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E-contracts and issues involved in its formation

Written by: Aniket Waghdhare - The author is a final year student of I.L.S Law College, Pune
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With the advancements in computer technology, telecommunication and information technology the use of computer networks has gained considerable popularity in the recent past, computer networks serve as channels between for electronic trading across the globe. By electronic trading we don’t just mean the use of computer networks to enter into transaction between two human trading partners by facilitating a communication but electronic trading or electronic commerce also means those contracts which are entered between two legal persons along with the aid of a computer program which acts as an agent even when it has no conscious of its own but also by initiating it.

A commercial transaction can be divided into three main stages: the advertising and searching stage, the ordering and payment stage and the delivery stage. Any or all of these may be carried out electronically and may, therefore, be covered by the concept of ‘electronic commerce’. Broadly defined, electronic commerce encompasses all kinds of commercial transactions that are concluded over an electronic medium or network, essentially, the Internet. In India the concept of electronic commerce has paced up in the last decade. Nowadays the geographical as well as the constraints with respect to the time limit has very well been overcome by the increasing use of information technology amongst common people , the scenario present now is completely different to the one which was prevalent about a decade back when the use of information technology was restricted to select individuals and the conventional methods of entering into contracts were the sole methods for entering into a legal relationship.

Meaning of electronic contract:

An e-contract is a contract modelled, executed and enacted by a software system. Computer programs are used to automate business processes that govern e-contracts. E-contracts can be mapped to inter-related programs, which have to be specified carefully to satisfy the contract requirements. These programs do not have the capabilities to handle complex relationships between parties to an e-contract.

Modes of entering into an econtract:

An electronic contract is an agreement created and “signed” in electronic form — in other words, no paper or other hard copies are used. For example, you write a contract on your computer and email it to a business associate, and the business associate emails it back with an electronic signature indicating acceptance. An e-contract can also be in the form of a “Click to Agree” contract, commonly used with downloaded software: The user clicks an “I Agree” button on a page containing the terms of the software license before the transaction can be completed.

In spite of slow progress in the field of artificial intelligence, computer systems are now emerging that can operate not just in an automatic way but autonomously as well. The processes of Artificial Intelligence includes forming intentions, making choices and giving and withholding consent which means humans can give substantial autonomy in decision making which permits computer systems to complete highly complex tasks involving precise judgements. Now the question which arises in our minds is that whether a computer system can replicate the processes that are regarded as free will of the humans and what would be the legal consequences of it. These are the questions which make people apprehensive while entering into a commercial contracts with the aid of a computer system. Contractual rights must be determined with reference to individuals, the need of the hour is to ascertain the whether the existing contract law doctrine can cope with the new laws of technology.

Present scenario:
Categorisation of the econtracts can be of two types i.e. web-wrap agreements and shrink-wrap agreements. We often come across these e-contracts in our everyday life but are unaware of the legal complexities connected to it. Web-wrap agreements are web based agreements which requires assent of the party by way of clicking the “I agree” or “I confirm” link, for example in case ebay by which we accept the terms and conditions mentioned by the seller. On the other hand Shrink-wrap agreements are those which are accepted by a user when a software is installed from a CD-ROM e.g. Microsoft Office software. Before analysing these concepts we must know how such a contract is entered into, for convenience let us assume the most simple web wrap agreement entered between the buyer and seller through a computer network.

A buyer accesses an autonomous computer controlled by a seller wherein the seller has hosted an item to be sold at a specific price, an interested buyer after satisfying himself makes an order after reading through the terms and conditions of the seller. The computer then checks the availability of the item in its stock and then notifies the buyer that the order has been confirmed and is despatched for its delivery after necessary payment option selected by the buyer. In such a case the actual seller of the goods is unaware about the fact that the transaction has been entered between him and the buyer. The question which arises here is that whether such contracts are valid or not.

E-contracts vis-à-vis conventional forms of contracts:

When it comes to legality/enforceability of such e-contracts entered between two or more parties we need to look into basic provisions of laws regarding the contracts. Indian Contract Act,1872 lays down various essentials of a valid contract.
There must be an offer and an acceptance.
There must be two or more separate parties to the contract.
These two parties must be in agreement with each other, i.e., consensus ad idem.
They must intend to create a legal relationship with each other and
There has to be a consideration.
In the present scenario we must analyse if these essentials are complied with or not while entering into a contract with the aid of a computer program.

Offer and Acceptance:
When a product is advertised on a website and someone accesses that website in order to buy them then the seller of the goods makes an invitation to offer to public at large through ways similar to advertisements, catalogues and shop displays, in such a case the seller does not become the offerer because he is merely inviting offers and not making an offer which a well established doctrine of law of contracts, now the buyer of the goods make an offer by accepting the terms and conditions of the seller and offers the seller of the goods to sell the goods at the price marked. When it comes to acceptance, the question which arises in our mind is that what constitutes an acceptance? Acceptance as defined in the Indian Contracts Act 1872 means, when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. The Act also lays down the provisions regarding the situation when communication is complete, s.4 of the Act lays down that the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of acceptance is complete –
As against the proposer, when it is put in course of transaction to him, so as to be out of the power of the acceptor.
As against the acceptor, when it comes to the knowledge of the proposer.

After analysing these two concepts under the Contracts Act, the question that arises in our minds is that whether the offer made by the buyer comes to the knowledge of the seller before the acceptance is made by the computer program on his behalf , whether the acceptance on part of the computer program would amount to a valid acceptance or not. In cases of e-contracts, even though the communication of acceptance is not complete and the computer program itself accepts the offer on behalf of the acceptor and that too without any knowledge of the acceptor but still these contract are deemed to be legal.

In present scenario, if an offer has been made, then prima facie the seller's computer uses the set of instructions to accept the offer and evince an intention to assent to that offer. But whose intention is it exactly?

There appear to be three possibilities:
(1) intention may be of the seller's computer alone but since computers are not capable of being parties, it must follow that we do not have a meeting of minds by the parties themselves; or
(2) intention may be the seller's alone, this view, however, is problematic given that the seller never knows of the transaction; or
(3) intention may be the seller's though embodied in an e- program of the computer. Can this view be realistic, though, when the decision to make the offer in question has been formed autonomously by the seller's computer?

If a question before the court of law comes about the legality of such a contract entered between the parties through a computer program, in my view the first and the second possibilities are not at all applicable to the present scenario. The third possibility, however, is more useful because this is particularly in light of powerful evidence that English courts, at least, are willing to use the option or unilateral contract device both actively and creatively.

In Great Northern Railway. v. Witham classic formulation of the option or unilateral contract: "If I say to another, ' I f you go to York, I will give you £100,' that is in a certain sense a unilateral contract. He has not promised to go to York. But, if he goes it cannot be doubted that he will be entitled to receive the £100.
What would the effect be of recognising the classic formulation as: "If you order goods from my computer, I promise to supply those goods."

Here, it may be that the issue of whether or not the specific transaction between the buyer and the computer amounts to a valid contract is moot when the irrevocable offer, by the controller, matures into a complete bilateral contract.

Parties to the contract:

On the question as to who is capable, by law, of being a party to a contract? It is generally accepted that both natural persons and legal persons are capable of entering contracts, Computers are clearly not natural persons ,and neither American nor English contract law, at present, deem them to be legal persons. Computers, therefore, are not capable of being parties to contracts. In our scenario, both the buyer and the seller are natural persons, and consequently, are capable of being parties to the transaction. The autonomous computer, however, clearly cannot be a contractual party as the law now stands.

Consensus ad idem:

According to the definition, the minds in question have to be the minds of the parties to the agreement. In our scenario, can it be said that there is a meeting of the minds in any meaningful sense? In both American and English contract law, the normal analytical tool used to test for such a meeting of minds is that of offer and acceptance which has already been discussed.

Intention to create legal relationship:

Another criterion to be considered is that of the intention to create legal relationship. To constitute a valid contract, the parties must intend to create binding legal relations between themselves. As in the case of offer and acceptance mechanism, the courts analyze the intentions of the parties from an objective standpoint. In the case of ordinary, commercial transactions, the courts start from the presumption that legal relations were indeed intended. If either party wishes to challenge that presumption, the burden of proof is on the party who asserts that no legal effect was intended. Hence in the case of the econtracts in the present scenario it is for the court to make clear that there is existence of a usual presumption applies. In the event that the court proves unwilling to apply the presumption because of the involvement of an autonomous computer, we must ask ourselves similar questions to those we addressed when considering the elements of offer and acceptance. In relation to the present scenario, the buyer's intention to create legal relations gives rise to no difficulties whereas the seller's intention faces the same three difficulties as discussed above. It is more problematic to deem that an autonomous computer is capable of forming an intention which is relevant, or to claim that the human trader has a specific intention as entered by the computer program and the buyer.

In the present scenario, once an item has been supplied and the price has been paid, the consideration is executed and the requirement is satisfied. Problems may arise at a time when the consideration is merely executory. This arises when the seller's computer has done no more than "promise" to supply that item. A key intention that lies behind such promises is, of course, the intention to be bound by that promise in other words, the intention to create legal relations. We have already examined this intention to create legal relations above. Another intention that can be associated with each promise is the intention to fulfil the promise. In my view, however, this intention can be seen as a corollary to the intention to create legal relations and thus does not require separate treatment.
It is clear from the above discussion that the involvement of an autonomous computer in the contract formation process gives rise to considerable doctrinal difficulties and hence the conventional laws with respect to the contracts between two or more legal persons embodied under the Indian Contracts Act,1872 can not be applied in cases of econtracts.

E-commerce under IT Act 2001:

In the WTO Work Programme on Electronic Commerce, Electronic Commerce means the production, distribution, marketing, sale or delivery of goods and services by electronic means and are, therefore, covered by the concept of ‘electronic commerce’. Broadly defined, electronic commerce encompasses all kinds of commercial transactions that are concluded over an electronic medium or network, essentially, the Internet and E-commerce covers three main types of transactions, i.e. business-to-consumer (B2C), business-to-business (B2B), and business-to-government (B2G) and hence E-commerce can be used as a synonym with the e-contracts.

Legal framework for ecommerce has been provided by the Information Technology Act, 2001, which makes India only the twelfth country in the world which has such a comprehensive legislation for ecommerce. This Act also effects consequential amendments in the Indian Penal Code, the Indian Evidence Act, 1872, and the RBI Act, 1934 to bring them in line with the requirements of digital transactions. (Similar amendments are being planned for the Companies Act, 1956 to also facilitate e-commerce and e-governance.)

The IT Act essentially seeks to address three areas or perceived requirements for the digital era:
(a) to make possible e-commerce transactions—both business to business and business to consumer
(b) to make possible e-governance transactions—both government to citizen and citizen to government
(c) to curb cyber crime and regulate the Internet.

Most of the provisions of the Information Technology Act as promulgated, deals with citizen interaction with government and certainly a proper and far-reaching mission towards e-governance. But there are several hurdles before this becomes a reality. The main being that government departments not only lack the hardware for electronic transactions but will also need to reorient their systems and procedures before they are ready to interact through electronic documents.

E-governance implies action and commitment of the state and its agencies at two levels:

(a) It involves the promotion of the information and communication technologies and, especially, e-commerce, on the one hand, and
(b) The adopting of these technologies and all they involve in the matter of a completely new type of commitment, open systems and use of the medium of the Internet for government business, citizen interaction, and most important, for development.

But when it comes to laying down of specific rules with respect to the basic essential ingredients of a contract in the sphere of econtracts the laws are not extensive enough to include each and every aspects of a valid contract.

My concern while writing this article is whether or not computer-generated agreements should be enforceable as legally binding contracts by trying to draw an analogy between the two forms of contract. There is certainly nothing about the subject matter of computer-generated agreements under any law present which should render them unenforceable but the laws prevalent doesn’t even lays down any express provisions when it comes to formation of such contracts and the difficulties arise only because the legal doctrine of contract law which is based on an idealized model of communication between natural persons. Therefore the real issue before us is to determine how the law should be changed, rather than whether it should be changed. Though the IT Act,2001 provides for some provisions with respect to the ecommerce but these provisions are restricted to the legality of the ecommerce and the security of such a transaction but the act doesn’t lays down any specific provisions with respect to the formation of such contracts.

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