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Legal issues pertaining to e-commerce ventures

E-commerce includes any transaction of business made through an electronic medium, including transactions made through mobile devices. Some of the popular e-commerce models are given below:
  • business to business (B2B) such as the one used by Indiamart.
  • business to consumer (B2C) or business to business to customer (B2B2C) – this is a very popular model. Most e-commerce companies use a B2B2C model, where they facilitate transactions of customers with specific sellers. This structure is also preferable to a direct B2B model to comply with the FDI regulations (relevant for e-commerce businesses with foreign investment). Most e-commerce companies such as Flipkart, Amazon use the B2C model.
  • consumer to consumer (C2C) models such as eBay, which allows buyers and sellers to enter into transactions through its platform
  • consumer to business (C2B) transactions – such as Elance or Freelancer. These models however are typically used for services.
Indian e-commerce companies have come up with innovative strategies to overcome the challenges which are specific to India.

One of the earliest e-commerce sites in India was Bazee, which was acquired by EBay. Since then, e-commerce has flourished in India, with recent sites like Flipkart has developed unique strategies like Cash on Delivery (COD) and Payment on Delivery (POD) system and development of their own logistics chain to increase their customer base. Rapid urbanization and increase in number of internet users and permeability of cellphones in different parts of the country has contributed to the rapid development of e-commerce.

With the maturity of the market and the complexities of the regulatory mechanisms, an e-commerce company will have to implement a legal strategy to deal with regulatory issues and possible litigation from customers, suppliers and other partners.

Online contracts and terms of service

Online contracts in India are governed under the Indian Contract Act and validated under Section 10A of the Information Technology Act. The relationship between the customers and the e-commerce entities are governed by the Terms of Service (ToS) (for websites) and End-User License Agreement (EULA) (used for downloadable or packaged software). Typical contracts for e-commerce sites are in the form of “click wrap contracts” and “browse wrap contracts”, are standardised and leave no scope for negotiation as they are on a “take-it-or-leave-it basis”. There is no conceptual problem with a standardized contract, but some of the terms of such contracts may not be enforceable, especially if they are unreasonable. In India, we do not have case laws pertaining to enforceability of online contracts but in other countries typical problem areas pertaining to the terms of service have surrounded the following:

i) Arbitration clause which exclusively determines the arbitration forum and the courts which have jurisdiction in case of any dispute. This can place undue cost on the other party. Courts may reject this choice and allow the customers to sue in another location also.

ii) A choice of law clause which decides the law of the country that will apply. For example, a clause which states laws of Singapore will be applicable. What if the buyer is in India? Can the contract completely exclude Indian law? Courts may reject a clause like this.

iii) Limitation of liability clause which absolves or limits liability to an artificially low extent. On this point, Indian courts have case law with respect to provision of goods and services on a brick-and-mortar based model. As long back as 1966, the Madras High Court had struck down a clause in a laundry services contract which restricted the liability of the service provider to 50 % of the cost of the goods.

Best practices for terms of service

While there is no way to have certainty on whether Terms of Service (TOS) will be treated as enforceable before a court, e-commerce sites may follow the follow certain “best practises”:
  1. When a customer is registering for the service, the entire Terms of Service should be presented in a clear readable format and ensure that the customer has read them (example through a timer that detects if the customer clicks on “I Agree” too soon or by disabling the “I Agree” feature until the customer scrolls down till the bottom of the provisions).
  2. The e-commerce site should ensure that important terms and conditions are presented in a concise manner. In some jurisdictions, it is safer if the more one-sided terms (such as arbitration or limitation of liability clause) are presented near the “I Accept” button.
  3. An opportunity must be given to the customer to save or print the terms of service
  4. The Terms of Service must be identifiable at a conspicuous place on the website, which will be easy to locate in case a customer needs to refer to them again.
  5. Changes to terms of service must be bought to the notice of the customers in a prominent manner and customers must be given an opportunity to accept them. For example, Facebook, Google and LinkedIn do this very clearly by prompting users to a drop down box or a pop-up which requires them to take a click-based action, such as ‘Dismiss’ or ‘I Agree’. Ideally, there must also be a “Decline” button which should of the same size as the “I Agree” button, although few sites implement this.
  6. The e-commerce site should present or direct users to the terms and conditions every time a purchase is made at the site. Indian e-commerce and travel sites do this.
Another problem that the e-commerce sites might face relates to usage of the website by minors. Under the Indian law, a contract is not enforceable against a minor. It is essential that the website must mention in its terms of service that the service is available only to persons above 18 years of age. Typically websites such as YouTube require confirmation that the users are ‘above 18’ before granting access to certain types of content. However, it might be practically difficult to restrict minors from creating accounts using fake information.

For other issues involved in online contracts like requirement of signature, stamping of online contracts in India, please read the chapter on Electronic Contracts.

Security and privacy

An online transaction involves sharing of personal information by the consumer, which includes crucial identifiable information like name, address, phone number, email-ids, credit card number and other related details – such details need to be protected by the site. E-commerce sites often collect other information like search and usage patterns and purchase history which helps them to post targeted ads and recommendations. Some data like credit card numbers and banking details are sensitive personal information and requires a higher degree of protection.

It is important for websites to create mechanisms to maintain data security in respect of various categories of personal user data that must be protected under the Information Technology (Sensitive Personal Data and Information) Rules, including payment-related information, whether payment is made through net banking, debit cards, credit cards, wallet payment and even through mobile banking. Interestingly, tracking user behaviour and providing recommendations is not considered ‘personal information’ under the rules – however, most businesses include the right to collect such information on an anonymous basis through their user policies and terms of service.

Security practices could include data protection measures like fire-walls, secured servers with proper authentication and authorisation processes, encryption of data as per industry standards and constant real-time auditing and integrity checks.

In case of breach of data protection obligations, the concerned site might have to pay compensation – the Information Technology Act (IT Act) does not provide a ceiling on the amount of damages that are payable. Therefore, users whose data is breached can claim very high amounts of compensation (which is extremely risky for the business) so long as they can prove the damage.

The IT Act also provides for criminal punishment of upto 3 years’ imprisonment or fine of upto INR 5 lakhs if data security obligations are breached.

Please read the specific chapters on “Data protection and privacy on the internet” and “Understanding online payment transactions” to understand the legal ramifications of breach of data security and privacy and the law related to online payment transaction.

Intellectual Property

One of the important aspects that an e-commerce company should keep in mind while they are starting their business is protection of their intellectual properties and they should be careful that they do not violate other’s IP. Some of the important forms of intellectual property that an e-commerce website should protect:

Trademarks: One of the primary IP protections that an e-commerce website can avail of is registering its trade name, slogan and logo as a trademark. In most cases the logo or the name of the entity is determined by the founders or the public relation or marketing agency taking into consideration the customer considerations and perceptions. However, it is advisable to take advice from a lawyer, who can tell you about existing registered trademarks or potential sustainability of the mark as a good trademark.

Websites: In the current world, having a website for any organisation is a must. Domain names are considered to be trademark, and you can file a trademark infringement suit against anyone who uses your domain name for fraudulent purpose. It is suggested that you must book your domain name even before starting formally.

The design, images and illustration used in a website are protected under copyright laws. There is no specific need to apply for copyright of the website – however, registration simplifies the process for establishing copyright as it acts as a prima facie evidence of copyright, unless a third party can establish that it had created the website before you.

If you are getting your website designed by a freelancer or any other agency, it is advised that the development agreement must contain a copyright assignment clause granting you the copyright of the website created.

Software/Platforms: Another important IP asset of an e-commerce venture lies in the proprietary platform that it develops. Though Indian law does not allow patenting of software, software can be protected under copyright law. However, while developing the platform one needs to be careful about the following points:
  • That the developer has assigned you copyright to the software in an appropriate manner.
  • The development agreement has a representation and warranties clause which clearly states that the developer has not copied any intellectual property of third parties or has the right to third party IP and will be able to sub-license such right to you.
  • If the developer has used open source codes, whether the developed software can be adequately protected under copyright law (generally open source licenses require the persons using the code to release the new code under the same license)
One should also be careful that they are not infringing IPs of third parties; the sites should take appropriate permissions for using logos of third parties, links to third-party websites.

E-commerce sites must be cautious that the vendors are not using their platform to sell pirated or fake goods, which infringes on the intellectual property rights of a third party. Lack of effective monitoring might not only damage the reputation of the website, but also lead to serious legal complications if not handled in a proper manner (see the chapter on intermediary liability). Representations and warranties must be taken from the vendors that they are not selling any goods which violate the intellectual property of a third party. Apart from contractually limiting the liability (intermediaries are generally not liable for third party content), the e-commerce sites must have an explicit take-down procedure for IP violation.

(Read the chapter on “Intermediary liability” in the NUJS Diploma Course in Entrepreneurship Administration and Business Laws to have a clear understanding on the liabilities of intermediaries and take down notices)

Consumer protection law

Consumer protection in India is governed under the Consumer Protection Act, 1986. A consumer can file a complaint with the Consumer Forum on the following grounds:
  • there is some defect in the goods
  • there is some deficiencies in providing the services
  • The trader is practising any unfair trading practices or restrictive trading practise
  • Have charged more than the MRP displayed on the goods
  • Selling hazardous goods without appropriate warning
An e-commerce site may be liable for the defects in the products sold on the platform – depending on how it represents itself to the customers. Even though they may merely provide a platform, e-commerce stores tend to place their brand name on the product packages. Therefore, they will be responsible under consumer protection law to repair or replace products –they should ideally have necessary contractual arrangements with suppliers which permit that. Further, e-commerce sites have started providing additional services – such as the 1-day or 2-day delivery service by Flipkart and Amazon. There are risks of legal liability in the event of a failure to deliver as committed, in case the consumer sues in a consumer forum.

Any consumer who is aggrieved by the goods or the services provided by an e-commerce site, can file a complaint with the relevant consumer forum. Under consumer protection law, a consumer forum can ask the e-commerce site to remove defects, replace the product, refund the money or even pay damages. 

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