Executing Contracts Online

The challenges ensuing from the global pandemic have revolutionized the workings of the business world. Overnight, the world had to adjust to new ways to fulfil its official agenda, transforming homes into board rooms, conference rooms, classrooms, clinics, etc. Working from home has become a reality with significant business continuity and connectivity being accomplished via video conferencing and other technological tools. Similarly, contracts and agreements are also being executed and effectuated online, using a cloud-based platform or e-mail exchanges or by simply affixing images of an existing signature. Ultimately, the sanctity of such electronic contracts (e-contracts) may be tested only in judicial proceedings. 

Traditionally, contracts are physically signed, which makes it easy to ascertain and validate the terms of a business offer and its acceptance. Electronic contracts, on the other hand, are executed in virtual space and are also recognized as legally valid in India. In India, for a contract to be valid and legally binding it must satisfy the essential pre-requisites prescribed under the Indian Contract Act (ICA), 1872. Similarly, all e-contracts shall also have the essential legal principles prescribed under the ICA.E-contracts have been recognized statutorily in India under the Information Technology Act, 2000 (IT Act), which is largely based on the Model Law on Electronic Commerce, 1997 adopted by the United Nations Commission on International Trade Law (UNCITRAL).

The IT Act not only legally recognizes electronic records, but it also provides legal validity to contracts issued by electronic means. The IT Act states that a contract executed electronically (including online) shall not be deemed to be unenforceable solely on the grounds that an electronic form or medium was used for its creation. The law in India recognizes all e-contracts that fulfil the essential legal principles of a contract under ICA as being valid and legally binding. One simple method to ensure this compliance, the proposal and the acceptance of offer under the e-contract can be explicitly stated by an e-mail, establishing an unconditional acceptance of the terms and conditions therein, and thus forming a binding e-contract between the parties. Also, it has to be ensured that such an e-mail is sent and received by parties using e-mail IDs of their authorized signatories. While legal recognition has been provided to e-contracts and e-records in general, specific documents and transactions relating to a negotiable instrument (other than a cheque), a power of attorney, a trust, a will (including any other testamentary disposition by whatever name called), and any contract for the sale or conveyance of immovable property or any document creating an interest in an immovable property have been excluded from the purview of the IT Act and cannot be executed and effectuated electronically (including online).

Agreements are often executed online by affixing a facsimile of an existing digital signature, an image of a wet signature, or by simply inserting one’s name in the signature block of an online contract. These practices are commonly adopted as they prove convenient and are believed to be credible in validating the creation of an agreement online. However, such documents could be challenged in the event of a dispute between contracting parties; therefore, as an extra safeguard, the parties shall implement the method above to provide their unconditional acceptance of the terms and conditions of the contract. 

The question then arises is, what are the valid methods of electronic signatures in India. The IT Act recognizes two types of electronic signatures, namely: (i) digital signature, and (ii) electronic signature. A digital signature involves the use of the hash function and asymmetric cryptosystem to transform the initial electronic record into a new identification-based electronic record. Access to this ID system requires the user to be a subscriber of the digital signature certificate (DSC); he/she is then allotted a private key (unique to the subscriber) that creates an encrypted digital signature, which if tampered with invalidates the electronic record. Any person who has the corresponding public key of the respective subscriber can verify an electronic record and authenticate the signatory of the electronic record. The DSC’s are issued and authenticated by the certifying authority as appointed under the IT Act. Such use of digital signatures is increasingly popular in authenticating electronic records with government agencies and departments such as the Ministry of Corporate Affairs,  the Office of controller general of patents, designs, and trademark, Reserve Bank of India,  and for GST filings and verifying income tax returns. 

Electronic signatures, on the other hand, are defined in the IT Act as authenticating an electronic record by means of specific electronic techniques: (i) Aadhar-based e-KYC services; and (ii) other e-KYC services.

The Aadhar-based method of electronically signing/authenticating an electronic record uses an individual’s Aadhar number to verify his/her identity through the Aadhar online authentication infrastructure. However, subsequent to the Supreme Court’s judgement in the case of Justice K.S. Puttaswamy (Retd.) and Another versus Union of India and Others (commonly known as Aadhar Judgement), this facility cannot be used by private entities, unless such authentication services are permitted under law or for purposes as may be prescribed by the Central Government in the interests of the nation.

After the Aadhar Judgment, the term ‘other e-KYC services’ was added to Schedule II of the IT Act in the year 2019. Perhaps the intention of the legislature is to keep the scope wide, allowing interpretation of the term ‘other e-KYC services’  such that it validates e-KYC methods that are in compliance with the IT Act and are developed for authenticating the identity of an individual authenticating an electronic record using such ‘other e-KYC services’ without using the Aadhar infrastructure.  

Electronic contracts and electronic records executed by using digital signatures or e-signatures are legally valid in India, provided the signatory possesses a valid DSC or an electronic signature certificate, as the case may be, issued by the certifying authority under the IT Act, and the e-contract or the electronic record being executed or authenticated enables affixing of a digital signature or an e-signature. However, though the highly technical and procedural method and format of digital signatures and e-signatures have the advantage of being recognized as the most reliable methods of authenticating an electronic record, yet they are also an uncommon and not so user-friendly method of executing contracts online. 

In today’s fast-paced digital/e-commerce world, the method of exchanging copies of the contract by parties trough an e-mail according to their unconditional acceptance of the terms and conditions of the contract (using the authorized signatories of the concerned parties)may be the easiest mode for executing a contract online by the parties.  The use of the virtual platform to facilitate business transactions, complemented with an adequate legal framework to establish justifiable business practices, undoubtedly eases the challenges in the e-commerce world. However, every precaution to fulfil all the legal principles of the ICA has to be ensured to guarantee the authenticity of the e-contract.