Legal Validity of Electronic Contracts
Electronic Contract is (almost) same as Paper Contract.
With the growth in e-commerce and online transactions, more and more contracts are being executed electronically, online over the internet.
Like any ordinary paper contract, an electronic contract (or e-contract or online contract) is also primarily governed by the Indian Contract Act, 1972 (ICA).
Therefore, an e-contract contract can only be executed if it satisfies all the essential requirements of a valid contract under ICA, such as:
- The contract should have well-defined “Offer” and “Acceptance,”
- There should be lawful consideration for the contract,
- The object of the contract should be Lawful,
- The contract should be entered into with the free consent of the contracting parties,
- Parties should be competent to contract,
- Parties should have the intention to create a legal relationship,
- There should be certainty and possibility of performance,
- The contract should comply with formalities under different laws governing the contract.
Information Technology Act, 2000 clarifies that electronic/online means of communication can be used for proposal, acceptance of proposal or revocation of a proposal.
Signature and Jurisdiction for Electronic Contract
Information Technology Act, 2000 recognizes digital signature as validation of e-contract contracts. Information Technology (Amendment) Act, 2008 has substituted the term ‘digital signature’ with the term ‘electronic signature.’ A digital signature is the technology specific and is irreversibly unique to both the document and the signer. However, an electronic signature is technology unbiased and general in nature. However, there is no standard for electronic signature. It can be either a typed name or digitized image of a handwritten signature.
Indian courts do recognize contracts executed over email. For instance, in the case of Trimex International FZE Limited, Dubai vs. Vendata Aluminum Ltd., the Supreme Court of India held that the contract between the parties was unconditionally accepted through e-mails and was a valid contract which satisfied the requirements of the ICA.
Since e-contracts are not physically signed and are concluded in a virtual space, determining territorial jurisdiction in case of any dispute might be a challenge. Hence, e-contracts should mention what would be the governing laws and which court would have jurisdiction to try disputes arising out of the contract.
If any jurisdiction is not mentioned in an e-contract, the jurisdiction can be determined based on the principal place of business of either party. For instance, in the case of PR Transport Agency vs. Union of India, the Allahabad High Court decided the territorial jurisdiction based on the principal place of business of the petitioner (PR Transport Agency) for a contract communicated and accepted over email.
The process of paying stamp duty as defined under the stamp laws is applicable only for physical documents and is not feasible for e-contracts.
Is Electronic Contract Unfair to Customers?
In general, there is little or no scope for negotiations between e-commerce platforms (websites) and end users (customers) for the terms of online contracts. Most of the time, it’s the case of take-it-or-leave-it for the end user i.e. either the end user will have to accept all the terms in the contract, for example – delivery time, replacement/warranty terms or mechanism for dispute resolution, and accept the same or don’t accept the terms and leave the site.
Then the questions arise whether such standard contracts could be considered unfair, i.e. unconscionable and may be struck down by the courts.
Indian courts have dealt with cases where the parties to a contract had unequal bargaining positions. Indian Contract Act states that if the consideration or object of the contract as opposed to public policy or is immoral or is fraudulent or involves injury to the person or property of another person, then the contract cannot be valid.
Also, in such cases, the courts can put a burden on the person in the dominant position to prove that the contracts were not induced by undue position.
In the case of Lily White v R Munuswami, the court held that a limitation of liability clause printed on the back of a bill issued by a laundry, which restricted the liability of the laundry to 50% of the market price of the goods in case of loss, was against public policy and therefore void.
In the case of LIC India v. Consumer Education & Research Center, the Supreme Court declared certain clauses in the policy, which restricted the benefit of the policy only to the Government employees, as void under article 14 of the Constitution.
Hence, it is essential to have well thought out terms in online contracts, giving adequate opportunity to the customers to familiarize themselves with the terms of the contract.
Types of Electronic Contracts
Following are the most common forms of e-contracts:
2) Click Wrap: In a click-wrap agreement, a user is required to give consent actively:
(i) by checking a box to confirm that he has read and agreed to the terms of the agreement, or
(ii) by continuing an action – register an account, log in, check-out to purchase an item – he agrees with the terms of the agreement
3) Shrink Wrap: In this case, the contracting party (aka user) can read the terms and conditions only after opening the box within which the product with a license (aka software) is packed. It is not directly relevant to e-commerce or online business and has fewer usage because of increased prevalence of offering software as Software As A Service (SAAS) model.
Reasonably prominent notice of the existence of e-contract and unambiguous manifestation of assent to those terms by users are essential for e-contracts to be enforceable.