Understanding e-contracts

Banking & Finance, Corporate & Commercial | Oct 2020 | Private: Harsh Arora

Authored by Harsh Arora & Raj Nandini

The term ’contract’ is defined under Section 2(h) of the Contract Act, 1872 (Contract Act) as an agreement enforceable by law. Although, Contract Act does not specifically provide for electronic contracts (e-contracts), it does not prohibit them per se. Like any other form of contract, an e-contract is also primarily governed by provisions of section 10 of Contract Act. The essential elements required for validating an e-contract set out under Contract Act are as follows:

▪ Lawful offer and acceptance
▪ Lawful object
▪ Lawful consideration
▪ Free consent
▪ Parties to be competent to contract
▪ Intention of parties to create legal relationship
▪ Not expressly declared to be void, it will meet the test as a valid and binding contract

Therefore, an e-contract cannot be validly executed unless it satisfies all the essentials of a valid contract, as prescribed under the Contract Act. In Trimex International FZE Ltd, Dubai v. Vendata Aluminum Ltd, the Supreme Court (SC) held that a contract entered into between the parties that was unconditionally accepted through e-mails

Some of the pertinent aspects of e-contracts are as follows:

  • Recognition of e-contracts under the IT Act: Section 10A of the Information Technology Act, 2000 (IT Act) deals with validity of contracts formed through electronic means and states that if in a contract formation, communication and revocation of proposal/acceptance are expressed in an electronic form or by means of electronic records, it will not be considered as unenforceable solely on the ground that electronic form or means was used for that purpose. For any contract to be valid, signatures of parties to contract are required to showcase acceptance of terms and conditions of contract. In case of an e-contract, an electronic signature comes to play.
    Additionally, Section 4 of IT Act provides legal recognition to electronic records and states that where any law which requires information or matter to be in a written or printed form, then such requirement will be deemed to be satisfied if the information or matter is available and accessible in an electronic form. As per the second schedule of the IT Act, the following documents cannot be executed in the electronic or digital form and needs to be executed in a physical form in order to be valid and enforceable before the court of law:
    – Negotiable instruments (other than cheques) as defined under the Negotiable Instruments Act, 1881
    – Power of attorneys as defined under the Powers of Attorney Act, 1882
    – Trusts under the Indian Trusts Act, 1882
    – Wills/testamentary dispositions as defined under the Indian Succession Act, 1925
    – Any contract for sale/conveyance of immovable property or any interest in such property
  • Recognition of e-contracts under the Evidence Act: Under the Evidence Act, 1872 (Evidence Act), an e-contract has the same legal effect as a paper-based agreement. It may be noted that the term ‘evidence’ has an inclusive definition in Section 3 of the Evidence Act as including all documents including electronic records produced for the inspection of the Court being termed as documentary evidence. Section 67A of Evidence Act is pertinent in respect of the loan and financing documents wherein, apart from secure electronic signature, proof of the electronic signature of the subscriber needs to be proved which may be done through testimony of the subscriber himself. Delhi High Court in case of State of Delhi v. Mohd. Afzal and Ors held that, ‘Electronic records are admissible as evidence. If someone challenges the accuracy of a computer evidence or electronic record on the grounds of misuse of system or operating failure or interpolation, then the person challenging it must prove the same beyond reasonable doubt’. In Harpal singh and Ors. v. State of Punjab, SC has reiterated that any electric record in the form of secondary evidence cannot be admitted in evidence unless the requirements of Section 65B are satisfied.
  • Recognition of e-contracts under the Indian Stamp Act, 1899: There is no specific provision in Indian Stamp Act, 1899 (Stamp Act) that specifically deals with electronic records and/or stamp duty payable on execution thereof. ‘Instruments’ are defined under Stamp Act as ‘includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or record’. While a majority of State specific stamp duty laws do not specifically include electronic records within their ambit, Maharashtra, Rajasthan and Gujrat (governed by State-specific stamp laws) have amended the term ‘instrument’ to include electronic records as defined under section 2(1)(t) of IT Act and widened terms ‘signed’ and ’signature’ to include signing and execution of an electronic record as defined under section 11 of the IT Act. Additionally, States of Karnataka, Uttarakhand and Uttar Pradesh have only amended the term ‘instrument’ to include electronic records as defined under section 2(1)(t) of IT Act. Therefore, it is observed that the stamp laws applicable to the aforementioned states recognize ‘execution’ of an electronic record, thereby making a valid e-contract also liable to payment of stamp duty. The Indian Stamp Act (as applicable in States which do not have any State-specific stamp law) does not provide for stamping of electronic documents or e-contracts. It may be noted that in case of any inter-state transactions, state laws provide for levying differential stamp duty should the document first be executed in another state with lower stamp duty but brought into the former state. Further, a few state laws also prescribe that even photocopies and electronic records of documents brought into the state will attract differential stamp duty. Hence, it is recommended that the parties calculate the stamp duties that are payable in the relevant states and consequently stamp the e-contract with the highest stamp duty.

Electronic execution of the contracts: There are several options available for parties to execute the contracts electronically, some of which are listed below:

– Digital signatures: Parties may obtain secure digital signatures with a digital signature certificate issued by a licensing authority. Such a Digital Signature is considered as a secure electronic record under IT Act and Evidence Act. In a proceeding involving a ‘secure’ electronic record, court presumes, unless contrary is shown, that such record has not been altered since specific point of time to which secure status relates. Except in case of a ‘secure’ electronic record i.e. one signed using a Digital Signature, no automatic presumption relating to authenticity and integrity of electronic record will be made by courts and any other type of e-signing will need to be proved in a court of law.

– Sharing scanned copies of wet ink signed contracts: The Parties may consider executing a contract by way of circulation. In this scenario, the legal counsel prepares execution versions of the contract to be signed amongst the parties. Each of the parties to the contract shall be required to confirm by email that they are agreeable to the contract. Thereafter, each of the parties shall print the signature page of the contract, affix its signature,
scan the same and then send it back to the legal counsel for collating and verification.

– Email conveying acceptance of a contract: The Parties may also choose to exchange confirmations of acceptance of contracts by email exchange attaching the unsigned contracts. It is pertinent to note that whilst such a contract is enforceable, the risk lies in proving due execution in case this is challenged by the counterparty. Therefore, parties need to ensure that the language of the email conveys acceptance. The use of secure, tamper-proof encrypted email transmission and storage systems should also be ensured to mitigate the risk of a party disclaiming the attachment (i.e. the contract) to the email confirmation.

– Other electronic signatures: Once the contract is finalized in the electronic form (e-contract) post negotiations, the parties may also consider executing the contract by way of electronic signature (e-sign). Under the IT Act, it means authentication of any electronic record by means of: (i) digital signature; or (ii) the electronic technique specified in the Second Schedule of the IT Act. The latter specifies e-sign based on Aadhaar (12-digit identification number issued by the Unique Identification Authority of India) e-KYC services (Aadhaar e-sign). Aadhaar e-sign allows an Aadhaar holder to render its signature electronically through third-party applications. Further, such third-party applications maintain an audit trail that captures every alteration to the e-contract to which the Aadhaar e-sign has been affixed to. The parties need to ensure that the security and integrity of the transmission and storage system is not compromised.

Due to the nature of the systems and the networks that businesses employ to conduct e-commerce, parties may find themselves liable for contracts which technically originated with them but, due to programming error, employee mistake or deliberate misconduct were executed or were released without the actual intent or authority.