Home › Help › Blog › Contracts › Legal validity of electronic contracts and signatures

Legal validity of electronic contracts and signatures

---

What is an E-contract?

Any contract which is executed over any electronic medium by means of electronic data interchange and other means of electronic communication can be called an electronic contract (e-contract). The Information Technology Act, 2000 (the “IT Act”) explicitly recognized e-contracts as the legal equivalent of written contracts, thereby increasing trust of the parties in such contracts.

Under Indian contract law, there is no legal embargo to execute a contract over an electronic medium as long as it satisfies all the legal requirements under the Contract Act.

Requisites of a contract

An agreement can be anything (not contrary to law) agreed upon by the competent parties with free consent. An agreement that is enforceable by law is called a contract. However, in common parlance, the terms agreement and contract are used synonymously.

Under Indian Contract law, a contract can be made either orally or in writing. However, a contract is required to be made in written form only, in the following cases -

• If any law prescribes the contract to be in writing, for e.g. memorandum and articles of association of a company, assignment of copyright under Section 19 of the Copyright Act, 1957, etc.
• If the document is mandatorily registrable under the Indian Registration Act, 1908 for e.g. sale deed, gift deed, etc.
• If the document is required to be stamped under the Indian Stamp Act, 1899 for e.g. power of attorney, bill of exchange, bill of lading, indemnity bond, etc.

Some written contracts are also required to be attested by witness(es), for instance, an unprivileged will has to be signed in presence of two witnesses and a power of attorney executed in a foreign country has to be attested by the Indian embassy.

Provisions of the Information Technology Act, 2000

The IT Act was enacted to provide legal recognition for transactions carried out by the means of electronic communication. The IT Act covers all electronic documents and transactions except the following documents and transactions, which have been explicitly excluded out of its purview -

1. A negotiable instrument (other than a cheque ) as defined in Section 13 of the Negotiable Instruments Act, 1881.
2. A power of attorney as defined in Section 1A of the Powers-of-Attorney Act, 1882.
3. A trust as defined in Section 3 of the Indian Trusts Act, 1882.
4. A testamentary disposition including a will as defined in Section 2(h) of the Indian Succession Act, 1925.
5. Any contract for the sale of, conveyance of or any interest in an immovable property.

Except for the above-listed documents and transactions, all other electronic document transactions are duly recognized by law.

Section 4 of the IT Act provides legal recognition to electronic records by making them equivalent to written or printed records. Section 5 provides legal recognition to electronic signatures by granting them legal sanctity equivalent to that of a written signature or mark.

Section 10A provides legal recognition to all the acts leading to the finalization of a contract. The provision clarifies that the communication and acceptance of proposals, the revocation of proposals, and acceptances can be expressed in electronic form.

E-Signature

Consent of parties on a written contract is often recorded through the signatures of the respective parties. The signatures could be disputed by the defaulting parties in some cases and therefore, as a safeguard, parties get the written contract attested by independent witnesses and/or get it notarized by a notary.

An e-contract would also require a foolproof mechanism for recording the consent of the parties in order to avoid future disputes as to the existence of the contract itself. The consent can be gauged from the electronic communications in most of cases but the allegations as to misuse or tampering of the electronic device can be made in such cases. Therefore, the IT Act provides a reliable mechanism to authenticate an electronic record by way of affixation of electronic signature on such record. Moreover, as discussed above, some documents or transactions have to be necessarily recorded in writing due to the mandate of the law. These documents need to be signed by the parties and the law provides that such documents in the electronic form can be signed by an electronic signature.

An electronic signature is a foolproof mechanism to authenticate any electronic record because it is based on the use of an e-authentication, asymmetric cryptosystem, and hash function which envelopes and transforms the initial electronic record into another electronic record. This exercise helps in the detection of any alteration in the signature or the information of the document and also helps in the verification of the signature by the use of a public key of the signer. The use of electronic signature requires e-authentication by way of a digital signature certificate or by way of Aadhar-eKYC.

There are other ways of recording consent of the parties like recording actual signature through mouse or stylus or by way of upload of scanned signature. These alternative modes of recording consent are less reliable but more convenient and therefore should not be preferred by the parties in strategically important transactions. However, the following important aspects should be kept in mind if the alternative modes of recording consent are used -

• Consent recorded through email should be in unambiguous and clear terms.
• It is better to communicate with authorized officials on their official email IDs only.
• As an additional safeguard, a mechanism could be provided to verify the signature or to record the consent by way of authentication through OTP on mobile and/or official email.

Contract over emails

All contracts which are not mandatorily registrable or do not require to be stamped can be concluded over email, however, the consent of the parties should be evident from the email communications in clear and unambiguous terms. Other safeguards as enunciated above under the heading “E-signature” should also be considered.

In Trimex International FZE Limited, Dubai v Vedanta Aluminium Ltd., 2010 (1) SCALE 574, the Supreme Court upheld the validity of a contract whose terms were agreed upon by the parties over email but the contract was not formally executed. The court observed that “Once the contract is concluded orally or in writing, the mere fact that a formal contract has to be prepared and initiated by the parties would not affect either the acceptance of the contract so entered into or implementation thereof, even if the formal contract has never been initiated.”

In Sudarshan Cargo Pvt. Ltd. v. Techvac Engineering Pvt. Ltd., 2013 SCC OnLine Kar 5063, the Karnataka High Court interpreted various definitions and section 4 of the IT Act, 2000 and held that the acknowledgment of debt over email would constitute valid acknowledgment in terms of Section 18 of the Limitation Act.

Standard Form Contracts

In digital transactions, the users are made to agree on various terms and conditions in standard forms to undertake a transaction online. Moreover, the personal data/information of users is collected and analyzed by the online portals solely on the basis of their consent obtained through the Privacy Policy and Terms of Use. These standard form contracts are valid but are subject to such conditions as are applicable to standard form contracts in offline transactions.

Admissibility of electronic evidence

Electronic documents and records are admissible in courts of law, provided they fulfill the legal requirements under Section 65B of the Evidence Act. [Refer Arjun Panditrao Khotkar vs. Kailash Kishanrao Gorantyal, (2020) 7 SCC 1]

Concluding Remarks: Legal validity of e-contracts and e-signatures

As discussed above, all e-contracts are valid in law, with the exception of a few specific documents and transactions. However, e-contracts concluded over emails or other electronic mediums could be disputed in courts of law and therefore, it is imperative to get them authenticated by way of an electronic signature as a matter of abundant caution. E-contracts concluded over emails are also valid in the eyes of law, provided the identity and consent of the other party are duly established.