What is a digital signature?
A digital signature is an electronic version of a fingerprint or a wet signature. It guarantees that a digital document, such as a text file, email, or spreadsheet, is genuine. Digital signatures use advanced algorithms to form a coded message that associates a signer with a document. This signing method guarantees that the contents of a document have not been altered after the time of signature. It also provides key information like the message's origin, its status, and the signer's consent.
How does a digital signature work?
Digital signatures follow Public Key Infrastructure (PKI) protocol. This protocol requires two keys, one public and one private, which the signature software generates using a cryptographic algorithm. When an individual signs a document, their encrypted signature is created using a private key. The software also generates a cryptographic hash that matches the signed document. This information is then appended to the document and sent to the recipients with the signer's public key.
Recipients can decrypt the encrypted hash with the public key certificate. When decoded, a cryptographic hash is generated on the recipient's end. Both the cryptographic hashes are compared for authenticity. If they match, this proves the document has not been tampered with post signature, making it legally valid.
To protect the integrity of digitally signed documents, PKI mandates creating, conducting, and saving the keys securely; this often requires the services of a reliable Certificate Authority (CA).
What is an electronic signature?
As the name suggests, an electronic signature is a signature in electronic form. Just like wet signatures, an electronic signature enables signatories to approve and agree with the terms of a document, albeit digitally. Electronic signatures are secure, verifiable, and legally valid. Most software that provide electronic signature capabilities comply with e-signature laws worldwide.
Is an electronic and a digital signature the same?
Most often, the terms "digital signature" and "electronic signature" are used interchangeably. However, there is a subtle difference between the two. "Electronic signature" is a generic term for any signature transmitted electronically. A digital signature, on the other hand, refers to an electronic signature with advanced features that keep the data secure and compliant.
An electronic signature may be used in instances where security and compliance standards are not too high, say an HR representative approving an employee's vacation time or medical leave. But, a digital signature is mainly required for documents like contracts, which are subject to intense scrutiny and rigorous compliance standards.
The role of the digital signature in contracts
A contract goes into effect only after the parties involved sign it, making the signature phase one of the most critical stages of the contract lifecycle. In the past, contracts were signed using wet signatures, but these days, digital signatures are becoming the norm.
Digital signatures empower people to sign contracts anytime, anywhere. Since digital signatures are legally valid worldwide and offer much better security than wet signatures, they have become an indispensable part of the contract lifecycle.
Benefits of the digital signature for contracts
Improved contract turnaround time Before digital signatures arrived, contracts had to be signed, shipped, faxed or scanned, and filed. This tedious and time-consuming process ultimately affected contract cycle times. However, with the advent of the digital signature, signature turnaround time has gone from days to minutes!
Enhanced security With a digital signature, you do not have to worry about signature tampering. Digital signature software offers military-grade encryption and complies with e-signature laws worldwide, making it a secure and legally valid way to sign your contracts. Further, the algorithms used to create cryptographic hashes for a digital signature are fool-proof, making it difficult for an unauthorized party to tamper with the document post signature.
Easily traceable Digital signature software offers a comprehensive audit trail with timestamps for record keeping. In the event of a legal proceeding that requires details on the order of events, this feature will come in handy.
Better compliance Digital signatures are accepted worldwide as they comply with laws globally. This makes it easier to quickly perform secure business transactions and sign contracts with international partners. In addition, all digital signatures come with a certificate issued by a Certificate Authority. This certificate makes digital signatures reliable and compliant.
Reduced operational costs Companies can save time and money spent on the logistics of managing physical documents. In most business contexts, time is money. Digital signatures cut down execution cycle times by more than 90%.
Do all contracts need to be signed?
Not all contracts need to be signed. Some contracts are drawn orally rather than as a written document. These contracts, sometimes called handshake agreements, are verbally discussed and agreed upon and do not require a signature to be legally binding. However, because oral agreements can be challenging to prove in court, it is advisable to draft a written contract and get it signed.
- A valid offer and its acceptance
- A law-abiding purpose and consideration
- Clear terms
- Mutuality
Are there contracts that cannot be signed using a digital signature?
While most contracts are legally valid when electronically signed, certain agreements need handwritten signatures and physical documentation, including stamp papers, to hold up in court. However, these specifications vary from region to region based on the local laws
- Power of attorney
- Wills
- Contracts used for the sale or conveyance of immovable property and any interest on such property
- Trust deeds
- Negotiable instruments other than checks.
Other ways to sign a digital contract
Click-wrap A click-wrap agreement is a contract that the recipient signs with the click of a button or checking of a box. By clicking, the recipient confirms that they have read the contract and agree to the terms and conditions. Websites often use this method, as they require a user's permission to perform specific actions. Click-wraps are legally admissible in court because the user consciously clicks a labeled box to confirm their agreement and only then proceeds to the webpage.
Sign-in-wrapThe sign-in-wrap agreement is quite similar to the click-wrap agreement, but it doesn't require the user to provide explicit confirmation. Instead, it combines a user action, say the creation of an online account, with the implied acceptance of the website or company's terms of use. For a sign-in wrap to be enforceable in court, it needs to be clear that the user agreed to the terms and conditions of the contract by signing in. If the user is not explicitly notified about the terms, then the sign-in-wrap cannot be enforced.
Embedded contracts These are also called API signatures, since you can embed them into your app or webpage using an API. This API will gather the signature and other information, such as the time, IP address, and the date of signature, and send it to your company. Embedded contracts indicate to users that they consent to the terms and conditions, like click-wrap and sign-in-wrap. However, embedded contracts typically require users to type their names into a box before clicking and signing the contract. This agreement type is legally-enforceable in court.