Remote conclusion of contracts in financing transactions
The pandemic has made it hard to organise traditional deal closings. Earlier, in typical financing transactions, it was no problem to arrange a physical meeting of the parties to sign the complete set of financing documentation, including security instruments (e.g. a pledge agreement or agreement to establish a mortgage). Indeed, some clients insisted on holding a traditional closing. The pandemic has changed this perspective, focusing the parties’ attention on the possibilities for remote signing of agreements.
The aim of this article is to discuss the practical possibilities for using electronic forms of documents in financing transactions. For general information on forms for legal acts under Polish law and the details of electronic signatures, we would refer readers to the article on our portal “Remote signing of contracts.”
Financing agreements subject to foreign law
Many Polish companies that are part of larger, international groups are parties to financing agreements governed by foreign law. This situation may occur for example when the financing is organised at the level of the parent company and certain subsidiaries are parties to the financing documentation, such as a loan agreement governed by foreign law (for example, the Polish company may be a borrower or guarantor, or may play both roles simultaneously). Polish companies are also often parties to leasing or factoring agreements subject to foreign law.
In this situation, as a rule the law governing the specific contract determines the form and manner in which the contract must be signed. Or it may suffice to meet the requirements of the law of the state in which one of the parties or its representative is located at the time the contract is concluded, or the law of a state in which any of the parties has its regular abode at that time.
Consequently, whether a contract can be signed remotely in electronic form (and potentially the conditions that must be met for such signing) should be determined based on the rules of the law applicable to the specific contract. As the requirements in many European countries as to the form for financial documents (e.g. loan agreements) are more liberal than in Poland, it may prove in practice that remote signing of such documents by a Polish company does not pose any particular difficulties. Nonetheless, in each situation advice of foreign lawyers should be sought as to the possibilities and rules for remote signing of contracts.
Polish financing agreements
In the case of financing agreements subject to Polish law, the regulations governing the specific type of contract specify the form in which the contract can be concluded. In practice, there will most often be a requirement of “document form” or “written form”; for example, conclusion of a leasing agreement requires written form under pain of invalidity. In practice, if written form is required for the validity of a contract, electronic signing will be possible only using a signature meeting the requirements of a qualified electronic signature (we discussed the requirements that must be met by such a signature in our article on remote signing of contracts). Suffice it to say that many providers of electronic signatures offer products meeting the criteria for a qualified electronic signature as well as products not meeting those requirements. Thus in each case it should be examined whether the given electronic signature meets the requirements for a qualified signature enabling conclusion of the contract in a manner meeting the conditions for written form. In practice, an unqualified electronic signature only meets the requirements for document form.
For practical and evidentiary purposes, it should also be noted that a contract signed with an electronic signature is generally not intended for printout and circulation as a hard copy in physical (paper) form. Such a contract should be stored and processed on electronic media (e.g. in a data cloud or on a pen drive or CD) in a manner enabling verification of the signature.
The Banking Law provides for an important exception for banking activities. Under Art. 7(1), “Declarations of will connected with performance of banking activities may be submitted in electronic form.” And, under Art. 7(3), if the Banking Law requires written form for a legal act, an act performed in electronic form is deemed to meet the requirement for written form also when written form is required under pain of invalidity. There is a dispute in the legal literature over whether the Banking Law eliminates the requirement for use of a qualified electronic signature (necessary for maintaining electronic form within the meaning of Civil Code Art. 781, equivalent to written form) and permits electronic signing of documents involving banking activities, requiring only that documents connected with banking activities prepared on data carriers be properly created, recorded, delivered, stored and secured. There appear to be many arguments for admitting such an interpretation of the law and recognising that any banking activities may be performed electronically without using a qualified signature—even when the Banking Law requires written form for the given activity under pain of invalidity. It should be borne in mind that only banking activities, such as a loan agreement, are eligible for this exception. Thus, for example, a leasing agreement concluded with a financing bank will not be a banking activity.
To sign remotely a contract that requires written form under pain of validity but does not qualify for the exceptions discussed above under the Banking Law, there are basically three available procedures:
- Both parties sign the contract traditionally and exchange declarations of will containing physical, written signatures, e.g. by post or courier
- Both parties sign the contract in electronic form with a qualified electronic signature and exchange the declarations of will, signed in this manner, by electronic means, e.g. by email
- Hybrid procedure, i.e. one party makes a declaration of will in electronic form with a qualified electronic signature and submits its declaration of will to the other party electronically, and the other party makes its signature traditionally and transmits its declaration of will, with a physically written signature, by post or courier (although this procedure generates separate controversies which would have to be explored in another article).
The situation will be different in the case of contracts for which document form is sufficient for validity. (We also wrote about the requirements of document form in the article on remote signing of contracts.) An example of document form would be when the parties establish the terms of a contract through an exchange of emails or online messages. This greatly simplifies the formalities of contract formation. The most important financial contract that can be concluded in document form is undoubtedly a loan agreement, where document form is expressly provided for (for values above PLN 1,000). Thus, in practice the parties can conclude a loan agreement using electronic communication channels, without using a qualified electronic signature.
A typical financing transaction involves more than the financing agreement, e.g. loan agreement, but also involves documents establishing security instruments. Here the situation becomes more complicated, as different security instruments require different legal form, ranging from document form to a notarial deed.
Some contracts establishing security require a certified date. This applies for example to an agreement establishing a civil pledge on intangibles or a contract assigning intangibles for security. Typically a certified date can be assigned to documents concluded by the parties in written form, but theoretically it is possible to imagine a notary assigning a certified date to a contact concluded in document form, as no regulation expressly limits assignment of a certified date to documents physically signed by the parties. But this approach, more open to new technologies, should be applied with great caution, as it is stated in the legal literature that assignment of a certified date is inseparably linked with conclusion of a contract in written form. Even under the more rigorous view, the form of a certified date does not exclude the use of an e-signature, but only if the qualified electronic signature also bears a qualified electronic timestamp. A qualified electronic timestamp is a service separate from a qualified electronic signature, which must also be supplied by a qualified electronic signature provider.
Some security instruments must be signed in the form of notarised signatures or as notarial deeds. At present there are no regulations in Poland allowing notarial documents to be concluded electronically or at a distance, without the physical presence of the notary and the signatory. The most common form of security which must be issued in the form of a notarial deed is a submission to execution. Most banks, but also many non-bank financers, use this legal instrument to make it easier to enforce their claims. Unfortunately, in this case there is currently no possibility of remote signing, and it is necessary to meet with a notary.
Another security instrument that essentially requires the form of a notarial deed is a statement establishing a mortgage. But in the case of mortgages, there is one exception worth considering, i.e. a mortgage established in favour of a bank to secure claims arising out of banking activities. Here, to facilitate commerce, the legislature has introduced the possibility of waiving the form of a notarial deed, allowing the owner of the encumbered property and the bank to make statements in written form, under pain of invalidity. In that situation, it is possible for the bank and the mortgagor to exchange their declarations of will without the need to be physically present at the same location. It may also be considered whether in light of Art. 7 of the Banking Law (discussed above), declarations concerning a mortgage could be made in electronic form. But here we run into two practical problems:
- The requirement that mortgage documents bear the bank’s seal (there are some doubts whether this can be an electronic seal)
- The inability to file an application for entry of a mortgage in electronic form (currently the only entities authorised to communicate with the court in this form in cases involving the land and mortgage register are notaries, bailiffs, and revenue administration authorities).
Another important security instrument that cannot be signed electronically in any manner is an in blanco promissory note. Typically, in transactions where for any reason (e.g. the high costs) a statement by the debtor submitting to execution is not obtained, creditors require issuance of in blanco promissory notes as a form of guarantee facilitating enforcement of their claims. Given the very essence of a promissory note, remote signing is impossible, as the promissory note must exist in physical paper form, and any change in the bearer of the promissory note requires physical delivery of the note to the acquirer.
Finally the possibility of remote signing of a registered pledge agreement should be considered. Currently, alongside a mortgage, a registered pledge is the most common form of in rem security for claims. As a rule, an agreement establishing a registered pledge on any object must be concluded in ordinary written form, under pain of invalidity. Thus with such agreement, there is potentially room for using a qualified electronic signature.
The Registered Pledge Act does not oppose this solution, but it must be remembered that for a registered pledge to be effective, it must also be entered in the pledge register by the court. The current regulations and procedural solutions allow electronic filing of an application to the pledge register for entry of a pledge. The person filing such an application must possess a qualified electronic signature and file the enclosures to the application in electronic form. This requirement also determines the form of the power of attorney and the pledge agreement itself. The court will not uphold the correctness of a power of attorney on the basis of an enclosed scan, so the only option is to enclose a power of attorney with a qualified electronic signature.
It should also be pointed out that when filing an application to the pledge register, one specific procedure should be chosen—for example, the application cannot be filed with the agreement electronically and then followed up by a portion of documents in paper form. The current regulations require the applicant to choose the route by which it will communicate with the court. This also has an impact on the pledge agreement enclosed with the application. If the application is filed electronically, because of how the IT system for the pledge register operates, the pledge agreement must contain qualified electronic signatures of both parties. Thus a mixed (hybrid) procedure for signing the agreement is not permissible.
In the past, most market participants, and the courts themselves, have tended to prefer the procedure of physical filing of applications to the pledge register. Now the electronic procedure may begin to enjoy greater interest, but the practice for filing and consideration of such applications has yet to be developed.
The current pandemic is forcing participants in commerce to change their thinking, habits, and manner of organising transactions. For various reasons, some market actors may display a reluctance to meet for a physical closing. Others would rather not give up the convenience they enjoy from remote working.
To meet their clients’ expectations, transactional lawyers will thus more and more often encounter the need to organise remote signing. Unfortunately, the current regulations in Poland, particularly with respect to legal instruments for securing claims, are not adapted to efficient organisation of remote meetings for signing documentation.
Hopefully, Polish lawmakers will perceive this problem and adopt regulations facilitating remote, safe and secure signing of security documentation. Notarial documents and the possibilities open to the judicial system seem particularly important in this respect. A new method of cooperation must be developed allowing notaries and judges to join the new remote reality.
Mateusz Tusznio, adwokat, Daniel Smarduch, adwokat, Banking & Project Finance practice, Wardyński & Partners