E-contracts and E-signatures in a Post-Covid Era – Deficiencies in the Current Framework?

[Ayesha Bhattacharya is a graduate of the West Bengal National University of Juridical Sciences, Kolkata (Batch of 2019)]

As the covid-19 pandemic continues to rage across the world, the corporate and the commercial factions of business have witnessed major disruptions. Most commercial negotiations rely on execution of documents in physical format and while start-ups and tech enabled businesses are amenable to adapting a virtual format through adoption of electronic contracts (‘e-contracts’), businesses which were established prior to the digital age find this transition abrupt and problematic. Recently, a survey conducted by the Endurance International Group revealed that the pandemic severely impacted the economic health of several micro, small and medium enterprises (‘MSMEs’) due to their dearth of technical expertise which posed a grave challenge to serving and engaging customers.

However, owing to the barrage of government restrictions, frequent lockdowns and uncertainty regarding resumption of normal business practices, corporations, both old and new, on a global scale have been compelled to familiarize themselves with the concept of e-contracts, exchange and finalization of contractual terms via email and ultimately, accord their stamp of approval to such contracts through electronic signatures (‘e-signatures’). The purpose of this post is to examine the current regulatory framework governing the remote execution of contracts, analyse the implications and suggest reformative measures for an alternative framework, if required.

E-contracts Within the Legal Framework

A contract is signed by the parties who are entering into the agreement to prove that the essential principles of contract law have been satisfied. While the Indian Contract Act, 1872 (‘Contract Act’) specifies the ingredients of a valid contract, which include offer, acceptance, intention, free consent, lawful consideration and object, competency of parties to contract and the possibility of performance, it neither specifies that an agreement has to be signed nor that it must be in writing. It is through custom that we sign contracts, thus establishing a means to determine enforceability and a mutual acceptance. E-contracts attained visibility and a status of recognition under the folds of the Information Technology Act, 2000 (‘IT Act’). Section 4 of the IT Act places e-contracts on the same pedestal as physical documents since it states that a law which requires a document to be in a written, typewritten or printed format shall be deemed to be satisfied if it is in an electronic form and can be made accessible for future reference. However, the IT Act excludes from its scope, documents specified under its first schedule namely, negotiable instruments, power of attorney, trust deeds, wills and contracts for the sale or conveyance of immoveable property (‘Schedule I documents’). Section 10A of the IT Act further reinforces the principles of contract law through communication of proposal and its subsequent acceptance or revocation and states that a contract shall not be deemed unenforceable solely because it is concluded by electronic means.

The Legal Position Regarding Execution of E-Contracts

While doubts continue to circle the legality of e-contracts, the Indian Evidence Act, 1872 (‘Evidence Act’) provides that electronic records are admissible as evidence in a court of law. Relying on the provisions of the Evidence Act, courts have acknowledged the idea of e-contracts and upheld their validity as seen in Tamil Nadu Organic Private Ltd v. State Bank of India (AIR 2014 Mad 103). The case centered around the process of an e-auction wherein the Madras High Court held that “…contractual liabilities could arise due to electronic means and that such contracts could be enforceable through law”. Even the Supreme Court upheld the creation of a contract through offer and acceptance of its terms, communicated via an exchange of emails in Trimex International FZE Ltd. Dubai v. Vedanta Aluminum Ltd ((2010) 2 SCC 1). These decisions reflect the favourable stance adopted by Indian courts towards enforcing e-contracts.

The Use of E-Signatures

Post negotiations, once the parties have framed the contract to reflect their interests, the next step is the stage of execution by affixing an e-signature. The IT Act recognizes two forms of signatures, first,a digital signature which is created by an asymmetric crypto-system and hash function and second, the electronic technique specified in its second schedule, wherein the holder of an Aadhar card is allotted a unique identification number by virtue of which, they can render their signature electronically via third-party forums (often through generation of a one-time-password). E-signatures recognized under section 5 of the IT Act refer to a broad category of methods for signing a document, while a digital signature is a kind of e-signature which uses a particular technique for implementation. While the lack of jurisprudence regarding the legal tenability and feasibility of e-signatures implies that acceptance of the same remains ambiguous, attempts have been made to resolve these doubts through amendments to the IT Act. The Information Technology (Amendment) Act, 2008 substituted the term ‘digital signature’ for ‘electronic signature’ with the objective of providing a wider scope to e-contracts. E-signatures are valid if they are uniquely linked to the signatory who must exercise complete control over all data used to create the e-signature, if alterations made to the e-signature or the document to which it is affixed are detectable after the act of signing and a digital signature certificate is issued upon completion of the process. Therefore, a co-joint interpretation of the IT Act and the Evidence Act has accorded legal validity and enforceability to electronic documents executed through e-signatures, barring Schedule I documents.

Resolving Issues that pose a Challenge to the Indian Economy

E-contracts and e-signatures have revolutionised the remote execution of contracts and fostered swift negotiations, through adoption of an economically feasible paperless route, but they come with their own set of issues. Communication via e-mail may result in a misunderstanding because the exchange of contractual terms can often be ambiguous, informally expressed or parties may agree to certain terms but not convey acceptance of others. Proving the admissibility of the contract then becomes a hassle. This can be avoided in a physical signing, since parties often insist that documents be notarized so as to prove that both parties have read, acknowledged and accepted the terms and thereby, willingly signed the same. Moreover, while it is not compulsory, the execution of most physical contracts is attested by two or more witnesses, which may prove to be useful from an evidentiary standpoint at a later date, if either party contests the validity of the agreement, an option which is not available in an e-contract.

Impact on the Real Estate Sector due to Exclusion of Schedule I Documents

Schedule I documents are excluded from the purview of digital transactions as they require wet ink signatures, registration under the relevant authorities or must follow formal notarial practices. These contracts may undermine the importance of e-contracts and e-signatures, especially for corporations which are unaccustomed to using a digital format and who might hierarchize between physical signatures and e-signatures, therefore insisting on a physical execution. Lease deeds and sale agreements are integral for the proper functioning of the real estate sector and the fact that they are incapable of being executed remotely, is a cause for concern. The pandemic has witnessed parties attempting to stall the process of execution through an exchange of drafts which contain the final terms, based on an understanding that the contract will be executed, once the situation eases and a physical registration is possible. In the meanwhile, other obligations are fulfilled. This is problematic because while the parties have tried to ensure that all conditions precedent to the execution have been satisfied, their efforts are in vain unless registration is complete, since the document has no legal validity up to that point. Moreover, as per the provisions of the Transfer of Property Act, 1882 and the Registration Act, 1908, leases for immovable property require mandatory registration within a period of four months from the date of execution. Section 25 of the Registration Act, 1908 provides for an extension of four months, but this is at the discretion of the registrar and also involves levying of a penalty of up to ten times the registration fee. Despite an extension, the timelines are still tight and include an added factor of monetary penalty, due to which parties often find themselves in a fix, if they have ascertained the terms of the contract and fulfilled the conditions precedent but due to uncertainty regarding resumption of business practices, are unable to formally execute a physical registration.

Foreign Signatories and the Barriers to Affixing E-signatures

Moreover, while the IT Act provides for e-contracts and e-signatures, the latter is restricted to digital signatures and Aadhar e-sign which might make it problematic for non-Indians who cannot opt for either and end up relying on intention expressed through email. Often, the intentions expressed by one party may not be the same as those conveyed or understood by the other party thereby initiating a communication gap and ultimately, stalling live transactions. The pandemic has witnessed the usage of e-signature platforms such as DocuSign, eSign and Leegality by several Indian companies, all of which are acceptable unless the client demands a particular format in which the document is to be executed. In fact, the Securities and Exchange Board of India issued a press release dated 29 April 2020 to enable the use of eSign, DigiLocker and electronic signatures so that investors could complete their know-your-customer requirements without the hassle of being physically present at the office of the intermediary. Platforms such as DocuSign follow a multi-layered authentication process to verify the identity of all transacting parties and also provide a certificate of completion which is admissible in court, as proof of the entire signing process. While these measures have made e-signatures acceptable, international transactions face problems if Indians residing abroad or foreign parties do not have the required Aadhar documentation, or their guidelines prohibit the usage of e-signature platforms and specifically require them to abide by their own set of rules while adding their e-signatures.

Conclusion

Given that neither the Contract Act nor the IT Act was enacted with the intention of adapting Indian contracts to a long-term electronic format and the glaring limitations therein, there is a need to formulate a separate legislative framework which accounts for the challenges faced by parties in the remote execution of contracts. Under the present circumstances, with the world undergoing a transition whereby parties are being forced to adapt to a digital format to execute contracts, perhaps the need of the hour is to create a platform or an introductory workshop for corporate bodies and MSMEs to digitalise and understand the relevance of e-contracts and e-signatures. Such initiative may be taken up by the Ministry of Electronics and Information Technology, Government of India, to enable these bodies to ease into the process and gradually eliminate their inherent disdain for technology.

Ayesha Bhattacharya

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