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This article has been written by Buddhisagar Kulkarni pursuing a Diploma in Business Laws for In-House Counsels. This article has been edited by Tanmaya Sharma (Associate, Lawsikho)

This article has been published by Sneha Mahawar.

Introduction

The disastrous condition of the COVID-19 pandemic and the subsequent lockdown and other limitations imposed by the Government of India has stymied all business activities and posed severe logistical challenges. Since physical contract signing was not possible, several deals in the discussion before the pandemic were put on hold. Companies and individuals have pondered opting for electronic contracts (E-Contracts) at such times. An E-Contract is not a novel idea in India, and it was recognized long before the pandemic. There has been an upsurge in the execution of electronic contracts and electronic signature of documents as a result of the pandemic.

Forms of electronic contracts

Shrink-wrap contracts

Shrink-wrap contracts are often software licensing agreements.

The name “Shrink-wrap” is derived from the shrink-wrap packaging of CD-ROMs which were used to transfer software. When a licensing contract is packed with software, the contract starts when the user tears open the shrink wrap to utilize the product.

Licensing agreements appear before the software is installed and are no longer typically included with software packages. Shrink-wrap contracts have a distinct benefit over other types of electronic contracts in that their acceptance can be revoked by returning the merchandise.

Click-wrap contracts

Click-wrap contracts are those huge blocks of text that a lot of people usually don’t read that outlines the terms of the contract for using a web-based service, software, or other services. The user has to click a button or check a box to show that they agree to the terms and conditions of the contract, which is why they are called click-wrap contracts.

You would have probably observed that click-wrap contracts are “less negotiable” than shrink-wrap contracts because they must be acknowledged for the user to advance to the next web page or obtain access to the software and so on. Click-wrap agreements, in essence, create a situation in which the user is obliged to either take it or leave it. This raises a plethora of legal issues concerning the enforceability of click-wrap contracts.

Browse-wrap contracts

You have undoubtedly seen browse-wrap contracts daily. They relate to the wording on websites that says things like “By continuing to use these services, you agree to the terms and conditions” or “By signing up, I agree to the terms of usage.” Browse-wrap agreements are contracts that you agree to merely by continuing to use the service or browsing the web page, which is where the name comes from. Furthermore, the conditions of browse-wrap agreements are typically accessible via a hyperlink.

Emails

Emails are not something you would anticipate seeing on a list of electronic contracts, yet they are legally enforceable in some circumstances.

In Trimex International FZE vs. Vedanta Aluminium Limited, India 2010, the Supreme Court had held that an unregistered and unsigned contract discussed through email is valid. Hence, such contracts agreed by email are also enforceable. Emails can also be electronically signed, which is a key factor in determining whether an agreement becomes a contract.

Are E-contracts legally acceptable

Like any other tangible contract, an E-Contract is largely bound by the provisions of the Indian Contract Act, 1872 (ICA). As a result, the legitimacy of an E-Contract is dependent on the fulfillment of the criteria of a valid contract. Section 10 of ICA addresses the fundamental elements of a legal contract.

  1. An offer is made by one party and accepted by the other.
  2. The parties’ mutual agreement.
  3. Desire to establish legal relations.
  4. Parties to the contract must be legally competent to enter into a contract, which means they must be over the age of 18, of stable mind, solvent, and so on.
  5. The contract’s object must be legal and does not violate public policy; for example, an agreement to sell illegal narcotics is not a valid contract.
  6. Consideration should be used to back up the agreement. i.e., monetary or in-kind compensation.
  7. The agreement should be possible to be carried out.
  8. The contract’s provisions must be unambiguous.

Because of the form of E-Contracts, several laws have specific provisions for governing E-Contracts. All such statutes must be interpreted in conjunction with the provisions of the ICA and not in separation from one another.

The requirement of Section 4 of the Information Technology Act (IT Act) that any information or matter must be in writing shall be deemed satisfied if such information or matter is in an electronic forum and the same is accessible so that it can be used for future analysis.

Furthermore, under Section 10A of the IT Act, where,

(i) a contract construction, 

(ii) communication of offers, 

(iii) acceptance of offers, 

(iv) cancellation of offers, and 

(v) acceptances, as the case may be, are conveyed in electronic form or through electronic records, such contract shall not be deemed unenforceable merely on the ground that such electronic form or means were used for that purpose.

In Tamil Nadu Organic Private Ltd v. State Bank of India, the Madras High Court stated that the contractual liabilities might arise through electronic contracts and such contracts can be enforced through legislation. According to the High Court, Section 10A of the IT Act, allows for the use of electronic records and electronic methods for the completion of agreements and contracts.

Exceptions to application of IT Act with regards to E-contracts

It should be noted that the IT Act’s first schedule expressly excludes the following documents and transactions from its application:

  1. Negotiable instruments other than cheques, as specified in Section 13 of the Negotiable Instruments Act of 1881.
  2. Power of attorney as specified in Section 1A of the Powers-of-Attorney Act, 1882;
  3. A trust, as specified in Section 3 of the Indian Trust Act of 1882;
  4. A Will, as described in Section 2 (h) of the Indian Succession Act of 1925; and
  5. Any contracts for the sale or transfer of immovable property, as well as any interest in such property.

In light of the aforementioned provisions of the IT Act, Indian courts have periodically recognized the validity of contracts made in electronic mode.

Stamp duty on E-contracts

In India, stamp duty is due on certain instruments on a fixed or ad valorem basis in accordance with applicable Central or State level stamp duty regulations.

Stamp duty is normally levied on documents that are physically printed and signed.

The Indian Stamp Act, 1899 (“Stamp Act”) contains no particular provisions dealing with electronic records or the stamp duty payable on their execution. According to the Indian Stamp Act, an instrument is any document that creates, transfers, limits, extends, extinguishes, or records a right or responsibility or pretends to do so. While the majority of state stamp duty statutes do not mention electronic records, some do. Electronic records are included in the definition of “instrument” in states like Maharashtra, Delhi, Uttar Pradesh, Karnataka, Gujarat, and Rajasthan, resulting in stamp duty being imposed on them.

Implications of failure to pay stamp duty

  • As previously stated, it seems that any contract performed electronically (and if liable to duty under the appropriate stamp acts) may be subject to stamp duty payment. 
  • Unless particular repercussions have been stipulated for electronically executed instruments under the respective stamp duty law, failure to pay stamp duty in respect of such documents would lead to consequences comparable to those applicable to physical instruments. 
  • Documents on which the stamp duty is levied as per the Stamp Act are not allowed as evidence in the court of law.

Nevertheless, under the Stamp Act and also most state stamp duty regulations, improperly stamped instruments may be accepted as evidence after payment of appropriate duty and a penalty of up to 10 (ten) times the amount of duty charged. Furthermore, anyone who executes or signs any such instruments payable with stamp duty, other than as a witness, without having them appropriately stamped is subject to monetary fines.

Are E-signatures legally acceptable

In the above paragraphs, we saw that one could legally enter into a contract through electronic methods. The following question concerns how to validate an Electronic Contract. The parties validate paper contracts by signing them with their handwritten signatures. Similarly, according to sections 3 and 3A of the IT Act, the parties could validate an Electronic Contract by affixing their Electronic Signature to the Contract. The Central Government has accepted the Electronic Signatures, as defined in Section 3A of the IT Act, and they have been included in Schedule II of the IT Act. Currently, the Central Government has approved two types of electronic signatures, namely:

Using Aadhaar or other e-KYC services for e-authentication

A user with an Aadhaar ID connected to their mobile number could sign digital documents securely online using an online e-signature service. In this example, an Application Service Provider (ASP) amalgamates with the online e-signature service to give users a mobile or web app interface with which they can engage. Users can then use the app interface to affix e-signatures to any digital documents online. Once the user validates his/her name using an e-KYC service offered by an e-sign service provider, such as an OTP (one-time passcode), then the e-signature can be affixed to any digital documents.  The online e-signature service collaborates with an authorized service provider to deliver government-compliant certificates and authentication services.

E-authentication technique based on a Digital Signature Certificate issued by a Central Government-approved Certifying Authority

In this situation, a person could use a Digital Signature Certificate received from a Certifying Authority certified by the Central Government to authenticate a digital document. The Digital Signature Certificate is included in a USB token with a personal identification number (PIN). The USB token needs to be plugged into a computer to sign a digital document using the PIN.

An Electronic Signature affixed to an Electronic Contract is equivalent to a handwritten signature affixed to a paper contract and has the same legitimacy.

According to Section 5 of the IT Act, if any law requires that information or any other matter be validated by affixing the signature of any person, or that any document is signed or bear the signature of any person, such requirement shall be deemed to have been satisfied if such information or matter is authenticated by means of Electronic Signature attached in such manner as the Central Government may recommend.

Contract validity that has not been certified using statutorily authorized electronic signatures

  • The preceding view calls into question the enforceability and validity of contracts performed by affixing electronic signatures via methods other than the Aadhaar e-KYC approach, such as the frequently used Docusign.
  • The relevant question is whether a contract that has been electronically signed by both parties (using methods other than the Aadhar e-KYC approach) and communicated through email between the parties is invalid just because it lacks a statutorily recognised electronic signature?
  • While discussing the requirement of formal execution of a contract for the enforceability of its provisions in the Trimex case, the Hon’ble Supreme Court of India opined as follows: 

The fact that a formal contract must be drafted and initialled by the parties after the contract is completed orally or in writing has no bearing on the acceptance or performance of the contract so entered into, even if the formal contract has never been signed.

  • As a result, it can be argued that a contract is entered between the parties through email and there is no disagreement between parties regarding its provisions, it symbolizes both parties’ acceptance of the contract. The said contract is then legally binding on both parties. Unless the parties had established formal execution of the contract as a prerequisite for being legally bound, this inference would hold valid regardless of whether the exchanged electronic copy of the contract has a statutorily recognised electronic signature or contains no signature at all. This principle is likewise incorporated in section 10A of the IT Act, which accords legislative weight to electronic offers, acceptances, and contract formation.

Authenticity Presumption: Digital Signatures vs. Electronic Signatures

The fundamental difference between a document validated through digital signatures and one validated through electronic signatures not stipulated in the second schedule of the IT Act is that the former enjoys the benefit of a presumption of truthfulness and admissibility, whereas the latter must be manifestly proven for its truthfulness.

Is it possible to use E-Contracts and E-Signatures as evidence in court

  • In Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal and Others, a three-judge bench of the Supreme Court analyzed the Sections 65 A and 65B of the Indian Evidence Act, 1872 (Evidence Act), comprehensively answered the question as to how the execution of an electronic document could be proven in court. 
  • According to paragraph 72 of the judgment, an original electronic document can be proven in court by the owner of a laptop computer, computer tablet, or even a mobile phone where the electronic document is saved, by entering the witness box and demonstrating that the relevant device, on which the original data is first saved, is owned and/or controlled by him. 
  • In cases where the foregoing is not feasible, a printout of such electronic document may be obtained and demonstrated in accordance with Section 65B(1) of the Evidence Act, along with the necessary certificate under Section 65B(4) of the Evidence Act, as set down by another three-judge bench of the Supreme Court in Anvar P. V. v. P. K. Basheer & Ors
  • The certificate u/s 65B(4) of the Evidence Act, according to the aforementioned judgment, should be signed by a person possessing a competent official position regarding the operation of the device in which the electronic document is kept, and it must meet the following criteria:
  1. It should recognize the electronic document;
  2. It must explain the process through which the electronic document was created;
  3. It must provide information on the device used in the creation of that document; and
  4. The certificate must address the criteria specified in Section 65B(2) of the Evidence Act.

Conclusion

Since the passage of the IT Act in 2000, the laws governing information technology in India have come a long way. In light of and subject to the aforementioned conditions, an Electronic Contract executed properly would have the same legality and enforceability as a physical contract.

However, there are difficulties and confusion regarding many parts of an online contract, including the need for signature and stamping. With the present inclination towards digitization, removing any doubts about the legitimacy of e-contracts and e-signatures appears to be a pressing need, and we hope that the Government would take the required steps in this area.

References


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