Online Contracts under Indian Contract Act, 1872

What are online contracts?

Meaning of Online Contracts: – Online contracts are an agreement made, signed and executed electronically, usually over internet in electronic form, no paper is used. An online contract is a contract that you write on your computer and email to a business associate and that the business associate accepts the email with an electronic signature. Online contracts are also known as e-contracts.

An online contract is simply a digital version of a regular contract. However, it isn’t enough for an electronic contract to just be a contract; it must also be a valid contract within the interpretation of the law.

In case of an online contract, the seller who intends to sell their products, present their products, prices and terms for buying such products to the prospective buyers. In turn, the buyers who are interested in buying the products either consider or click on the ‘I Agree’ or ‘Click to Agree’ option for indicating the acceptance of the terms presented by the seller or they can sign electronically.

An online contract can also be in the form of a ‘click to agree‘ agreement, which usually comes with downloaded software; the user clicks the “I agree” button on a page that contains the terms of the software before completing the transaction.

Also, an online purchase involves a form of the online contract. Even without signing anything, the buyer agrees to pay the seller a certain amount in exchange for a promise to provide the product to the seller. The online contract is brought to the scenario to help people in the way of formulating and implementing policies of commercial contracts within business directed over internet.

What is an electronic signature?

Meaning of an Electronic Signature: – An electronic signature is a digital file or symbol such as a scanned pen-and-ink signature or typed name that attaches a person to a contract or file, allowing that person to sign the contract or file which demonstrates his intention. Electronic signatures can be done in different ways like typing the name of the signer’s in the specific signature space, copying and pasting the scanned version of the signature or clicking an option meant for that purpose.

People use e-signatures in many different ways, including typing the name of the signer in the signatory field, pasting it into a scanned version of the signer’s signature, click the “I accept” button, or using the cryptographic “scratching” technique.

What are the types of Online Contracts?

Online contracts can be of three types mainly i.e., shrink-wrap agreements, click or web-wrap agreements and browse-wrap agreements: –

Shrink-Wrap Agreements: – Shrink-wrap agreements are usually the licensed agreement applicable in case of software products buying. Shrink-wrap contracts are typically licensing agreements for software. In case of shrink-wrap agreements, with opening of the packaging of the software product, the terms and conditions to access such software product are enforced upon the person who buys it. Shrink-wrap agreements are simply those which are accepted by user at the time of installation of software from a CD-ROM, for example, Nokia pc-suite. Sometimes additional terms can be observed only after loading the product on the computer and then if the buyer does not agree to those additional terms, then he has an option of returning the software product. As soon as the purchaser tears the packaging or the cover for accessing the software product, shrink-wrap agreement gives protection by indemnifying the manufacturer of the product for any copyright or intellectual property rights violation. Shrink wrap contracts have a decided advantage over other types of electronic contracts in that their acceptance can be reversed by returning the product.

Click-Wrap Agreements: – Click-wrap agreements are web based agreements which require the assent or consent of the user by way of clicking “I Agree’ or “I Accept” or “Ok” button on the dialog box. They’re called clickwrap contracts because the user typically has to click a button or check a box to indicate that they accept the contract. Users who disagree to the terms and conditions will not be able to use or buy the product upon cancellation or rejection. A person witnesses web-wrap agreements almost regularly. The terms and conditions for usage are exposed to the users prior to acceptance. For agreement of an online shopping site etc. You’ll have noticed that clickwrap contracts are “less negotiable” than shrink-wrap contracts, i.e., they must be accepted for the user to proceed to the next web page or gain access to an application, so forth. Essentially, clickwrap agreements create a scenario in which the user is forced to either take it or leave it.

Browse-Wrap Contracts: – An agreement made intended to be binding on two or more parties by the use of website can be called a browse wrap agreement. In case of browse wrap agreement a regular user of a particular website deemed to accept the terms of use and other policies of the website for continuous use. They refer to pieces of text on websites that go something like – “By continuing your use of these services, you agree to the terms and conditions” or “By signing up I agree to the terms of use.” Essentially, browse-wrap agreements are contracts that you agree to simply by continuing to use the service or continuing to browse the web page, which is where the term originates. Additionally, the terms of browse-wrap agreements can be viewed usually through a hyperlink.

What are the essential elements of Online Contract?

The essential elements of online contract are discussed below: –

Offer: – Just like paper made or conventional contract, one of the most essential elements of online contract is the requirement of an offer to be made. There must be a lawful proposal or offer made by one party known as the proposer and it is the starting point of a contract. By browsing and choosing the goods and services available on the website of the seller, the consumer makes an offer to purchase such in relation with the invitation to offer made by the seller. A proposal must be distinguished from the invitation to offer or treat and must be made with an intention to create legal relationship. An offer or proposal is revocable and can be withdrawn at any time before it is accepted because once it is accepted by the other party, it becomes a promise.

Acceptance: – When a proposal or offer is made is accepted by the person to whom the offer is made, it becomes a promise. The acceptance of the proposal must be unconditional and absolute and must be communicated to the proposer or the offeror. In case of an online contract, offer and acceptance can be made through e-mails or by filing requisite form provided in the website. They may also need to take an online agreement by clicking on ‘I Agree’ or ‘I Accept’ for availing the services offered.

Intention to create Legal Relationship: – If there is no intention of creating legal relationship on the part of the parties to contract, then there is no contract between them. It is an essential element of valid contract that parties to the contract must have intention to create legal relationships. The intention of the parties is to be considered by the Court in each case and must be ascertained from the terms of the agreement and surrounding consequences. Agreement of social or domestic nature do not create legal relationship, hence they are not contracts and are not enforceable by law. In the case of arrangements regulating social relations, it follows as a matter of course that parties do not intend legal consequences to follow. For example, an invitation for marriage to a friend or family through e- mails or fax or through any means of telecommunication is not a contract.

There must be a Lawful Object: – Parties to the agreement must contract for a legal object. A contract is only enforceable by law only when it is made for a lawful purpose. It must not defeat any provision of law and must not be fraudulent in nature. Thus a contract on a website designed for the purpose of selling illegal substances online is a void contract. If an agreement is made to cause injury to any person or his property, such agreement is not lawful and therefore to be considered as void. If any competent Court regards any agreement as opposed to public policy, it is a void contract.

There must be a Legal or Lawful Consideration: – Consideration is one of most important element of a contract. The basic rule is that when a party to a contract promises to perform his promise he must get something in return for the performance of his promise. Consideration is something of some value in the eyes of law. It may be of some benefit, right, interest or profit given to the party as inducement of promise. An act constituting consideration must be moved at the desire of the promisor and must be legal, real and not imaginary. Promises that are physically impossible to perform cannot have real consideration. For example, an online site that offers purchase of land in moon.

Capacity of Parties: – Parties to a contract must be capable of entering into a contract. He must attain the age of majority and must be of sound mind. He must not be disqualified from contracting by any law for the time being in force. In our country an agreement where either party is a minor has no significance. It is considered as void ab-initio. As per Section 12 of the Indian Contract Act, 1872, any person who is in a position to judge and safeguard his own interest is of sound mind and capable enough to enter into a contract. When a person is declared insolvent by any competent Court, he cannot enter into a contract relating to his property. In the old age foundation case of Mohori Bibee vs. Dharmodas Ghose, it was held by the Privy Council that an agreement by a minor is void.

There must be Free Consent: – Consent which is defined under Section 13 of the Indian Contract Act, 1872 is an essential requirement of a contract. It is basically the meeting of minds of the parties. When both agree upon the same thing in the same manner, they are said to consent. In case consent is caused by coercion, it is voidable at the option of the party whose consent was so caused. Coercion includes physical compulsion, threat, and violence. Consent has to be free and genuine and not induced by misrepresentation, undue influence i.e a case where one person is in a position to dominate the will of another. But in case of online contract there is a narrow scope of physical communication between the website and the customer availing their service, they just give consent by clicking the option that ensures free and genuine consent.

Possibility of Performance: – The terms and conditions of agreement must be certain and not vague and must also be such as are capable of performance. An agreement to do an act impossible in itself cannot be enforced as per section 29 of the Indian Contract Act, 1872. It is the general rule that the promisors of the contract to perform the promise but there other persons also who may perform under certain circumstances such as an agent if appointed by the promisor for this purpose, legal representative in case of death of a promisor. The time, place and manner of the performance of contract are fixed generally at the desire and conveniences of the parties. Various rules regarding the time and place of contract are laid down under section 46 to 50 and section 55. When the time is the essence of contract, a promisor is expected to perform his promise with the stipulated time period and if he fails to do so, the contract becomes voidable at the option of the promisee.

How e-contracts can be entered into?

E-contracts can be entered through communications such as e-mail, internet and fax. The only requirement for validating an e-contract or online contracts in compliance with the necessary pre-requisites provided under the Indian Contract Act, 1872. These are: –

Offer and Unconditional Acceptance: – It can be made online or by e-mail communication.
Legitimate Purpose and Consideration: – A contract is enforceable only by law when there is no clause made against the law and there should be some consideration as well. It should not defeat any provision of the law and should not be fraudulent in nature.
Capacity of the Parties and Free Consent: – Parties to a contract can enter into a contract if they meet the requirements of sections 11 and 12 of the Indian Contract Act, 1872 (contract capacity), and the parties’ consent should be free as per Section 13 of the Indian Contract Act, 1872.

Evidentiary value of electronic records

In a country like India, where the literacy rate is not so high, the concept of ‘Digital India’ is a far reach. People still feel insecure to do online based transactions mainly because the terms and conditions of such contracts are not transparent. Another major issue is the nature of the law governing the electronic contracts. Even if the IT Act, 2000 has legalized electronic contracts, there are no definite provisions mentioned in the Act.

Documents are mainly registered for conservation of evidence, assurance of title and to protect oneself from fraud. The evidentiary value of electronic contracts has been given recognition and can be understood in the light of various sections of Indian Evidence Act. Section 65-B of the Indian Evidence Act, 1872 deals with the admissibility of electronic records. As per Sec 65B of the Indian Evidence Act any information contained in an electronic record produced by the computer in printed, stored or copied form shall deemed to be a document and it can be admissible as an evidence in any proceeding without further proof of the original subject to following conditions are satisfied such as the computer from where it was produced was in regular use by a person having lawful control over the system at the time of producing it, during the ordinary course of activities the information was fed into the system on a regular basis, the output computer was in a proper operating condition and have not affected the accuracy of the data entered.

Section 85A, 85B, 88A, 90A and 85C of the Indian Evidence Act deal with the presumptions as to electronic records. Sec 85A has been inserted later to confirm the validity of electronic contracts. It says that any electronic record in the form of electronic agreement is concluded and gets recognition the moment a digital signature is affixed to such record. The presumption of electronic record is valid only in case of five years old record and electronic messages that fall within the range of Section 85B, Section 88A and Section 90A of Indian Evidence Act.

It is essential that the document or e-mail sought to be produced from a computer is used regularly by someone who has legal control over the system at the time of production.

Execution of an e-contract or online contracts

The simplicity of the execution of an e-contract or online contracts makes one wonder at times about its legitimacy, especially when compared to a traditional written contract. The simple truth lies in the fact that the Indian contract act, 1872 has not prescribed any particular way of communicating a proposal and what is its acceptance.

It can also be obtained orally, in writing or through conduct. This shows that even in its simplicity, an e-contract is as valid as a traditional written contract. The only condition/requirement is that an e-contract must contain all the requirements of a valid contract, as mentioned above.

Unless a conclusion can be drawn from the facts that the parties intend to be bound to execute only a formal agreement, the validity of an agreement will not be affected by its lack of formality. Therefore, once the parties are on the consensus-ad-idem (free consent of the parties), formal execution of the contract is secondary.

Therefore, once an offer is accepted through means of communication such as e-mail, Internet and fax, a valid contract is formed unless unless it is specifically mentioned in any Indian law that it is invalid; Such as the Registration Act, 1908, various stamp acts etc. Further, section 1(4) of the IT Act lists the instruments which the IT Act does not apply, as follows:

Negotiable Instruments;
Powers of Attorney;
Trust deeds;
Wills;
Contracts for Sale or Transfer of Immovable Property.

What are the remedies for the breach of online contract?

There is no specific rule in case of breach of online contract but the rules regarding remedies for breach of contract can be followed as provided in The Indian Contract Act. A valid contract gives rise to co-relative rights and obligations and they are enforceable in the court of law when infringed on breach of contract. The Contract Act mainly talks about two remedies for the breach of contract such as Damages and Quantum Merit. But few other remedies are also available as provided in the Specific Relief Act such as specific performance of contract and injunction restraining the other party from making a breach of contract.

Section 73 and Section 74 of the Indian Contract Act, 1872 deals with the rules regarding the remedies of damages on breach of contract. The person whose rights are infringed by the breach of contract may bring an action for damages or compensation in terms of monetary value for the loss suffered by the party. There are two main aspects to be considered when any action of damages i.e., remoteness of damage and measure of damage. Section 73-75 provides rules regarding the assessment of damages based on the famous case Hadley vs. Baxendale. According to the rules laid down in this case, there can be damages which naturally arose on the usual course of things from such breach of contract and can be called ordinary damages and secondly, damages for loss arose from special circumstances i.e., special damages. There are also other kinds of damages mentioned in the Act such as nominal damage, pre-contract expenditure, compensation for mental agony and liquidated damages. Nominal damages are those substantial damages awarded by the Court in recognition of right of the aggrieved party in cases where the party has not suffered any monetary loss on the breach of contract. Whereas, pre-contract expenditure may be recovered as damages if such is within the knowledge of the parties. Liquidated damages are those pre-determined damages decided by the parties at the time of formation of the contract i.e amount of compensation payable in the event of breach of such contract.

When a person has done some work under a contract and the other party repudiates the contract or at the occurrence of an event that makes further performance of the contract impossible, the party who has performed his work can claim remuneration for the work already done. And under such circumstances the party can file suit upon quantum merit and claim for the value of work he has done.

Should you be using electronic contracts?

Electronic contracts are primarily a response to the expensive and inefficient paper-based documentation methods employed by many businesses. If you’ve been using paper contracts and wet signatures, you know how slow and frustrating they can be.

Electronic contracts, on the other hand, are completely digital and have been shown to increase worker efficiency by more than 20%, and reduce turnaround time by almost 99%!
E-signatures, in particular, save businesses massive amounts of time and effort. Therefore, the answer should be obvious – Yes! You should be using electronic contracts.