November 27, 2021

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The legality of unilaterally drafted e-contracts

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This article has been written by Debdattaa Das, pursuing the Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho. The article has been edited by Zigishu Singh (Associate, LawSikho).

Table of Contents

Aren’t we all guilty of clicking on the checkbox next to “I have read and understood all terms and conditions”, without actually reading them? If you’ve ever wondered whether that practice is healthy or if it can cause trouble for you, then you’ve landed in the right place! In this article, I explain the validity of such e-contracts.

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In the simplest terms, an e-contract (sometimes, online contracts) is just like a regular contract but in electronic form. They prove to be a great tool to facilitate transactions in a hassle-free and paperless mode. In our daily lives, we come across multiple e-contracts. Sometimes these are in the form of digitally signed files. More frequently, we see them in the form of textual content, followed by a checkbox. To know more about e-contracts in-depth, click here.

For a contract to be valid in the eyes of law, it needs to fulfil the following pre-requisites as provided under Section 10 of the Indian Contract Act, 1872:

Proposal and acceptance

This includes one party expressing their willingness to perform an act or abstain from performing an act and the other party giving its assent to such performance or abstinence. (Section 2)

You tell your friend that you wish to give him a book- this is a proposal. Your friend agrees to take the book from you- this is acceptance to the said proposal.

Free consent

This involves both parties agreeing to the same thing in the same sense and in the absence of coercion, undue influence, fraud, misrepresentation or mistake. (Sections 13 and 14)

Your friend agrees to buy your car. You know that your fuel tank is leaking and yet, you sell it to your friend saying that the car is in ‘perfect’ condition. This is not free consent.

The capacity of parties to a contract

Every person who has attained majority at the time of making the contract, is of sound mind and is not barred by any law to enter into a contract, is said to have the capacity to contract. (Section 11)

You want to buy a house whose owner has recently died. You make an agreement of sale with the owner’s son who is 17 years old. He does not have the capacity to contract and thus, the contract is not a valid one.

Lawful object and consideration

The purpose to be fulfilled by means of the contract as well as the consideration being offered for the same must be lawful. Unlawful objects and considerations are enlisted under Section 23 of the Indian Contract Act, 1872.

You agree to buy a firearm from your friend for a sum of Rs. 50,000 whereas you do not possess a licence to use the firearm. This contract is not valid.

Unless from a legal background, you might be wondering why this list does not contain the requirement for it to be written and signed. Well, that’s how simple it is!

Interestingly, the law does not provide for any requirement as to the mode of entering into a contract in order for it to be valid. If we look at an e-contract and assess it in terms of each of the above requirements, it is quite evident that it forms a valid contract. Not just that, they are also enforceable by law.

Upholding this validity is Section 10A of the Information Technology Act, 2000 which prohibits invalidation of electronic contracts solely on the basis of being in the electronic form. The authenticity of such contracts as ‘electronic records’ may be secured by affixing digital signatures or electronic signature or techniques specified in Schedule II of the IT Act, on the electronic records. (Section 3 and 3A)

While you might be rejoicing at the recognition given to electronic records and e-contracts, it is vital to look at the documents that are excluded from the purview of the IT Act and hence, do not receive the same legal recognition.

The following documents are excluded under Section 1(4) read with Schedule I of the IT Act:

  • A negotiable instrument (other than a cheque),
  • Power-of-attorney,
  • A trust,
  • A will,
  • A contract of sale or conveyance of immovable property.

Click-wrap

These are pre-drafted terms and conditions which typically come with an ‘Agree’ button (and all its variants) and you become bound by that contract by clicking on the button. You may have seen these on End-user licence agreements for using the software.

Shrink-wrap

Usually found in the hard copy of the software, these become binding when you open the packaging of the software.

Browse-wrap

These require minimal requirements to bind you by the terms, by continuing to use an online service, you are automatically considered to have agreed to their terms. These use the phrase, “By continuing, you agree to all terms and conditions”. These are common with the cookie policies of various websites.

Digitally signed documents

Though not very prevalent in India at the moment, these types of contracts may be used by businesses who wish to go paperless. For using this, a contract first has to be drawn in the digital form of a document, and then digitally signed by the parties to the contract. This would ensure the integrity of the contents of the document.

Emails

As unsuitable as it may sound, email conversations between parties may also be considered for the purposes of enforcement when it is unregistered and unsigned. This principle has been upheld by courts, however subject to other provisions of evidence law such as other pieces of evidence establishing the intention of parties, subsequent contract on same subject matter etc.

When only one of the parties to the contract drafts the terms of the contract and the other party has no participation in the drafting procedure and has no room for negotiation, such contracts are known as unilaterally drafted contracts. Thus, these are what we would call in general terms ‘one-sided’.

Sounds unfair, doesn’t it? But unfortunately, we all enter into these agreements more often than we notice. In fact, it is the most frequent form of contract that most of us enter into when we visit a website or use new software.

Businesses would usually have a standard contract for multiple customers where the terms are pre-decided by one of the parties and the other party has to accept the contract in its entirety. Loan agreements and insurance agreements are common examples of this type of contract.

If we look closely, we will find that all e-contracts, except for the last type, i.e., digitally signed documents, are unilateral and standardised in nature. This means that the customers/users do not have an option but to agree to all terms in order to use or reap the benefits of the concerned services.

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In 1984, the Law Commission of India released its 103rd report on standardised contracts which may be applied to the unilaterally drafted e-contracts as well. The report had highly criticised such contracts and termed them as ‘pretended contracts’. It recognised how these documents were unilaterally drafted and insisted upon by a powerful enterprise and that free consensus was absent. The Contract Act falls short of a statute to offer relief in such cases and reliance has to be, therefore, laid on judicial precedents which do not serve the same purpose as specific legislation.

While we do not find many judicial precedents for e-contracts per se, we might resort to the ones set for regular contracts that are unilaterally drafted, which the courts have determined, thankfully. The same principles may be applied here, pertaining to the analogous character of e-contracts with regular contracts.

Courts have found the contracts with one of the parties placed at a dominant position, to be void. This may be attributed to the unfairness that may arise in such a situation if the drafting party chooses to impose some unreasonable condition upon the other party, thus misusing their position. The test of reasonableness is done and examined by the court from the perspective of an ordinary prudent man. However, the intervention of the court in deeming a contract as void would arise only in the situation where there exists a huge difference in the bargaining power of the parties. And, this difference is likely to cause economic duress of one the parties on another. Meaning thereby, that in cases where the parties are at an equal or near-equal bargaining power, the court would not deem the contract as void t or a part thereof only by reason of it appearing unreasonable. Furthermore, in case any ambiguous terms are found, they are interpreted against the party that has drafted it.

This intervention of courts exists to reassure the principles behind Section 16 of the Indian Contract Act, 1872 which stipulates what constitutes ‘undue influence’. On the other hand, it is Section 19A that empowers the courts to do so.

In the cases where one of the parties was aggrieved by the unreasonable terms of a unilaterally drafted contract of another party, the courts have been actively participating to restore justice.

In Rohit Bajaj v. ICICI Ltd 2008, the National Consumer Dispute Redressal Commission (NCDRC), New Delhi, relying heavily upon the suggestions of Law Commission’s 103rd report of 1984, regarded unjustified and unilateral terms in standardised contracts as unintentional and amounting to unfair trade practices. Thus, relief against the grievances caused by means of these terms can be granted under the Consumer Protection Act, 1986.

In the infamous LIC case, the Supreme Court observed that in standardised contracts, the party other than one drafting the contract would never assume a bargaining power that is equal or near equal to the party drafting it. The only way to escape such unjust practice would be to forego the service forever.

The Calcutta High Court has held that the test of good faith is the fairness of bargain[6]. When on the face of it, the transaction seems to be based on inadequate consideration, thus resulting in an unconscionable advantage, it is liable to be set aside by the court.

Thus, click-wrap, shrink-wrap and browse-wrap agreements in the electronic mode are unilaterally drafted and represent the standardised form of contracts. However, there is no such legislation in place which can determine them to be invalid, considering the practicability of the situation. It is only feasible to have a standardised contract when a huge number of similar transactions need to be made. Only in cases where such contracts seem unreasonable and against the principles of natural justice, would the bargaining power become a factor. Once it is established that the party which has drafted the contract, was in a dominant position which caused them to draft terms that are grossly unreasonable, the courts may interfere and give relief to the weaker party. Nevertheless, the decisions by the court do not have a binding effect or formulate standards that may be followed by businesses while drafting unilateral contracts.  

As already suggested by the Law Commission, the Contract Act needs reforms. Additionally, it is important that the consumers are aware of the situation and take up active steps for enforcing the legal principles under Section 16 of the Contract Act until legislation to that effect is enacted.

So, the next time you find yourself in a position of injustice, do challenge it in a court of law, instead of accepting it just because you clicked on ‘I Agree’.

[1] Trimex International FZE Ltd. v. Vedanta Aluminium Ltd., (2010) 3 SCC 1

[2] Lloyds Bank v. Bundy, (1975)1 QB 326.

[3] Kanto Mohan Mullick v. John Carapiet Galstaun, 1928 SCC OnLine Cal 202

[4] Rohit Bajaj v. ICICI Bank Ltd., 2008 SCC OnLine NCDRC 27.

[5] LIC India v. Consumer Education and Research Centre, 1995 SCC (5) 482.

[6] Sonia v. Maula Baksha, AIR 1955 Cal 17.


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