Validity of Contracting & Transacting Electronically

Author - Rashi Suri (Managing Partner) and Pradyun (Associate)

As global businesses and the domestic wheels of commerce grinds to a halt due to the pandemic COVID-19 (novel coronavirus), the economy it appears is headed for uncharted, troubled waters. The problem for businesses lie with uncertainty as no one knows how long the virus will remain potent, how authorities will be able to efficiently tackle it post-which normalcy could be brought back to the society and the economy. What business hates is uncertainty and uncertainty is the only thing that abounds when it comes to predictions about the vitality, endurance and longevity of the virus. At these difficult times, although physical activities, meetings and on-ground work may be needed to be postponed or suspended but there are many transactions that can happen using the tool of internet, particularly by using E-contracts.

What is a Contract?

The term “contract” has been defined in Section 2(h) of the Indian Contract Act, 1872 (ICA) as “an agreement enforceable by law”. The Indian Contract Act, 1872 governs the manner in which contracts are made and performed in India. It governs the way in which the requirements in a contract are implemented and codifies the effect of a breach of promises and obligations under the agreement.

What are Electronic Contracts?

Electronic contracts or e-contracts are contracts which are not entered on physical papers but which are executed in the electronic form. The same has emerged due to the need for ease, efficiency and speed. An electronic or a digital contract (e-contract) is an agreement which has been drafted and signed in an electronic form. Are electronic signatures legal in india ? What is electronic signature validity in india ? We will get answer to this question and see E Contracts examples.

●        The e-agreement is similar to a normal hard copy agreement only that in the case of the former the e-agreement is at first drafted on Party A’s computer and then sent to the second contracting party, Party B, via an e-mail. When Party B, in his turn, e-mails the e-agreement back to Party A with his electronic signature indicating acceptance, then the conclusion and beginning of contractual rights and duties of the respective parties are said to commence.

●        For an example, if two businesses wishes to enter into a contract, one way for doing that would be, one party first draws up two copies of the contract, signs and couriers them to the other party, who in turn will sign both copies and retains one copy back with itself. The other option would be that both parties meet at a chosen place and sign the contract in physical presence of each other.

●        In the digital age, the whole of the above process can be achieved in a matter of seconds, with both parties simply affixing their digital signatures to an electronic copy of the contract thereby dispensing with the need for couriers and travelling costs.

E Contracts examples:

E Contracts are of many types some electronic contracting examples are :

i. Employment Contracts

ii. Consultancy and Contractor Agreements

iii. Sales and Distributor Agreements

iv. Non-Disclosure Agreements

v. Development and Licensing Agreements etc.

Validity of E-Contracts

What is electronic signature validity in india ? While the Indian Contract Act 1872 does not exclude electronic contracts from its ambit, the Information Technology Act, 2000 (ITA) specifically provides legal validity to electronic contracts.

●        Section 10-A of the ITA  reads as: “Validity of contracts formed through electronic means

Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.”

●        Under the provisions of the ITA, an e-contract would be valid and enforceable when it is in compliance with the necessary pre-requisites as enumerated under the ICA.

●        As in every other contract, an electronic contract also requires the following necessary requirements:

i. An offer is required to be made; and same needs to be acknowledged; (The offer and acceptance can be exchanged entirely via e-mail;

ii. There must be a legal consideration

iii. There should be an intention to create a lawful relation for a lawful purpose

iv. The parties must be eligible to contract.

v. The consents of both the parties to be bound under the contract should be free and without force or coercion 

vi. The must be possibility of performance of the contract

●        Under the Information Technology (Amendment) Act, 2008, the term ‘digital signature’ has been substituted with the term ‘electronic signature’. In an electronic signature there are no standards, the same can be either a typed name or digitized image of a hand written signature. The substitution of the term ‘digital signature’ with ‘electronic signature’ is solely meant to expand the scope of E-contracts in a digitized world. Recognizing the same the Supreme Court disregarded the argument that exchanges over e-mail did not qualify as contracts and held that

“Once the contract is concluded orally or in writing, the mere fact that a formal contract has to be prepared and initialed by the parties would not affect either the acceptance of the contract so entered into or implementation thereof, even if the formal contract has never been initialed.” 

Thus, the e-mails which conveys a clear and distinct intention of the parties to enter into a contract will be treated as a binding contract.

Execution of E-contracts

E-Contracts are regulated by various laws such as the ICA, ITA and the Indian Evidence Act, 1872 (IEA). 

●        The provisions in the ITA recognizes the basic features of the contract, such as the communication of offers/proposals, acceptance of such proposals, revocation of proposal and acceptances, which can be expressed either in the electronic form or via an electronic record. In addition to the above, the ITA also mentions the attribution, acknowledgement and dispatch of electronic records and secured electronic procedures.

●        Further, the recognition of a contract is accorded under the IEA, by which the term “document” includes any information which is contained in an electronic record that is printed on a paper, stored, recorded or copied in optical or magnetic media produced by a computer.

The courts in India recognizes an electronic document under Section 65-A of the IEA and the procedure for furnishing electronic documents as evidence is provided under Section 65-B of the IEA. As per the provision, any information contained in an electronic record produced by a computer in printed, stored or copied form shall be deemed to be a document and it can be admissible as evidence in any proceeding without further proof of the original. 

However, the admissibility of the same is subject to various conditions prescribed under section 65-B which requires that:

i. The document or e-mail sought to be produced from a computer which had been in regular use by a person having lawful control over the system

at the time of producing it; 

ii. The document or the e-mail had been stored or received during the ordinary course of activities;

iii. The information was fed into the system on a regular basis; 

iv. The output computer was in a proper operating condition and has not affected the accuracy of the data entered.

●        Even where various steps of a contract process have been conducted through electronic means, if not entirely done electronically, and where the parties are at consensus ad idem along with fulfilling all the essentials of a valid contract under the ICA has enumerated above, then, such contract is valid and will be legally enforceable

In the aftermath of Severe Acute Respiratory Syndrome (SARS) epidemic in China in 2003, the business community and the customers began to prefer transacting and buying/selling online, to avoid crowded spaces, due to which the Chinese e-commerce major Alibaba’s fortunes expanded manifold after this. 

E-contracts are therefore not only suitable for facilitating the re-invigoration of business processes in the times of remote working due to COVID-19, but they also reduce costs, saves time, fastens response time and improves service quality by reducing paper work, thus increasing efficiency. The business transactions through the electronic mediums in the present times of faster internet speeds may see even more traction than before. With offices and workplaces shutting down temporarily, online/electronic medium should be extensively utilized to cut losses and contain the economic impact of COVID-19 on the businesses.