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Formation of e-contract

With the advancements in computer technology, telecommunication and information technology the use of computer networks has gained considerable popularity in the recent times. The computer networking serves as the medium for Electronic-trading across the globe. By electronic trading we dont 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. 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 have 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. An electronic contract is an agreement created and signed in electronic form in other words, no paper or other hard copies are used.

Categorisation of the e- contracts can be of two types i.e. web-wrap agreements and shrink-wrap agreements. We often come across these econtracts 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 CDROM e.g. Microsoft Office software. In the traditional notion of contract formation, negotiating parties must come to a "meeting of the minds" on the terms of an agreement. In the course of negotiation, there may be invitations to make offers (e.g., price lists are generally not offers, but invitations) and counter-offers, but the general rule is that formation requires an offer and acceptance to be communicated between the parties. Generally, a contract is formed when acceptance is communicated to the offeror. In face-to-face negotiation, this rule provided few problems. However, with the development of methods of communicating over distances, and the associated reliability problems, the case often arises when the offeree has dispatched an acceptance which either is never received by the offeror or arrives after the expiry of the offer. The issue to be resolved in such cases is whether the acceptance is communicated to the offeror when it was sent or when it arrives. Case law tends to distinguish between delayed forms of communication, through mail or telegrams, and virtually instantaneous forms of communication, such as the telephone, telex and fax machine. But the courts have yet to consider the electronic message. Early case law saw the development of the "mailbox rule" for ordinary mail, wherein acceptance is deemed to be communicated to the offeror when it enters the postal system. This rule has been extended to telegrams and even couriers. The offeror, however, is free to put conditions on the

communication of the acceptance (e.g., offer must be received; must be by telephone). In contrast to the "mailbox rule", acceptances communicated using instantaneous or virtually instantaneous means, such as the telephone, telex, and fax, are formed when the offeror receives the acceptance. These means are analogous to face-to-face communications; presumably both parties will be aware of any break in the connection and be able to take corrective action. Now, the question that arises in our minds is that in case of e-contracts 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 but still these contracts 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 of the seller's alone, this view, however, is problematic given that the seller never knows of the transaction; or (3) Intention may be of 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 then 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. 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. There is little case law on acceptance by electronic message. On the one hand, some cases suggest the general rule is that the acceptance must be received by the offeror and that the mailbox rule is only a narrow exception. On the other hand, receipt of electronic messages may not be instantaneous and since the mailbox rule has been extended to telegrams, it could be argued that it should be extended to electronic mail. Although some electronic message systems, such as private EDI(Electronic Data Interchange) networks, provide almost immediate transmission, anecdotal evidence suggests that Internet e-mail is inconsistent and could take minutes, hours or even days to reach its destination. While much of the contract formation discussion revolves around the use of computer technology as a means of communication by contracting parties, a far more difficult issue is beginning to emerge with the automation of the contracting process itself. Traditional contract doctrine centres around the requirement of two or more people, negotiating either face-to-face or through some means of communication. However, modern technology is evolving with a goal of eliminating human involvement in transactions. How traditional contract doctrine will accommodate situations where the only `minds' that meet are programmed computer systems is uncertain.

In a fully automated system, human decisions are involved in creating the system and making it accessible; humans assent to the system, not specific transactions. Traditional contract doctrine looks at the intention of the parties surrounding the offer and acceptance of the specific agreement in dispute. As such, it is not clear whether people can be bound by offers or acceptances made by their computer on their behalf. They may have had no knowledge of, let alone intention to enter, a given transaction. The main issue is one of attribution -- when do the actions of an agent become attributed to the principal. While agency law plays a role in attribution when using human agents, human judgements, such as voluntary assent and reliance, are major themes in this area of law. Therefore, the existing law of agency may not be very helpful in determining attribution with automated agents. With automated transactions, another challenge for the courts is

determining where the communication system ends and the legal agent begins. The challenge is separating responses that are part of the functional communication process, such as those acknowledging receipt of a message, from responses that are part of the contract formation process, such as an acceptance of an offer. However, Contracts result only when one promise is made in exchange for something in return. This something in return is called consideration. The present rules of consideration apply to e-contracts. There is concern among consumers regarding Transitional Security over the Internet. Laws on e-contract in India Advancement of Science & Technology has changed the scenario of the world at large. It has affected every walk of life. The law of contract is no exception to it. The present law of contract which is consisting roughly eleven enactments is proving insufficient, inefficient and traditional. It is unable to keep pace with time in society due to new technologies which are being used in the formation of contract. Although it is a fact that contract act has not contemplated such exigency but no where the contract has

prohibited the use of such devices which was not feasible when the contract act was passed 135 years ago. Hidayatullah, C.J.I. convinced that though the law was framed at a time when telephones, wireless, Telstar and Early Bird were not contemplated, but the language of section 4 is flexible enough to cover telephonic communication. The courts should not completely ignore the language of the Act. There is no specific act dealing with e- contract. However the legislature has incorporated provisions for regulating the authenticity of electronic records in the chapter IV of the Information Technology Act 2000. The year 2000 marked the recognition of electronic transaction with the enactment of the IT Act, 2000.The principal of the Act was to legislate e-documents. An extended object of the Act was to introduce Digital Signature as a mean to conduct the transaction. The Act as amended in 2008 vide notification dated October 27, 2009 further introduces the concept of Cyber Security. Said day is now celebrated as CYBER SECURITY DAY OF INDIA. Digital signature refers to the authentication of any electronic record by a subscriber by means of an electronic method or procedure. The Act allows any subscriber to authenticate an electronic record by affixing his digital signature. Here again electronic record refers to date, record or date generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche. Any person by the use of a public key (key of a key pair used to verify a digital signature and listed in the Digital Signature Certificate) of the subscriber can verify the electronic record. Section 3 refers to the authentication of electronic record. Section 4 and Section 5 propose legal recognition of documents in electronic form which implies that printed copy or hard copy is treated at par with the soft copy and also that of digital signature respectively. Section 11, 12 and 13 incorporate the Attribution, Acknowledgement of receipt and the time and place of despatch and receipt of electronic record

respectively. To add to this Section 14 and 15 relate to securing electronic record and digital signature in order. Draft of Electronic Commerce Act 1998 The use of Computer & Internet is frequent now a days and present law of contract has no provision to regulate the contracts based on these devices. The legislature felt a strong need for a law regulating contract based on electronic devices. A survey was conducted which was headed by Justice Fazal Ali who strongly recommended for a separate law regulating contracts based on electronic devices. He refused to modify the present law of contract so as to include electronic devices into the preview of present law of contract. It was also noted that in future contracts and other commercial activities shall mostly be based on electronic devices due to its smoothness and fastness. Legislature then decided to form a new act in this regard which is called Electronic Commerce Act 1998. A draft of the said act was prepared which is yet to be approved by the Parliament. With the growing use of e-contracts the need for enactment of a specific act which deals with e-commerce has become inevitable and an utmost necessity.


E- Contract and Problems on the Internet

Today the recent advancement in the area of information technology has resulted in changing the standard of living of people in an unimaginable way. The communication is no more restricted due to the constraints of geography and time. Information is transmitted and received widely and more rapidly than ever before. And this is where the electronic commerce offers the flexibility to business environment in terms of place, time, space, distance, and payment. This e-commerce is associated with the buying and selling of information, products and services via computer networks. It is a means of transacting business electronically, usually, over the Internet. It is the tool that leads to enterprise integration. With the growth of e-

commerce, there is a rapid advancement in the use of e-contracts. But deployment of electronic contracts poses a lot of challenges. Problems with the Electronic Contract However several legal issues arise, many of which are the same as encountered in traditional contracts: What are the exact terms of the contract? Is it enforceable? What happens if a message is garbled or sent in error? What if one of the messages was unauthorized or sent by an impostor? Frequently parties to a contract do not always clearly address all of the contract terms. Terms may be missing or unclear, or the parties may have exchanged conflicting documents. In these cases, how are the terms of the contract determined? The general rules of contract law follow a hierarchy of evidence when determining the terms of a vague or incomplete contract, as follows: The terms stated in the discussions and writings exchanged by the parties that are not in conflict; Terms implied by the current and past conduct of the parties; Terms implied by industry custom and practice; and Terms implied by law, i.e., damages for breach, liability for negligence, jurisdiction and venue, etc. If a planner and supplier exchange promises by e-mail the law will interpret this agreement the same way it would interpret a more traditional contract written on paper. Parties to an electronic contract should be careful in articulating the terms as they would be in traditional contracts. Another concern in electronic communication is the identity and authority of the person on the other side of the transaction. It is a simple matter for a person to adopt a pseudonym on-line or to send an electronic message that appears to come from someone else. This person could be anyone from a curious competitor to a dishonest person with too much time on their

hands. It could even be a disgruntled former employee. For those who want to engage in on-line contracting, two major issues arise:
How can you be sure that the person

with whom you are

communicating is the person he or she claims to be?

Can an impersonator bind you to an electronic contract?









letterhead or corporate seals it is impossible for one party to determine the other party's authority to book a meeting or sign a contract. Just because someone has a corporate e-mail address and says they are the executive director, vice-president of special events or director of meeting planning does not make it so. Parties to an on-line contract must still exercise due diligence to ascertain who they are dealing with on the other side. Everyone should be concerned with who else is impersonating them and fraudulently signing their name to contracts. The key issue of course is who, if anyone is bound to these contracts. Under current law a forged signature will only bind the forger, not the party being impersonated. The other party to the transaction, however, may be left holding an empty bag if the impostor can't be caught or identified or if the impostor is in no position to perform on the fraudulent contract. The exception to this is if the real party ratifies the signature or was somehow negligent and contributed to the forgery. This is just as true in on-line contracts as it is in traditional paper contracts. Digital signatures are solving some of these problems however new laws are being proposed that would hold business people liable for not providing an adequate level of security for their digital signatures. These issues are not unique to on-line communications. Impostors and persons without authority operate in paper transactions as well. The difference is that in on-line communications there is greater anonymity and greater ease in perpetrating fraud without a great deal of financial investment. Technology companies and lawmakers are dealing with these issues daily and the result is new techniques to combat the potential for


fraud in on-line communications. As mentioned above, one of these new techniques is the creation of digital signatures. A digital signature can provide assurance that the communication was sent by a known party and not an impostor. For the business world in general, and the meetings industry specifically, to embrace electronic contracts the exchange and storage of these records must satisfy certain legal requirements. These requirements generally include the following: AUTHENTICITY INTEGRITY NON-REPUDITATION WRITING AND SIGNATURES CONFIDENTIALITY


Authenticity is concerned with the source or origin of a communication. Who is the message from? Is it genuine or a forgery? Every party to an electronic contract must have confidence in the authenticity of the messages it receives. A party who fails to verify the other party's identity in any transaction may have no recourse if a fraud is perpetrated. Communications that cannot be authenticated in a tangible form may not be used as evidence in a court room.

Integrity is concerned with the accuracy and completeness of the communication. Both senders and receivers of electronic communications must be able to tell: is the message sent identical to the message received? , is the message complete or has something been lost in transmission? , has the message been altered in any way either in transmission or in storage? Messages sent over the Internet pass through many routing stations and


packet-switching nodes. Hence, there are many opportunities for messages to be altered along the way to their final destination. For example, a meeting sponsor needs to know that a supplier's reply to a request for proposal is accurate and can be relied on.

Non repudiation is concerned with holding the sender to the communication he or she sent. The sender should not be able to deny having sent the communication if he or she did, in fact, send it, or to claim that the contents of the communication as received are not the same as what the sender sent if, in fact, they are what was sent. When a contract is in dispute, the party relying on it must be able to prove that the other side actually agreed to the deal.

As a general rule, contracts do not have to be in writing or even signed by either party to be enforceable. Contracts may be formed by conduct of the parties and may be oral unless they fall under the Statute of Frauds. When the statute of frauds applies, there must be writing sufficient to indicate that a contract has been made between the parties. The definition of writing is not limited to ink on paper. Rather, the essence of the requirement is that the communication be reduced to a tangible form. Electronic transmissions recorded in a tangible form should meet the writing requirement. To ensure this result it is probably necessary to preserve electronic communications, such as e-mails, in printed form or in a computer log. In many cases, the law requires that an agreement be both in writing and signed by the person who is sought to be held bound in order for that agreement to be enforceable. If two parties are entering into a contract online, these writing and signature requirements may apply.


Generally, a signature is "any symbol executed or adopted by a party with present intention to authenticate writing. Therefore, a signature need not be ink on paper -- rather, the issue is the intent of the signer. A symbol or code on an electronic record, intended as a signature by the signer, should meet the statute of frauds requirement. Digital signatures should certainly do so.

Confidentiality is concerned with controlling the disclosure of information. Corporate meeting planners for instance may not want the general public to know about the content of the upcoming meeting that concerns a new product. Suppliers may not want everyone to know the special rates being quoted to a particular group. However there are many other problems which also occur while using an econtract: failure to deliver goods on time; failure to provide the goods requested; returning goods; warranties; fraud by rogue purchasers who, when armed with the benefit of credit card details, are able to secure goods and services without the authority of the credit card holder; confusion as to whether or not any contract was actually entered into or whether the person making the promise was engaging in mere hype rather than making any offer; and confusion as to where the contract was made. ordering the wrong product receiving the wrong item difficulty in returning the product security issues privacy issues


the goods are not delivered the goods delivered do not match the online description the goods are not delivered on time the seller failed to disclose all relevant information about the product or terms of sale the goods are damaged in transit scamming

Most persons are comfortable with traditional contracts because of the security and familiarity with paper documents and handwritten signatures. In on-line contracts the security factor has been missing in the past and there is not much familiar with electronic lines of type. In other words, it is easy to be a victim of fraud when conducting business entirely on-line. The technology industry recognized early on the pitfalls inherent in on-line communications. They have risen to the occasion by creating systems and procedures authenticity, for satisfying non the business and legal and requirements signature, of and integrity, repudiation, writing

confidentiality. The primary tool in use is digital signatures. Section 2(p) of The Information Technology Act, 2000 defines digital signatures as authentication of any electronic record by a subscriber by means of an electronic method or procedure. A digital signature is an electronic substitute for a manual signature and is generated by a computer rather than a pen. It serves the same functions as a manual signature, and more. A digital signature has many advantages over a manual signature. Both are used to signify authorship, acknowledgment and acceptance of terms. A digital signature, however, also serves an important information security purpose that a manual signature cannot. Digital signatures allow the recipient to determine if the digitally signed communication was changed or not after it was digitally signed. This feature provides integrity and authenticity to a communication that a manual signature does not. Additionally, a message sender can include information about the sender's authority and job title as well as the sender's identity encrypted into their digital signature.

14 3.


The European Union Electronic Commerce Directive was established on 8th June, 2000 under the guidance of The Electronic Commerce (EC Directive) Regulations. They apply to contracts concluded by electronic means over distance whereby the buyer is a consumer. This subordinate legislation provides for rights of the consumer and provisions for which the seller is obliged to fulfill. Promoting the development of electronic contracts via E-Commerce is one of the key factors in the effort to make the European Union the most competitive and dynamic knowledge-based economy in the world. The European Union Directive created the basic legal framework for electronic contract in the global markets. The Directive removes obstacles to cross-border online services in the European Union and provides legal certainty to business and citizens alike. For electronic commerce to develop its full potential, it must be possible for contracts to be concluded on-line unrestricted by inappropriate rules. The proposal would therefore oblige Member States to adjust their national legislation to remove any prohibitions or restrictions on the use of electronic media for concluding contracts. In addition, it would ensure legal security by clarifying the moment of conclusion of the contract, whilst fully respecting contractual freedom. Article 9 - Treatment of Contracts

Article 9, creates a functional equivalence for e-documents in both informal and formal contracts. It requires that anything which can be achieved through written documents must be in law achievable through edocuments. Article 9(1) provides that Member States shall ensure that their legal system allows contracts to be concluded by electronic means. Member States shall in particular ensure that the legal requirements applicable to the contractual process neither create obstacles for the use of electronic


contracts nor result in such contracts being deprived of legal effectiveness and validity on account of their having been made by electronic means. Article 10 - Information to be Provided The aim of this Article is to provide the consumer with adequate protection measures required to stand in place of the badge of formality previously associated with the written document. It reflects concerns that with digitisation: (1) formality in the contract-making process may be lost, meaning consumers may inadvertedly enter into binding contacts without realising the gravity of the agreement into which they are entering (2) familiarity with counterparties can be lost when there is a lack of physical interaction (3) there is an increased risk of error in electronic documents due to the informal nature of the medium. Article 11 - Placing of the Order Article 11 mentions that certainty would ensure that consumer confidence in cross-border trading would be greatly enhanced and harmonisation of the rules of contract formation would benefit e-businesses who could streamline their systems to a single European contract formation model.

LEGISLATIVE VIEWS IN EUROPE: ASSESSMENT OF UNNECESSARY LEGISLATIVE INTIATIVE IN EUROPE. The European Union attempts to harmonise national legislation of Member States and create a legal framework for electronic contracts. However, most of the rules governing the formation of an electronic contract are included in national Laws, being a difficult task to know which the applicable Law to a specific contract is. Regarding the formation of a contract, provisions on national laws are uncertain and based on ambiguous terms, besides their does not exist national regulations specialised on electronic contracts. Regarding electronic contracting, in order to promote the validity of a contract which has been concluded making use of an electronic mean, all national laws within the European Union must remove any obstacle that stops such contracts from being effective.


Service providers should also transmit some mandatory information to consumers or another businesses, concerning the electronic contract. Prior to the order, information regarding the technical steps necessary for the conclusion of the contract has to be provided. E-contract requires the need to acknowledge the receipt of the order by the service provider. The order and the acknowledgement of the receipt are understood to be received once they are accessible. Conclusion E-contracts are well suited to facilitate the re-engineering of business processes occurring at many firms involving a composite of technologies, processes, and business strategies that aids the instant exchange of information. The e-contracts have their own merits and demerits. On the one hand they reduce costs; on the other hand they save time, fasten customer response and improve service quality by reducing paper work, thus increasing automation. With this, E-commerce is expected to improve the productivity and competitiveness of participating businesses by providing unprecedented access to an on-line global market place with millions of customers and thousands of products and services. On the other hand, since in electronic contract, the proposal focuses not on humans who make decisions on specific transactions, but on how risk should be structured in an automated environment. Therefore the object is to create default rules for attributing a message to a party so as to avoid any fraud and discrepancy in the contract.