Execution of contracts during lockdown and work-from-home
For the containment of the pandemic in India, Ministry of Home Affairs had to impose lock-down on a national level. This has severely and adversely impacted the business operations in India. One of the major challenges faced by business organizations is in relation to the execution of the contracts. In normal circumstances, business organizations in India prefer to execute contracts physically by affixing one’s signature in the physical copy of the contract. However, considering the prevailing lock-down, travel restrictions and work-from-home where printers and scanners may not be available, execution of the contracts physically is difficult or not possible.
Online execution of agreements is the alternative. An agreement is valid when there is a valid offer and acceptance by the parties to the agreement. A valid agreement which is enforceable is a contract. Please read on what makes an agreement a valid contract.
A. Enforceability of Electronic Records
Section 10A of the Information Technology Act, 2000 (“Act”) recognizes the enforceability of the contracts which have been executed in electronic form or by electronic records. The said provision clearly states that a contract cannot be considered to be unenforceable on the grounds that the communication of proposals, the acceptance of proposals and the revocation of the proposal are in electronic form or electronic record. Section 65A of The Indian Evidence Act, 1872 (“Evidence Act”) also recognizes admissibility of electronic records as evidence subject to fulfillment of certain criteria stated in Evidence Act. Hence, contract which have been executed in an electronic form can be considered to be enforceable in the courts of law subject to validation of the electronic record as stated in the Act.
B. Execution of Electronic Contract
As per the Act, on order to execute contracts electronically, the contract needs to be authenticated by the respective parties entering into the contract. There are two methods by which contract can be authenticated, (i) by affixing digital signature (DSC); or (ii) by affixing electronic signature. However, it is important to note that pursuant to section 3A of the Act, electronic signatures which can be used to authenticate electronic records should either be considered to be reliable (as defined under the Act) or should be listed in the second schedule of the Act.
Pursuant to the Act, an electronic signature is considered to be reliable only when it fulfills the criteria such as (i) electronic signature is only linked to an individual and not to any other person i.e. it should be unique; (ii) electronic signature while execution of the contract was under the control of the signatory to whom such signature is assigned to; (iii) any alteration to be made to electronic signature after affixing signature is detectable; (iv) there should be an audit trail of steps taken during the signing process (ie, primarily to overcome the burden of proof of offer and acceptance). As per second schedule of the Act, electronic signature technique using Aadhaar or e-KYC services shall be considered to be a valid electronic signature. Users with an Aadhaar ID, are free to use an online e-signature service to securely sign documents online. In this case, the online e-signature service integrates with an application service provider (ASP) to provide users with a mobile or web app interface that they can interact with. The users then use this app interface to apply e-signatures to any online document by authenticating their identity using an e-KYC service such as OTP (one-time passcode) provided by an e-sign service provider. The online e-signature service works with an accredited service provider to provide certificates and authentication services that comply with government guidelines.
C. Contracts which cannot be executed electronically
It is important to note that documents which are compulsorily registrable under the Registration Act 1908 or document which require to be notarized cannot be executed electronically.
D. Stamp Duty on Electronic Contracts
As per section 35 of the Indian Stamp Act 1899, no instrument which is chargeable with the duty shall admitted as evidence unless and until appropriate stamp duty has been duly paid. It is imperative to state that the electronically executed contracts have not been exempted from payment of stamp duty. Also, as per Karnataka Stamp Act, 1957, Instrument shall include every document and record created or maintained by an electronic signature and retrieval device or media. Hence, any agreements which have been executed electronically needs to be duly stamped. The Indian government introduced e-stamping to tackle counterfeiting and make the payment of stamp duty easier and glitch free. The central government has appointed the Stock Holding Corporation of India Limited (SHCIL) as the Central Record Keeping Agency (CRA) for all e-stamps used in the country. Hence, stamp duty which needs to be affixed to an electronic contract can be obtained online (by visiting https://www.shcilestamp.com/). However, the said facilities are not available pan-India. There are states which do not permit for paying stamp duty online.
In these difficult times, the pandemic may act as impetus to paperless execution of the contracts. However, it is important to note that execution of the contract electronically shall only be valid if it has been affixed with a digital signature or an electronic signature using the techniques/ steps as mentioned above. It is also important to ensure that the stamp duty (as applicable) is paid while executing contracts electronically.
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