online contracts

This article about online contracts is written by Tirumala Chakraborty, pursuing M.A. in business law from NUJS, Kolkata.

INTRODUCTION

With recent technological advancement, there is an immense change in the standard of living of people. Thus, communication is no more restricted within its geographical limits and information is transferred much widely and quickly than ever before. Electronic commerce has made its way and many problems are removed through the use of e- commerce which flow as a traditional data. Electronic commerce is a means of the transaction of business electronically and is associated with the buying and selling of information, products and services over computerized communication networks. Though, it is a much broader term encompassing not only Electronic Data Interchange but also other forms of communications such as Electronic Mail and Electronic Bulletin Board.

With the emergence and steady growth of e–commerce, there is a quick elevation in the use of e-contracts. But the concept of e-contract is still not unclouded, it faces lot of challenges. The law of contract in India gives a statutory recognition to the common contractual rule. The Indian Contract Act, 1872 does not lay down the rights and duties which the law will enforce but it deals with the limiting principles, subject to which parties may create right and duties for themselves.

MEANING OF CONTRACT

The Indian Contract Act, 1872 deals with the principles of law of contract, its essential elements, its formation, its performance and the remedies for the breach of contracts. It determines the circumstances in which promises are made by the parties to a contract, general principles of the formation of contract and also prescribes the remedies which are available in the Court of law for the breach of contract against a person who fails to perform his undertaking created under the Contract.

As per Section 10 of the Indian Contract Law, 1872, an agreement is a contract which is enforceable by law. An agreement is enforceable by law and can be defined as a valid contract if it is made by competent parties, out of their free consent and for lawful object and consideration. In simple words, a contract is an agreement binding between two or more parties intending to create a legal relationship, in which one makes the proposal while the other accepts the proposal or offer and thus it becomes a promise. Such acceptance has to be certain and not vague and must be free from any undue influence, force or misrepresentation. Both the parties to the contract must be major, sound mind and not declared disqualified by any law for the time being in force in India. As per Section 23 of the Indian Contract Act, 1872 the object of the contract and the consideration must be lawful. It must be certain, definite and not vague and such as are capable of performance. A contract may be made by words spoken or written. In India, usually where there is a statutory need that contract for example Agreements relating to mortgage, sale, lease etc must be made in writing, attested by witnesses, signed by the parties and to be registered by the parties in order to make that agreement enforceable.

 

WHAT IS AN ONLINE CONTRACT

With the advance use of internet and electronic commerce, online contracts have assumed importance mainly in terms of reach and multiplicity. Online contract or an electronic contract is an agreement modelled, signed and executed electronically, usually over internet. An Online contract is conceptually very similar and is drafted in the same manner in which a traditional paper-based contract is drafted. In case of an online contract, the seller who intends to sell their products, present their products, prices and terms for buying such products to the prospective buyers. In turn, the buyers who are interested in buying the products either consider or click on the ‘I Agree’ or ‘Click to Agree’ option for indicating the acceptance of the terms presented by the seller or they can sign electronically. Electronic signatures can be done in different ways like typing the name of the signer’s in the specific signature space, copying and pasting the scanned version of the signature or clicking an option meant for that purpose. Once the terms are accepted and the payment is made, the transaction can be completed. The communication is basically made between two computers through servers. The online contract is brought to the scenario to help people in the way of formulating and implementing policies of commercial contracts within business directed over internet. Online Contract is modelled for the sale, purchase and supply of products and services to both consumers and business associates.

Online can be categorized into three types mainly i.e. browse or web wrap contracts, shrink wrap contracts and clickwrap contracts. Other kinds of online contracts include employment contract, contractor agreement, consultant agreement, Sale re-sale and distributor agreements, non-disclosure agreements, software development and licensing agreements, source code escrow agreements. Though these online contracts are witnessed in our everyday life, most of us are not aware of the legal complexities connected to it; the use of online contract faces many technical and legal challenges.

 

TYPES OF ONLINE CONTRACT

Online contracts can be of three types mainly i.e. shrink-wrap agreements, click or web-wrap agreements and browse-wrap agreements. In our everyday life, we usually witness these types of online contracts. Other types of online contracts include employment contract, contractor agreement, consultant agreement, Sale re-sale and distributor agreements, non-disclosure agreements, software development and licensing agreements, source code escrow agreements.

  • Shrink-wrap agreements are usually the licensed agreement applicable in case of software products buying. In case of shrink-wrap agreements, with opening of the packaging of the software product, the terms and conditions to access such software product are enforced upon the person who buys it. Shrink-wrap agreements are simply those which are accepted by user at the time of installation of software from a CD-ROM, for example, Nokia pc-suite. Sometimes additional terms can be observed only after loading the product on the computer and then if the buyer does not agree to those additional terms, then he has an option of returning the software product. As soon as the purchaser tears the packaging or the cover for accessing the software product, shrink-wrap agreement gives protection by indemnifying the manufacturer of the product for any copyright or intellectual property rights violation. Though, in India, there is no stable judicial decision or precedent on the validity of shrink-wrap agreements.
  • Click- wrap agreements are web based agreements which require the assent or consent of the user by way of clicking “I Agree’ or “I Accept” or “Ok” button on the dialog box. In click –wrap agreements, the user basically have to agree to the terms and conditions for usage of the particular software. Users who disagree to the terms and conditions will not be able to use or buy the product upon cancellation or rejection. A person witnesses web-wrap agreements almost regularly. The terms and conditions for usage are exposed to the users prior to acceptance. For agreement of an online shopping site etc.
  • An agreement made intended to be binding on two or more parties by the use of website can be called a browse wrap agreement. In case of browse wrap agreement a regular user of a particular website deemed to accept the terms of use and other policies of the website for continuous use.

Though these online contracts have become common in our daily, there are no precise judicial precedents on the validity and enforceability of shrink-wrap and click-wrap agreements. Other countries have dealt with these online agreements such as courts in the United States have held that as far as the general principles of contract are not violated, both shrink-wrap agreements and click- wrap agreements are enforceable.

 

ESSENTIAL ELEMENTS OF ONLINE CONTRACT

The essential elements of online contract is discussed below:

  • Offer – Just like paper made or conventional contract, one of the most essential elements of online contract is the requirement of an offer to be made. There must be a lawful proposal or offer made by one party known as the proposer and it is the starting point of a contract. By browsing and choosing the goods and services available on the website of the seller, the consumer makes an offer to purchase such in relation with the invitation to offer made by the seller. A proposal must be distinguished from the invitation to offer or treat and must be made with an intention to create legal relationship. An offer or proposal is revocable and can be withdrawn at any time before it is accepted because once it is accepted by the other party, it becomes a promise.
  • Acceptance – When a proposal or offer is made is accepted by the person to whom the offer is made, it becomes a promise. The acceptance of the proposal must be unconditional and absolute and must be communicated to the proposer or the offeror. In case of an online contract, offer and acceptance can be made through e-mails or by filing requisite form provided in the website. They may also need to take an online agreement by clicking on ‘I Agree’ or ‘I Accept’ for availing the services offered.
  • Intention to create legal relationship – If there is no intention of creating legal relationship on the part of the parties to contract, there is no contract between them. It is an essential element of valid contract that parties to the contract must have intention to create legal relationships. The intention of the parties is to be considered by the Court in each case and must be ascertained from the terms of the agreement and surrounding consequences. Agreement of social or domestic nature do not create legal relationship, hence they are not contracts and are not enforceable by law. In the case of arrangements regulating social relations, it follows as a matter of course that parties do not intend legal consequences to follow. For example, an invitation for marriage to a friend or family through e- mails or fax or through any means of telecommunication is not a contract.
  • There must be a lawful object – Parties to the agreement must contract for a legal object. A contract is only enforceable by law only when it is made for a lawful purpose. It must not defeat any provision of law and must not be fraudulent in nature. Thus a contract on a website designed for the purpose of selling illegal substances online is a void contract. If an agreement is made to cause injury to any person or his property, such agreement is not lawful and therefore to be considered as void. If any competent Court regards any agreement as opposed to public policy, it is a void contract.
  • There must be a legal or lawful consideration – Consideration is one of most important element of a contract. The basic rule is that when a party to a contract promises to perform his promise he must get something in return for the performance of his promise. Consideration is something of some value in the eyes of law. It may be of some benefit, right, interest or profit given to the party as inducement of promise. An act constituting consideration must be moved at the desire of the promisor and must be legal, real and not imaginary. Promises that are physically impossible to perform cannot have real consideration. For eg. an online site that offers purchase of land in moon.  
  • Capacity of parties – Parties to a contract must be capable of entering into a contract. He must attain the age of majority and must be of sound mind. He must not be disqualified from contracting by any law for the time being in force. In our country an agreement where either party is a minor has no significance. It is considered as void ab-initio. As per Section 12 of the Indian Contract Act, 1872, any person who is in a position to judge and safeguard his own interest is of sound mind and capable enough to enter into a contract. When a person is declared insolvent by any competent Court, he cannot enter into a contract relating to his property. In the old age foundation case of Mohori Bibee vs. Dharmodas Ghose, it was held by the Privy Council that an agreement by a minor is void.
  • There must be free and unaffected consent – Consent which is defined under Section 13 of the Indian Contract Act, 1872 is an essential requirement of a contract. It is basically the meeting of minds of the parties. When both agree upon the same thing in the same manner, they are said to consent. In case consent is caused by coercion, it is voidable at the option of the party whose consent was so caused. Coercion includes physical compulsion, threat, and violence. Consent has to be free and genuine and not induced by misrepresentation, undue influence i.e a case where one person is in a position to dominate the will of another. But in case of online contract there is a narrow scope of physical communication between the website and the customer availing their service, they just give consent by clicking the option that ensures free and genuine consent.  
  • Possibility of performance – The terms and conditions of agreement must be certain and not vague and must also be such as are capable of performance. An agreement to do an act impossible in itself cannot be enforced as per section 29 of the Indian Contract Act, 1872. It is the general rule that the promisors of the contract to perform the promise but there other persons also who may perform under certain circumstances such as an agent if appointed by the promisor for this purpose, legal representative in case of death of a promisor. The time, place and manner of the performance of contract are fixed generally at the desire and conveniences of the parties. Various rules regarding the time and place of contract are laid down under section 46 to 50 and section 55. When the time is the essence of contract, a promisor is expected to perform his promise with the stipulated time period and if he fails to do so, the contract becomes voidable at the option of the promisee.
  • FORMATION OF ONLINE CONTRACT

The Indian Contract Act, 1872 gives a lawful status to the common contractual rule. A valid contract is formed by free consent of competent parties for a lawful object and consideration. This Act does not prescribe any specific provision for communicating offer and acceptance. It may be made in writing or by word of mouth or inferred from the conduct of the parties and the circumstances. Express contract is said to be expressed and entered into by words spoken or written where the offer and acceptance are expressly agreed upon at the time of formation of the contract. When the contract is inferred from the conduct of the parties, a contract is said to be implied. Such contract comes into existence on account of conduct or act of the parties.   

The Information Technology Act, 2000 has made certain provisions for the validity and the formation of online contracts but no specific legislation has been incorporated for the validity of online contracts in India. Even if no specific provision is made for the validity of online contracts, it cannot be challenged based on technical grounds.

There are few processes available for forming an electronic contract such as e-mail by which offers and acceptances can be exchanged. An online contract can be formed by completing the website form provided for availing good or services offered by the seller in the website for example air tickets. The person who intends to avail the good or services offered in the website can place an order on the website by filling the concerned form and communicating such. The goods offered can be delivered directly through electronic means for eg. e- tickets or may be later for eg. clothes. Another process available for the formation of an online contract is through online agreements by clicking on the button that says ‘ I Accept’ while connecting to a software and by clicking on ‘I Agree’ button while signing up for an e-mail account.    

Online contract is formed through new modes of communication such as e-mail, internet, fax and telephone. The requirement of essential element such as offer and acceptance in online contract formation is as much essential as it is for the formation of paper based traditional contract. Contract formation over websites is quite different from the earlier ways of contract formation. Online contract formation mainly raises issues in relation to the applicability of the offer and acceptance rule. It is the website which acts as the retailer and responds as per the consumer’s action. When a consumer is interested in downloading songs, videos or movies from a retailer website in lieu of payment, the consumer will have to agree to the standard terms of the retailer’s website by clicking the particular option button. Once the terms are agreed by the consumer and the acceptance is expressed, it is the responsibility of the website to deliver the service to the consumer. And lastly, on making the appropriate payment, the contract is completed between the consumer and the retailer’s website for the particular transaction.

 

  • VALIDITY OF ONLINE CONTRACT

The Information Technology Act, 2000 provides various procedural, administrative guidelines and regulates the provisions relating to all kinds of electronic transactions. These include computer data protection, authentication of documents by way of digital or electronic signature. Though electronic contracts have been given recognition by the IT Act, 2000, but majority feels it less secured to get into any kind of online contracts as there are no concrete judicial precedents for the validity and enforceability of online contracts in India.  In case of browse wrap contracts, we usually accept the terms and conditions of the contract by clicking the button that indicates ‘ I Agree’ and in case of  shrink wrap contract or purchase of a software product, assent is given by the consumer or the purchaser with tearing of the wrapper and using it. Many have the tendency of not reading the terms and conditions carefully before agreeing to such. But these actions should be taken consciously and carefully only after reading the terms of the contract properly as it leads to a valid contract and the terms can be strictly enforced against them.

However courts in other countries such as US, have dealt with validity and enforceability of contracts such as shrink wrap and click wrap contracts. It was held in the famous case of ProCD. Inc. versus Zeidenburg “that the very fact that purchaser after reading the terms of the license featured outside the wrap license opens the cover coupled with the fact that he accepts the whole terms of the license that appears on the screen by a key stroke, constitutes an acceptance of the terms by conduct.” Thus it is confirmed that shrink wrap agreements are valid contracts and are enforceable against the purchaser of the software. But the enforceability of the shrink wrap agreement is extended as far as the general principles of contract are not violated. The validity of click wrap agreement was first considered when the Court for northern district of California upheld in the famous case of Hotmail Corporation that “the defendant is bound by the terms of the license as he clicked on the box containing “I agree” thereby indicating his assent to be bound” [Hotmail Corporation v. Van $ Money Pie Inc, et al].

It was also held by the Appellate Division of Superior Court of New Jersey, that by clicking the “I Agree” option given in the dialogue box the plaintiff has entered into a valid and binding contract and can be made liable for the terms and conditions laid down in the contract. Click wrap agreements are thus valid and enforceable in US as long as the offer and acceptance rule is taken into consideration.

In the year 2015, an initiative known as ‘Digital India’ was launched by Narendra D. Modi, the present Prime Minister of India. This campaign was launched to ensure that government services available to the citizens of our country in any electronic way which will lead to the improvement of online infrastructure and internet connectivity in our country. The initiative of Digital India aims to connect rural areas with high speed internet networks and consists of three components such as the creation of digital infrastructure, Delivery of services digitally and digital literacy. Its main object is to make our country digitally empowered in the field of technology.

With the wide spread expansion and globalization of technology, existence of online contract has become regular in our life right from buying daily groceries from the market to withdrawing money from an ATM. Electronic contracts by use of technology is much cost effective and delay can be instantly removed in comparison to traditional paper based contracts. There is less chance of committing errors as it is much automated. It provides an opportunity to the seller to reach millions of consumers irrespective of distance and most importantly without the involvement of middlemen or any brokers.

The Indian Contract Act, 1872 provides a basic contractual rule that a contract is valid if it is made by competent parties out of their free consent for a lawful object and consideration. There is no specific way of communicating offer and acceptance; it can be done verbally, in writing or even by conduct. Thus oral contracts are as valid as written contracts; the only condition is they should posses all the essentials of a valid contract. It was held in the case of Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas, “that ordinarily, it is the acceptance of offer and intimidation of that acceptance which results in a contract. This intimation must be by some external manifestation which the law regards as sufficient. Hence, even in the absence of any specific legislation validating e-contracts cannot be challenged because they are as much valid as a traditional contract is.”

An online contract is simply a communication between two parties in regard to transfer of goods/services. And as per Indian Evidence Act any e- mail communication and other communication made electronically is recognized as valid evidence in a Court of law. By considering the points, it can be concluded that the contract that follows the communication is valid too and Indian law thus recognizes the validity of online contracts.

The citizens of India are encouraging the concept of Digital India, but there are no definite legislations relating to the transactions done over computerized communication networks. Several laws such as The Indian Contract Act, 1872, Information Technology Act, 2000, Indian Copyright Act, 1957 and the Consumer Protection Act, 1986 to some extent are working and acting on resolving issues that arise relating to the formation and validation of online contracts. The Information Technology Act, 2000 is the Act that governs the transactions conducted over internet and explains the considerable mode of acceptance of the offer and provides the rules for revocation of offer and acceptance in a vague or indefinite manner. Hence, a separate law for regulating contracts based on electronic devices is highly recommended.

 

  • EVIDENTIARY VALUE OF ONLINE CONTRACT

In a country like India, where the literacy rate is not so high, the concept of ‘Digital India’ is a far reach. People still feel insecure to do online based transactions mainly because the terms and conditions of such contracts are not transparent. Another major issue is the nature of the law governing the electronic contracts. Even if the IT Act, 2000 has legalized electronic contracts, there are no definite provisions mentioned in the Act.

Documents are mainly registered for conservation of evidence, assurance of title and to protect oneself from fraud. The evidentiary value of electronic contracts has been given recognition and can be understood in the light of various sections of Indian Evidence Act. Sec 65B of the Indian Evidence Act deals with the admissibility of electronic records. As per Sec 65B of the Indian Evidence Act any information contained in an electronic record produced by the computer in printed, stored or copied form shall deemed to be a document and it can be admissible as an evidence in any proceeding without further proof of the original subject to following conditions are satisfied such as the computer from where it was produced was in regular use by a person having lawful control over the system at the time of producing it, during the ordinary course of activities the information was fed into the system on a regular basis, the output computer was in a proper operating condition and have not affected the accuracy of the data entered.

Section 85A, 85B, 88A, 90A and 85C of the Indian Evidence Act deal with the presumptions as to electronic records. Sec 85A has been inserted later to confirm the validity of electronic contracts. It says that any electronic record in the form of electronic agreement is concluded and gets recognition the moment a digital signature is affixed to such record. The presumption of electronic record is valid only in case of five years old record and electronic messages that fall within the range of Section 85B, Section 88A and Section 90A of Indian Evidence Act.

 

  • REMEDIES FOR BREACH OF ONLINE CONTRACT

There is no specific rule in case of breach of online contract but the rules regarding remedies for breach of contract can be followed as provided in The Indian Contract Act. A valid contract gives rise to co- relative rights and obligations and they are enforceable in the court of law when infringed on breach of contract. The Contract Act mainly talks about two remedies for the breach of contract such as Damages and Quantum Merit. But few other remedies are also available as provided in the Specific Relief Act such as specific performance of contract and injunction restraining the other party from making a breach of contract.

Sec 73 and Sec 74 of the Indian Contract Act, 1872 deals with the rules regarding the remedy of damages on breach of contract. The person whose rights are infringed by the breach of contract may bring an action for damages or compensation in terms of monetary value for the loss suffered by the party. There are two main aspects to be considered when any action of damages i.e remoteness of damage and measure of damage. Sec 73 to 75 provides rules regarding the assessment of damages based on the famous case Hadley vs. Baxendale. According to the rules laid down in this case, there can be damages which naturally arose on the usual course of things from such breach of contract and can be called ordinary damages and secondly, damages for loss arose from special circumstances i.e special damages. There are also other kinds of damages mentioned in the Act such as nominal damage, pre- contract expenditure, compensation for mental agony and liquidated damages. Nominal damages are those substantial damages awarded by the Court in recognition of right of the aggrieved party in cases where the party has not suffered any monetary loss on the breach of contract. Whereas, pre- contract expenditure may be recovered as damages if such is within the knowledge of the parties. Liquidated damages are those pre-determined damages decided by the parties at the time of formation of the contract i.e amount of compensation payable in the event of breach of such contract.

When a person has done some work under a contract and the other party repudiates the contract or at the occurrence of an event that makes further performance of the contract impossible, the party who has performed his work can claim remuneration for the work already done. And under such circumstances the party can file suit upon quantum merit and claim for the value of work he has done.

 

CONCLUSION

An online contract is designed and enacted with an aim to provide security to online transactions. It is formed to check frauds to promote and build confidence in genuine online transactions and to give a legal status to the concept of digital signature. Online contract is a much efficient concept in the interest of time and money in comparison to the traditional method of paper and writing contract. But to keep a pace with the fast advancement of the technology, a separate legislation in regard to electronic or online contract has to be enacted in India.

 

LIST OF ABBREVIATIONS

 

Vs. Versus
Ors. Others
SC Supreme Court Of India
IT Act Information Technology Act

 

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INDEX OF AUTHORITIES

Books referred

  • Professional’s Contract Act, 1872 (Bare Act)
  • Professional’s Information Technology Act, 2000
  • Indian Evidence Act (Bare Act)

 

Websites referred

 

  • http://www.itlaw.in

 

 

Dictionaries referred

  • Oxford Dictionary
  • Black’s law Dictionary

 

List of Case Laws referred

Name of Case Law Citation
Mohori Bibee vs. Dharmodas Ghose (1903) 30 Cal. 539
ProCD. Inc. versus Zeidenburg 86F .3d 1447 (7th Cir. 1996)
Hotmail Corporation v. Van $ Money Pie Inc, et al 47 U.S.P.Q.2d (BNA) 1020, 1998 US Dist. LEXIS 10729, 1998 WL 388389 (N.D. Cal. Apr. 16, 1998).
Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas 1966 AIR 543, 1966 SCR (1) 656
Hadley vs. Baxendale [1854] EWHC J70, (1854) 156 ER 145

 

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