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Understanding Electronic Contracts

This discussion is intended for entrepreneurs who aim to start (or already have) e-commerce businesses or who provide services on the internet. This part discusses whether electronic contracts are binding, and how one can minimize legal risk at the time of entering into them.

Practical difficulties in their enforcement will also be pointed out. As per the Information Technology Act, an electronic version of any document would be treated in the same manner as a written or printed version.(Section 4, Information Technology Act). Terms of service or terms of use or various websites, End User License Agreements (EULAs) and digitally signed contracts are all forms of electronic contracts. EULAs and terms of service are heavily standardised - users are not usually able to negotiate their terms with service providers on an individual basis. Standard form contracts are commonly used in electronic form. However, digitally signed contracts are not commonly used in high value business deals such as loan agreements, licensing agreements, distribution agreements, share purchase agreements, which are still usually executed in physical form (irrespective of whether these are standardised documents). Such contracts may be drafted, discussed and negotiated by parties (or their lawyers) over emails, but are seldom signed in electronic form.

Nowadays, several contracts are entered electronically, in the following manner:

  • Over email - Sometimes, parties may arrive at a contractual understanding which is not even consolidated in a single document, but described in a series of emails. However, such series of communication can form a contract only if a clear offer and acceptance can be made out from the correspondence. Alternately, a party may also sign the contract and circulate scanned copies to the other parties, who may in turn put their signatures to the document. While both forms would result in creation of valid contracts, they will require to be stamped for their terms to be enforceable in court.
  • Signed contracts, which are in counterparts –When parties to a contract are based in different locations and cannot physically meet, each party (or its authorized representative) can sign the agreed version of the contract and send a scanned copy to all the other parties for reference. This is followed by sending the physical copy to the other parties. It is not necessary for all the parties to physically meet to sign such copies. In this case, there are multiple physical copies of the contract (each copy signed by a party), which are known as counterparts. All the physical versions (which should be identical to one another) together form the contract, and each individual version is called a counterpart.
  • Click-wrap contracts – Software that is downloaded online typically contains an ‘End User License Agreement’, which a user must agree to by clicking the ‘I Agree’ button.
  • Browse-wrap contracts – User policies and terms of service of websites, e.g. Flipkart or Ebay are classified as browse-wrap contracts. Usually, browse-wrap contracts are in the form of a ‘terms of use’, a ‘user agreement’ or ‘terms of service’, which exist in the form of links at a corner or at the bottom of the website. These agreements contain standard terms (even if they may be unenforceable), for example, clauses stating that the service provider may unilaterally amend the terms, without any notice to the user, and that it is the responsibility of the user to periodically check the terms for any amendments or updates. The legal validity of these terms has not been confirmed by courts in most countries, and from a contract law perspective they may stand on a weak footing. This is because the terms of use are not clear and certain for a user in most cases – if the user is not specifically directed to the terms of use and if they can be unilaterally amended without intimation to the user. In fact, US Courts have held such terms not to be binding for these reasons, in certain cases.

    See for example, a note on the Zappos case at http://blog.ericgoldman.org/archives/2012/10/how_zappos_user.htm

    However, certain checks can be followed to ensure that the terms are binding:

i) The user agreement/ terms of service must be specifically intimated to the user. Merely inserting a link to the terms on the website, without specifically drawing the attention of the user to the terms may not qualify as intimation to the user. This way, when the user continues to browse the website, he is aware of the terms, and his action of continuing to use the website after intimation of the terms constitutes acceptance of the contract.

ii) The agreement should not be unilaterally changed to prejudice any past actions taken by users, in reliance of the prior version of the agreement. This action ensures that the terms that users assented to for particular actions are not changed after their acceptance. 

Any changes that are made should be specifically intimated to users. This provides a user to freshly consent to any modification of the terms. Users who do not agree have the option of leaving the website at that moment.

  • Shrink-wrap contracts usually present on the plastic or in manuals accompanying an off-the-shelf software. These are in physical form and hence not within the purview of electronic contracts.
    Click-wrap, shrink-wrap and browse-wrap contracts have certain unique features:
  • They are usually standard-form contracts. A purchaser must accept the entire contract as it is or not use the website, but you cannot negotiate them.
  • Consent is given not in writing but by a particular action, e.g. by clicking in click-wrap contracts, by continuing to browse the website in browse-wrap contracts, or opening a software package.

Electronic contract and its validity in India

As per the IT Act, contracts (except on the matters listed above) which are in electronic form will be considered valid, unless there are additional requirements imposed by another law (such as having a minimum number of witnesses, or compliance with the provisions of the Indian Contract Act) to which the contract applies, and which have not been met (Section 10A, Information Technology Act). Under Indian law, for a contract to be binding and enforceable in a court, it should be in writing, and should be adequately stamped (as per the law of the appropriate state). For most ordinary contracts, no additional requirements are required. However, there are certain instruments to which the IT Act does not apply, and hence they cannot be entered into electronically. See Section 1(4) read with the First Schedule, Information Technology Act (as amended in 2008).These are listed below:
  • Negotiable Instruments
  • Powers-of-attorney
  • A trust deed
  • A will
  • Contracts for the sale or any other kind of transfer of interest in immovable property
These instruments do not have the recognition that the IT Act grants to other instruments (discussed below). Therefore, it is advisable to execute these in physical form.
 Note: In practical situations, drafts of the above instruments are often made in electronic form, which are then printed out and signed by appropriate parties.

There is no legal requirement to affix a digital/ electronic signature to such documents.

1.Documents which require stamping or registration may not be enforceable

However, stamping of documents such as the terms of service of a website is a practical issue in India. Although it is possible to buy an e-stamp or get a document ‘franked’ by a bank (in case of franking, a bank affixes a stamp of a particular value on the paper which contains the document), e-stamping and franking can only be undertaken for instruments executed in physical form (on paper) and not electronically. There is no procedure for stamping for a document which is only in digital form under Indian law.

Is a signature necessary on an e-contract?

It is not mandatory under Indian law for an electronic contract to be signed. At a practical level, most e-contracts such as End-User License Agreements and Terms of Service are accepted by the user performing an action such as clicking on the ‘I Agree’ button and proceeding further with the usage of the website. This is known as acceptance by conduct and is a valid form of acceptance of a contract under Indian law. However, digital or electronic signatures may be used by parties as a means to secure the content of the communication and reduce chances of its alteration in the process of transmission over the internet, as explained in greater detail below.

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