Is Digital Signature a Valid Alternate to Wet Signature in Nepal?

With general movement and life restricted in the country due to Covid 19 and subsequent lockdowns, more and more people and the corporate culture is gearing towards work from home. This has challenged the overall functioning of businesses. And one among them is the requirement of authorised signatures on commercial documents. In this article, I have outlined briefly the legal provisions of digital signatures in Nepal. Electronic Transaction Act 2006 (2063) (the ‘ETA’) Electronic Transaction Rules 2007 (2064) (the ‘ETR’) is the primary legislation dealing with the use and validation of digital signatures. Surprisingly, though the provision regarding digital signature has been adapted more than a decade ago, there has not been significant use of digital signatures in Nepal. However, it is important to understand how Nepal’s law treats digital signature. ETA has defined it as a signature made in any electronic form to be included in the transformation of an electronic record by using a type of asymmetric cryptosystem. Electronic Form has been further defined as data, record, image, or sound transmitted, received, or stored in an electronic form by generating the same through any means. ETA accords digital signature and documents executed with digital signature identical validity as documents which are traditionally signed through hand signatures (wet signatures). The verification of digital signature relies mainly upon two conditions as provided by ETR: (a) such digital signature corresponds to the digital signature with the public key and (b) hash result extracted by means of public key and the original hash result of the digital signature used in the electronic record are identical. The authentication of an electronic record to other electronic records shall have to be affected by the use of (i) asymmetric cryptosystem, and (ii) hash function. An asymmetric Crypto System means a system that creates a secured key pair consisting of a private key creating a digital signature and a public key to verify the digital signature. ETA only permits and validates the use of the certified digital signature which is subject to issuance by a licensed and recognised Certification Authority. Only those digital signatures issued by the Certification Authority shall be considered as Digital Signature. The Office of Controller of Certificate (the “OCC”) (www.occ.gov.np) has the list of recognised Certification Authority having the power to issue certified digital signatures in Nepal.

Exceptions to Digital Signature

Though digital signature is widely used, states exclude the use of digital signature in some sort of documents depending upon the sensitivity and enhanced risk associated with their execution. This is also the case with Nepal. ETA has listed the following documents which cannot be executed by digital means:

• Negotiable instruments like cheques, bank drafts, etc.,
• Deed of will or mortgage, bonds, etc. or any other document which demonstrates title or ownership in any immovable property,
• Power of Attorney, statement of claim, or any such other documents as may be used in courts proceedings or any such other document as may be submitted in writing in the proceedings of any Arbitration,
• Documents as prescribed by the prevailing law that requires not to be retained in electronic form.

Further, there are certain forms of agreement that require fulfillment of execution formalities. Such formalities include requirements such as (a) writing requirement, (b) affixation of physical signature or thumbprint, (c) registration at concerned Land Revenue Office, and (d) authentication at concerned Ward Office for its validity and/or enforceability. In case of non-compliance with the formalities prescribed, the agreement will not be considered valid. However, these sets of documents are very narrow and specific.The execution formalities are generally applicable in relation to involving transfer/lease of property or for household purposes having prescribed transaction value or deed of partition, mortgage and related to the transfer of title in immovable property or contracts which are required to be registered at government authorities for its enforceability. Therefore, there is still room for adopting the digital signature in corporate and commercial documents.

Areas for Adoption of Digital Signature

Nepal’s law requires an employment agreement to be concluded in writing. However, it does not stipulate the kind of signature. Further, as a certified digital signature made in any electronic form have the same value as a handwritten signature, therefore the use of a digital signature in the employment agreement should be regarded as valid. Similarly, the essential notices and information required to be disseminated in the functioning of the company can also be issued using digital signature as the prevailing labour laws do not specifically require wet-ink signature within the documents. However, in case the documents relating to termination letters or letters regarding disciplinary action having a serious effect and its immense consequence, the use of digital signature may not be effective. Therefore, only in limited circumstances, the digital signature may not be practical and valid. It is highly practical and efficient to adopt digital signatureson other operations. As Nepal’s corporate houses are familiar with the electronic conclusion of contracts, there should not be any difficulty in familiarising with this mode of execution of corporate documents. This would also make the cross-border conclusion of the contract efficient as the counterparty will not be required to expend significant resources merely for the conclusion of the contract.

Way Forward

Though Nepal has a full-fledged legal regime regarding digital signature, its use is still nascent in Nepal. With the increase of e-commerce and work culture shifting towards online operation and documentation, the use of digital signatures can be a beneficial addition to corporate culture during the Covid 19 pandemic. As the legal recognition of the digital signature is equivalent to the wet-signature, this is high time that the companies utilise the flexibility achieved from physical signature and save significant time and costs.