Nature and formation of contract/E-contract | Law Optional Notes for UPSC PDF Download

Introduction

The Internet has transformed the way people communicate and conduct business, giving rise to a new form of commerce known as e-commerce. E-commerce has seen significant growth due to the widespread availability of the Internet and the increasing number of online users. The Internet's speed and global reach have played a pivotal role in this expansion. For example, a person in India can effortlessly purchase products from a seller in the United States with a few clicks, all from the convenience of their home or office.
E-commerce has introduced a new dimension to contracting, often referred to as electronic contracts or e-contracts. Electronic contracts are familiar to many of us, with one of the most common types being the "End User License Agreement" (EULA). These agreements are typically encountered during software installations or when users need to agree to the terms and conditions of a website by clicking an "I agree" button.

Contracts and Validity

In India, the Indian Contract Act, 1872 governs all agreements and contracts, including online contracts. Simply put, a contract is a legally binding agreement.
The fundamental essentials of a valid contract are addressed in Section 10 of the Indian Contract Act:

• A party offer and the other party’s acceptance.
• Mutual agreement among the Parties.
• Intense legal relationship building.
• Contracting parties should be legally able, i.e. be over the age of 18 years, have the soundness of mind, solvent etc.
• The purpose of the contact is legal and is not contrary to government policy, e.g. a prohibited drug’s sales agreement is not a valid contract.
• The agreement should be supported by means of cash or in any kind i.e. consideration
• The agreement should be capable of being performed.
• The contract terms are sure.
• studying law

A contract cannot be said to be valid until the above conditions are fulfilled. In India both the Indian Contract Act 1872 and the Information Technology Act 2000 should be complied with in accordance with a valid e-contract. An online contract is legally binding on the user when he/she clicks on the ” I agree ” button if the above essential terms are met.

Types of Online Contract

Online contracts can be categorized into three main types:

1. Shrink-wrap Agreements

These agreements typically involve licensing terms for software purchases. In a shrink-wrap agreement, the user accepts the terms and conditions as soon as they initiate the installation or access to a software product, often by breaking the seal on the packaging. In some cases, additional terms may be presented to the user after the product is installed, and they have the option to return the product if they disagree. Shrink-wrap agreements can protect the product manufacturer from claims of copyright or intellectual property rights infringement once the product's packaging is opened. It's important to note that the validity of shrink-wrap agreements in India lacks a well-established legal precedent.

2. Click or Web-wrap Agreements

Click-wrap contracts are web-based agreements that require user consent through actions like clicking an "I Accept" or "OK" button. Users must agree to the terms of use before they can use or purchase a product or service. If a user disagrees with the terms and conditions, they are typically unable to proceed with the transaction. Click-wrap agreements are commonly seen in various online settings, such as online shopping agreements.

3. Browse-wrap Agreements

A browse-wrap agreement is one that binds two or more parties through their use of a website. To continue using the website, an ordinary user must accept the terms and conditions of use and other website policies. These types of online agreements are prevalent in daily online activities. While they are increasingly common in various businesses, their legal validity and enforceability lack precise judicial precedent in India. In contrast, courts in other countries, like the USA, have addressed both Shrink-wrap and Click-Wrap Agreements, often deeming them enforceable as long as they adhere to fundamental contract principles.

Additional types of online agreements encompass employment contracts, contractor agreements, consultant agreements, sales and resale agreements, distributor agreements, non-disclosure agreements, software developer and licensing agreements, and source-code escrow contracts.

Formation of Online Contracts or Electronic Contracts

Electronic contracts, similar to standard contracts, are formed through the fundamental elements of an offer and acceptance.
These contracts can take shape through various means:

• Email: Parties can create a legally binding contract through email exchanges. Offers and acceptances can be conveyed entirely via email or in conjunction with physical documents, faxes, or oral discussions.
• Website Forms: E-commerce websites often present products or services for purchase through on-screen order forms. When a customer fills out and submits such a form, a contract is established once the order is accepted. Physical delivery of products or services can take place offline. Similarly, when a user agrees to the terms of use of a website by clicking "I Agree," a contract is formed.
• EULA (End User License Agreement): End User License Agreements, such as those encountered during software installations, are also valid contracts. Users typically agree to these contracts by clicking "I Accept" or "I Accept the Terms."

In essence, electronic contracts differ from traditional contracts in that they are paperless and may not necessitate face-to-face meetings between the parties. In this context, we aim to explore and assess various aspects of a typical online contract.

Offer and Acceptance

• The fundamental concept of offer and acceptance plays a crucial role in contract formation, but e-commerce introduces challenges to this traditional framework. Identifying the offer and acceptance is essential because it determines the precise timing and location of the agreement, which, in turn, dictates the jurisdiction that governs the contract.
• In many e-commerce transactions, the parties involved may never physically meet. This immediate disconnect challenges the conventional contract model, making it difficult to ensure that both parties are acting within the bounds of the law and that the transaction is legally valid. In bilateral contracts, an offer is a clear statement of the terms and conditions under which one party (the offeror) commits to being bound, while the other party (the offeree) accepts the offer. On the internet, it can be challenging to discern whether a website is extending an offer or merely an invitation to treat.
• The wording used in online offers can often be ambiguous, and legal systems may interpret these matters differently. Acceptance, on the other hand, is an unambiguous and final agreement to the terms and conditions of the offer. It typically needs to be communicated to the offeror, and parties may vary these methods by mutual agreement. In the realm of e-commerce, email is a common means of acceptance. The moment an offeree's indication of agreement reaches the offeror is when acceptance becomes effective. However, email acceptance in e-commerce can be problematic.
• In the context of traditional mail, the 'Postal Acceptance Rule' dictates that when a party agrees to enter a contract by mail, the contract is considered concluded when the offeror sends the acceptance letter, regardless of whether the offeree receives it. It's important to note that this rule does not apply to e-commerce transactions.

Jurisdiction and Place of Execution of a Contract

• Jurisdiction pertains to the territory or domain within which a court or legal institution holds authority. In a broader context, it refers to the country or legal jurisdiction that applies when interpreting contractual terms or addressing disputes. The place where a contract is executed typically determines this jurisdiction.
• In traditional contracts, the contract is formalized when the involved parties physically meet and sign the document at a prearranged location and time. However, this is not the case for e-contracts, where the parties engage online and may be located in different geographical areas. As a result, there isn't a clear-cut determination of jurisdiction based on the "place of execution."
• Nevertheless, the parties can voluntarily agree to a specific jurisdiction. This might be the location where one of the contracting parties conducts their business or an entirely different jurisdiction that all parties involved have mutually consented to.

Signature Requirement

• In a general sense, a signature refers to the act of signing a document with one's name. The primary purpose of a signature is to verify the identity of the parties involved in a contract, provide consent to the terms of the contract, and prevent subsequent denial, meaning that when a person signs a document, they cannot later claim that they were not part of the contract.
• Under the Indian Contract Act, a valid contract can exist through an oral agreement between parties, and physical signatures are not mandatory for its validity. However, specific statutes may require signatures. For instance, a transfer certificate for real estate cannot be considered valid unless the seller's signature and/or thumb impression are attested to. In another example, the Indian Copyright Act of 1957 mandates the customer's signature. The Information Technology Act recognizes a physical signature for electronic signatures, but electronic signatures have not been officially acknowledged by the central government.

Requirement as per The Indian Stamp Act

The Indian Stamp Act and various state legislations require that documents involving the creation or transfer of rights must be stamped. A document that is not adequately stamped may not be accepted as evidence in a court of law or by a competent authority unless the required stamp duty is paid, which often includes a fine amounting to ten times the original stamp duty.

It's important to note that as of the present date, online contracts cannot be stamped in a conventional manner.

Standard Form Contracts

The majority of online contracts fall under the category of 'Click-Wrap' contracts, which are standard form contracts. In these contracts, all terms and conditions are presented on the software or installation webpage, and all parties are required to click a button indicating their agreement to these terms. Standard form contracts do not allow room for negotiation. In some cases, courts in various countries, except for India, have found certain specific terms in these contracts to be unfair and unenforceable.

In the context of India, Section 15(3) of the Indian Contract Act stipulates that when a party holds a dominant position and enters into a contract with another party, and the transaction appears to be unfair on the face of it or based on evidence presented, the burden of proof is on the dominant party to demonstrate that the contract was not entered into under duress or pressure.

Enforceability

• The enforceability of internet contracts is a subject of uncertainty, particularly when it comes to determining whether agreements made online, even though they are in written form and agreed upon, are legally binding. As the internet is still a relatively new medium, contracts formed over the internet are generally subject to the principles established for written agreements.
• In many cases, when a user engages with a commercial website, they are asked to read and accept the terms and conditions before making a purchase or using the site's services. These agreements, formed in this manner, are often referred to as clickwrap agreements, where the user typically indicates their agreement to the terms and conditions by clicking a button or hyperlink labeled "I agree."
• Clickwrap agreements are typically enforceable, while browsewrap agreements, which rely on traditional contractual principles, are challenging to enforce. Shrinkwrap agreements fall somewhere in between, and recent cases tend to support their enforceability.

Specific Exclusions

The Information Technology Act of 2000 explicitly excludes certain documents from being considered as electronic transactions.
These excluded documents are:

• Negotiable Instruments
• Power of Attorney
• Trust Deed
• Will
• Sale Deed or Conveyance Deed pertaining to immovable property, and any documents related to interests in immovable property.

Conclusion

India's IT laws have evolved significantly since the introduction of the IT Act in 2000. However, several aspects of online contracts, such as signature and stamping requirements, still lack clarity and may lead to confusion. Given the ongoing trends of demonetization and digitalization, it is essential to address and eliminate uncertainties surrounding the validity of e-contracts. It is hoped that the government will take appropriate steps to address these issues and provide clarity in this regard.