • May not provide the same level of security or legal certainty as QES.
  • Requires some technical infrastructure, such as PKI systems.

3. Legal framework & compliance

In the context of corporate contracts, choosing the right signature technology plays a crucial role in meeting both legal and technical standards. Different regions and countries have specific regulations that regulate the use of electronic signatures and ensure their legal validity. Companies that process contracts electronically must comply with these regulations to ensure legal certainty and compliance. This section highlights the key legal frameworks and technological requirements for electronic signatures in various jurisdictions.

eIDAS (EU):
The eIDAS regulatory system (Electronic Identification, Authentication and Trust Services) provides the legal framework for electronic signatures within the EU. It ensures that qualified electronic signatures (QES) have the same legal effect as handwritten signatures when they are based on a qualified certificate and executed by a trustworthy authority. Companies must ensure that their signature methods comply with these requirements in order to process cross-border business transactions in the EU in a legally secure manner.

PKI and certificate-based signatures:
A public key infrastructure (PKI) forms the backbone of qualified electronic signatures. Certificates issued by trustworthy certification authorities are used to verify and verify the identity of the signer. Compliance with this process is critical to ensure the security and integrity of signatures, particularly in industries such as finance or health, where there are high security requirements.

Device and biometric signatures:
Technological developments such as biometric signatures (e.g. through fingerprint or facial recognition) and signatureable hardware (such as special smart cards or tokens) are playing an increasingly important role in qualified signatures. These devices must meet strict technical standards to meet legal requirements. In particular, they must ensure that the biometric data cannot be compromised and confirm the identity of the signatory beyond doubt.

eSign Act and UETA (US):
In the USA, the eSign Act (Electronic Signatures in Global and National Commerce Act) and UETA (Uniform Electronic Transactions Act) regulate the use of electronic signatures. These laws recognize electronic signatures as legally binding, provided that certain criteria are met. The use of PKI or certificate-based signatures is particularly important in regulated industries such as healthcare and the financial sector, as they meet the highest security requirements. It is crucial that companies align their compliance policies with these laws to avoid potential legal risks.

Global requirements for electronic signatures:
The legal framework for electronic signatures differs worldwide, which poses challenges for companies that operate internationally. For example, Asian markets, such as China or Japan, follow their own regulations for the use of electronic signatures, some of which are stricter or more comprehensive than in the USA or the EU. To ensure that a contract is recognized worldwide, companies must therefore be fully aware of and comply with regional differences and regulatory requirements.

4. Digital signatures

Digital signatures are a specific subset of electronic signatures that use cryptographic methods to ensure the authenticity, integrity, and undeniability of a signed document. Unlike simple electronic signatures, which can consist of a typed name or a scanned handwritten signature, digital signatures use a unique digital fingerprint that is linked to both the signer and the document. This process provides a much higher level of security and certainty and makes digital signatures particularly valuable in contexts where the identity of the signer and the integrity of the document come first. Distinguishing between digital signatures and general electronic signatures (e-signatures) is critical for companies.

While all digital signatures are a type of e-signature, not all e-signatures are considered digital signatures. eSignatures include a wide range of methods for signing a document electronically, ranging from simple electronic confirmations to more advanced methods that include identity verification. Digital signatures are characterized by using Public Key Infrastructure (PKI) technology to create a unique, encrypted signature that is unique to the signer. This encryption ensures that any change to the document after signing invalidates the signature, creating a robust mechanism to verify both the identity of the signer and the integrity of the signed content.

5. Choosing the right signature type

Choosing the right digital signature for your organization is an important decision that depends on several factors, including the type of contracts you have, the level of security required, and the legal environment in which you operate. Digital signatures are essential as a more secure form of electronic signature when the authenticity and integrity of a document are of paramount importance. In contrast to simpler electronic signatures, which are suitable for low-risk internal agreements or informal communication, digital signatures offer advanced features such as identity verification and proof of forgery that are required for high-risk transactions, cross-border agreements, and contracts in regulated industries.

When choosing a digital signature, consider the following important aspects:

1. Assess the risk level of the contract:
   1. High-risk contracts:
      • Use case: Financial agreements, medical records, legal contracts, or other documents containing sensitive information.
      • Example: A large multinational bank negotiating a loan agreement with another financial institution needs the highest level of security to ensure that the contract is both authentic and forgery-proof.
      • Recommendation: Choose digital signatures that use a public key infrastructure (PKI) or are supported by a certification authority (CA). These offer robust security features, including identity verification and tamper protection.
   2. Medium-risk contracts:some text
      • Use case: employment contracts, confidentiality agreements (NDAs), medium-value commercial contracts.
      • Example: A technology company that hires a new software engineer must sign an employment contract that requires a higher level of security than a simple electronic signature but is not as strict as a financial contract.
      • Recommendation: Advanced electronic signatures (AES) or certificate-based digital signatures provide a good balance between security and ease of use.
   3. Low-risk contracts:some text
      • Use case: Routine internal documents, approvals, or non-binding agreements.
      • Example: A marketing department that signs internal strategy documents may not need the high level of security of a digital signature, but could still use an electronic signature for reasons of convenience.
      • Recommendation: Simple electronic signatures (SES) may be sufficient, but a simple digital signature should be considered for additional security.

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2. Understand the legal requirements:
   1. Compliance with jurisprudence:
      • European Union (eIDAS): Only qualified electronic signatures (QES) are legally binding for certain contracts. These signatures offer the highest level of security and legal recognition, similar to handwritten signatures.
      • Example: A German manufacturing company that concludes a cross-border contract with a French supplier could be required to use QES to ensure that the contract is legally enforceable under EU law.
      • United States (ESIGN Act & UETA): While a wider range of electronic signatures is accepted, high-security environments may still require digital signatures with specific cryptographic standards.
      • Example: A US-based healthcare provider that contracts with a medical device supplier might need a PKI-based digital signature to comply with HIPAA regulations.
   2. Industry standards:some text
      • Regulated industries: Industries such as finance, healthcare, and government often require the use of digital signatures that meet specific security and compliance requirements.
      • Example: A pharmaceutical company that signs a clinical trial agreement with a research institution must ensure that the digital signature meets FDA's strict regulatory requirements.
      • General business use: For less regulated industries, a combination of AES and cloud-based digital signatures can provide sufficient legal security.
      • Example: An advertising agency signing a contract with a new client could use an AES that provides enough security for their needs without the complexity of QES.

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3. Evaluate your operational needs:
   1. Security requirements:
      • High security: Choose PKI-based digital signatures or certificate-based signatures if your contracts include high-value transactions or sensitive data.
      • Example: A cybersecurity company that signs a partnership agreement with a government defense agency needs the highest level of security to protect sensitive information.
      • Moderate security: Cloud-based digital signatures can be ideal for companies that need scalability and easy integration with digital workflows.
      • Example: A software company that manages license agreements with multiple customers could opt for cloud-based digital signatures to efficiently process large volumes of contracts.
   2. Accessibility for users:
      • Ease of use: Make sure that the digital signature solution you choose is user-friendly and easy to integrate with your existing contract management processes.
      • Example: A small startup that signs a series of vendor contracts could prefer a digital signature platform that is easy to set up and use, even though it doesn't offer the highest level of security.
      • Transferability: Teams that need to sign on the go may require device-based digital signatures using secure hardware such as smart cards or USB tokens.
      • Example: A sales team that travels frequently and signs contracts with local customers could benefit from device-based digital signatures to ensure security without having to access desktop systems.
   3. Scalability:
      • Large-scale operations: If your organization is handling a high volume of contracts, cloud-based solutions offer flexibility and scalability without the need for significant upfront infrastructure investments.
      • Example: A global e-commerce company that processes contracts with numerous suppliers and partners across the world would benefit from a cloud-based platform for digital signatures to efficiently manage the high volume.

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