Understanding E-Contracts – Validity and Jurisdiction

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Electronic contracts also known as e-contracts have witnessed phenomenal growth over the past decade owing to the rise of e-commerce and digital transactions. E-contracts are aimed at creating a safe atmosphere for online transactions thereby creating an alternative mode to paper-based contracts. It is pertinent to note that electronic contracts, similar to physical contracts, create a binding agreement between the parties to the contract.

The outbreak of pandemic has been a catalyst to the seamless execution of e-contracts on a large scale across the world. The significant increase in the practice of e-contracts necessitates the need to understand the key aspects of validity, jurisdictional issues, and other cardinal aspects of e-contracts.

The Information Technology Act, 2000 (“IT Act“) sets out the validity of electronic contracts. Section 4 of the IT Act states that any legal requirement, which requires information to be in typewritten form or printed, is deemed to be satisfied if it is in electronic form and accessible for future reference. Section 10A of the Act further states that a contract shall not be deemed unenforceable solely because the formation of the contract was expressed electronically or by means of an electronic record.

Key elements of Contracts and E-Contracts

Offer: One of the most vital aspects of any contract, whether online or physical, is the offer. Similar to physical contracts, the online contract requires an offer to be made that is lawful in nature and made by one party with an intention to create legal obligations. For instance, by browsing a website or selecting goods available on the seller’s website, the consumer will make an offer to purchase such products. Such an offer can be withdrawn or revoked before it is accepted. The offer is valid only if it is made by a competent person and clearly indicates the intention to enter into a contract.

Acceptance: In the event, the offer is accepted by the person who has received it, the offer becomes a promise. The Indian Contract Act, 1872 (“Act“) requires acceptance to be unconditional, absolute, and clearly communicated on unequivocal terms to the person making the offer. Silence does not amount to acceptance. Further, Section 13 of the IT Act encapsulates the time and place of an electronic message sent and received to determine if the contract formation has taken place, considering that the acceptance is sent to the offer, time and place determines the creation of the contract. In respect of the receiver, the message sent to designated e-mail is conclusive evidence of receipt of email when it enters the receiver’s system and for sender when it leaves the sender’s system. For instance, any acceptance made by e-mail stating “I agree” or clicking on “I agree” becomes a valid acceptance.

Consideration: Consideration is required to be legal and lawful and is the most important element of the contract. In other words, consideration necessitates that when a person performs a promise, something in return has to be provided. The absence of consideration makes the agreement void except for a few specific instances.

Other than the above-mentioned elements, the parties should also be capable of entering into a contract as per the Act and the parties should have attained the age of majority and should be of sound mind.

While the above-mentioned are the constructs of the Act that need to be reflected in the e-contracts, the IT Act further strengthens the principles laid down in the Act. As per Section 4 of the IT Act, the electronic record is legally deemed to be valid if it is rendered or made available in the electronic record or the matter is made available in record and accessible and usable for a reference subsequently. Further, the recognition of digital signature as per Section 5 of the IT Act provides for lawful recognition of a digital signature certificate if it is authenticated by such person by affixing the signatures.

In this regard, the IT Act and the Act complement each other as the provisions of the Act are enumerated in principles of e-contract and additional aspects of the digital contract are also combined to complete the same in the IT Act.

Signature: Even though entering into electronic contracts is valid and recognized under Indian law, parties to a contract should be attentive towards the manner of execution and validity of the execution of electronic contracts. The Supreme Court case of Trimex International FZE Limited, Dubai v. Vedanta Aluminium Ltd. is notable; wherein the absence of signed documents, a contract was held to exist where offer and acceptance were conveyed over emails between the parties. The court held that the absence of initialled formal documents would not affect the acceptance of the contract or the implementation of the same.

The IT Act acknowledges digital signature as validation of e-contracts. The term digital signature was introduced vide the 2008 Amendment to the IT Act.

The IT Act lays down certain requirements for an electronic signature to be valid such as the verifiability of the uniqueness of the signature and detectability of changes to the signature from when affixed. Even under the Companies Act, 2013, before a Director Identification Number can be issued, a director is required to obtain a digital signature certificate, which has to be used by the director to execute documents electronically.

Jurisdiction of E-Contracts

The nature of e-contracts brings significant ambiguity on the jurisdiction of courts on matters arising out of such contracts.

In the Indian Legal Scenario, the Civil Procedure Code provides guidance on the determination of jurisdiction based on two principles.

(i) the place of residence of the defendant; and

(ii) the place where the cause of action arises.

However, subject to the above-mentioned principles, parties are free to choose the governing law and dispute resolution mechanism. In practice, several e-contracts are concluded with a primary dispute resolution mechanism to be that of arbitration at a neutral place. Although the parties can decide the choice of courts to adjudicate their disputes, they can choose only such court which is not barred from exercising jurisdiction of the matters arising out of the specific contract. Section 13 and 14 of the IT Act also provide guidance in respect of the place of conclusion of the contract.

Further Section 13(3) of the IT Act provides that “Save as otherwise agreed to between the originator and the addressee an electronic record is deemed to be despatched at the place where the originator has his place of business and is deemed to be received at the place where the addressee has his place of business“.

In PR Transport Agency v. Union of India[1], the validity of an online acceptance of tender was questioned. As the transaction happened online, the Respondents argued that the cause of action did not arise in the territorial limits of the court (Uttar Pradesh). However, the court rejected the argument of the respondent as the place of business of the petitioner being in Uttar Pradesh itself, the acceptance of the tender in dispute by e-mail was deemed to have been received. The court relied on the aforementioned Section 13(3) of the IT Act.

Further, it is interesting to note that the courts have taken a liberal view when it comes to e-contracts. For instance, the Apex Court in the case Trimex International FZE Ltd. Dubai v. Vedanta Aluminium Ltd., India,[2] has upheld the aforesaid and recognized offer and acceptance through e-mails as a valid contract in absence of a formal contract.

Further, the Madras High Court in Tamil Nadu Organic Private Ltd v. State Bank of India,[3] observed that “contractual liabilities could arise by way of electronic means and that such contracts could be enforced through law“. In the instant case, the Hon’ble High Court was dealing with the validity of the e-auction sale process under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Courts have time and again interpreted legal provisions of the Act and the IT Act in a harmonious manner to give effect to the contractual arrangements between parties. The Indian courts have also exercised extraterritorial jurisdiction in respect of certain trademark and other intellectual property matters and criminal matters in order to uphold the legislative intent irrespective of the manner of undertaking an action.

In these unprecedented times of pandemic, e-contracts have become one of the most convenient methods to conclude business transactions. However, ambiguities around jurisdiction and the security of information in cyberspace are some of the challenges in the execution and large-scale adoption of e-contracts.

[1] AIR 2006 All 23: 2006 (1) AWC504.

[2] 2010 2 SCC 1.

[3] AIR 2014 Mad 103.

This Article is written by Vinayak Burman, Managing Partner, Vishal Mehta, Associate Partner and Sushmita Ravi, Associate at VERTICES PARTNERS.

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