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BITCOIN

In the last few years, several unconventional forms of money have become so
popular that cash transactions have largely become a thing of the past. However,
it can be argued that no other form of money has garnered as much attention in
recent years as Bitcoin, the worlds first decentralized
cryptocurrency. Interestingly, the origin of this virtual currency is shrouded in
mystery.
It was launched in 2009 by a person or group whose only identity is the
pseudonym Satoshi Nakamoto. Bitcoin has been designed in such a way as to
circumvent existing financial systems in most countries, so its use poses several
legal and policy questions. Before examining the legal validity of this virtual
currency, let us first examine how Bitcoin works.
How does Bitcoin work?
Unlike conventional currencies like rupees and Euros, Bitcoin exists almost
completely in the virtual world and is not issued by any central monetary
authority.Instead, it is based on a peer-to-peer network which is similar to the
networks that undergird services like Skype and Bit Torrent. Bitcoins are
created by a complex number-crunching method commonly known as Bitcoin
mining. Bitcoins can be purchased and sold for cash on several exchanges and
websites.Examples of such exchanges include Mt. Gox in Japan, BitBox in the
United States, Bitcurex in Poland, etc. BTCXIndia is Indias first Bitcoin
exchange. BTCX claims to take special efforts to verify the authenticity of its
customers in order to prevent the use of Bitcoins for illegal activities.
Any user who wants to enter into a transaction using Bitcoins needs to install a
digital wallet on a PC or mobile phone.Generally speaking, such wallets are of
three types: software wallets, mobile wallets or web wallets. These Bitcoin
wallets are used to create Bitcoin addresses using which Bitcoin transactions
can be undertaken.Once a user installs a digital wallet and creates a Bitcoin
address, he/she can enter into a transaction with a company that accepts
Bitcoins as a mode of payment for the services that they provide. In order to do
this, a person needs to acquire the recipients Bitcoin address on which the
Bitcoins are to be sent.
All Bitcoin transactions are recorded in a public transaction log known as a
block chain. A transaction is then verified by Bitcoin miners in order to
ensure that the person making the transaction really owns the Bitcoins and to
prevent double-spending.The miner who is able to successfully verify the
transaction first shares the result with the entire Bitcoin network. If his result is
accepted by the network, the transaction is successfully completed and the
miner gets 25 Bitcoins as a reward for his service.
Pros and cons of Bitcoins:
It is widely believed that the increasing use of the internet for facilitating a large
array of transactions necessitates the use of a digital currency.As a result, many
supporters of virtual currencies argue that, Bitcoin, as the most sophisticated
virtual currency in the market, is uniquely positioned to fill that void. Second, as
a decentralized currency, Bitcoin is free from unnecessary government control
and interference that is the bane of most physical currencies.
Third, the system of Bitcoin mining has been designed in such a way that the
maximum number of Bitcoins that can ever be created is 21 million. This
reduces the threat of devaluation of the currency due to a sudden influx of new
Bitcoins.
Finally, and most importantly, as the process of transferring Bitcoins is fairly
straightforward, the transaction costs are much lower.
However, Bitcoin also has certain inherent disadvantages.
First, as it remains unregulated, there is no effective framework for
addressing customer complaints, resolving disputes, processing refunds, etc.
Second, virtual currencies, by their very nature, are highly volatile as
their value is a matter of heavy speculation.As a result, holders of Bitcoins have
to grapple with the possibility of incurring heavy losses.
Thirdly, and more fundamentally, as Bitcoins are not regulated by any
agency, they can be used for funding illegal activities such as terrorism,
gambling, etc relatively easily.As a matter of fact, several news reports indicate
that Bitcoins have been extensively used in money laundering activities and in
other illegal contexts.
Finally, as a digital currency, Bitcoins are susceptible to hacking and
other technology-related problems such as loss of password, malware attacks,
etc.
Legal position of Bitcoins across the globe:
The use of Bitcoins remains a grey area from a legal perspective in most
countries, but some countries have made their position on the use of Bitcoins
abundantly clear.
In China, for example, the use of Bitcoins is restricted. On 5 December 2013,
financial institutions in China were prohibited from handling transactions
involving Bitcoins. The Peoples Bank of China has prohibited financial
institutions or payment companies from setting prices in the form of Bitcoins,
buying or selling Bitcoins or insuring products related to Bitcoin. However,
individuals are not prohibited from using Bitcoins in China.On the other hand,
using Bitcoins is completely legal in Germany.
On 19 August 2013, the German Finance Ministry stated that Bitcoin is
essentially a unit of account which can be used in multilateral clearing circles.It
is treated as private money for tax and trading purposes.Similarly, in the United
States, the Internal Revenue Service issued a statement in March 2014 stating
that Bitcoins would be treated as property and not a currency which implies that
every transaction in which Bitcoins are used would be subjected to capital gains
tax. Bitcoin mining activities in the U.S. are subjected to income tax which is
based on the fair market value as of the date of the specific activity.
Legality of Bitcoins in India:
In June 2013, the Reserve Bank of India acknowledged the use of virtual
currencies and noted that such currencies pose regulatory, operational and other
complex challenges.On December 24th, 2013, the RBI issued a press release
stating that the use of virtual currencies like Bitcoin is not authorized by any
monetary authority.Furthermore, the RBI cautioned users about the risks
associated with the use of digital currencies and advised them to use such
currencies in a circumspect manner.
In January 2014, a man named Venugopal Badaravada made a representation to
the RBI through a lawyer, urging them to clarify their policy with regard to
Bitcoins, but the RBI did not respond to his request. The RBI is closely
monitoring the use of Bitcoins and is keeping an eye on how other central
monetary authorities are reacting to the use of this currency.The definition of the
term currency under the Foreign Exchange Management Act, 1999, empowers
the RBI to include any instrument within the ambit of the definition by way of
an appropriate notification.
The RBI used this power in 2000 to include credit cards within the ambit of the
definition, so it can certainly exercise this power for bringing Bitcoins within
the auspices of the definition.Moreover, the Central Government is also
empowered to include any new securities within the ambit of the definition of
the term security, so Bitcoins can be legalized through this route as well.
Another interesting issue pertains to the legality of transactions involving
Bitcoins under the Sale of Goods Act, 1930. Under that Act, price is an
indispensable component for enforcing any transaction. However, if Bitcoins
are treated as a form of property, then such a transaction would amount to a
barter transaction and would not be enforceable under the Sale of Goods Act.
That being said, such a transaction would be enforceable under the Indian
Contract Act, 1872 as it encompasses lawful consideration and is not opposed to
public policy in any way.Similarly, transactions involving Bitcoins can also be
brought within the ambit of the Income Tax Act if individuals earning Bitcoins
convert their earnings into rupees and then pay income tax on the same.In the
same way, sellers of Bitcoins can be made to pay taxes on capital gains.
Conclusion:
Bitcoin is increasingly gaining prominence in a number of contexts. Although
Bitcoins have not yet been widely accepted in brick and mortar stores in India,
news reports indicate that Castle Bloom, which is a salon in Chandigarh, is the
first physical store to accept Bitcoins. Similarly, highkart.com is the first Indian
website to accept payments exclusively in Bitcoins.
An online portal, Buysellbitco.in, was set up to facilitate the purchase and sale
of Bitcoins, but it was shut down after a raid by the Enforcement Directorate
found that it had violated foreign exchange laws. As is often the case with
inventions that operate primarily in cyberspace, no single country can regulate
the use of Bitcoins.
In an era of digital transactions, the use of digital currencies is inevitable, so
countries have to work together to establish the necessary institutional
framework to embrace and promote these developments, instead of imposing
impediments that stultify their progress.

Trimex v. Vedanta
This post analyses the law on contract formation in India through the recent
case ofTrimex International Fze Limited v. Vedanta Aluminium
Limited (MANU/SC/0057/2010: 2010 (1) SCALE 574).

Trimex International FZE Limited (Trimex), the petitioner, applied to the


Supreme Court of India (SC or Court) under Section 11(6) of the Indian
Arbitration and Conciliation Act, 1996 (Act) for the constitution of an arbitral
tribunal. Section 11(6) reads:

"Where, under an appointment procedure agreed upon by the parties


(a) A party fails to act as required under that procedure; or
(b) The parties, or the two appointed arbitrators, fail to reach an agreement
expected of them under that procedure; or
(c) A person, including an institution, fails to perform any function entrusted to
him or it under that procedure,
A party may request the Chief Justice or any person or institution designated by
him to take the necessary measure, unless the agreement on the appointment
procedure provides other means for securing the appointment."

Vedanta Aluminium Ltd., the respondent (Vedanta) objected to the


application, arguing that there was no contract between the parties and therefore
there was no agreement between the parties to refer disputes to arbitration. [See,
SBP & Co. v. Patel Engineering Limited MANU/SC/1787/2005: AIR 2006 SC
450: 2005(3) Arb.LR 285 (SC), where the Supreme Court held in case the
respondent objected to an application made under Section 11 for the
appointment of the arbitral tribunal, the court had to decide on the existence of
the arbitration clause and then alone refer the dispute to arbitration or appoint an
arbitrator]. A single bench of the SC, consisting of Justice P. Sathasivam, had to
decide whether there was a contract and consequently, an arbitration agreement,
between the parties.

Trimex is a company registered under the laws of Dubai and is engaged in the
business of minerals trading. Vedanta is an Indian company whose business
involves aluminium as a major raw material. A detailed chronology of facts is
provided below.
05.09.2007 Trimex made an offer for 45000 MTs of Bauxite (of Australian origin). Upon
the offer, Vedanta issued a purchase order accepting the said Offer.

09.10.2007 Discussions between Trimex and Vedanta seemed to have taken place for
delivery of two lakh metric tonnes of Bauxite. In furtherance of the discussions,
Trimex wrote to Vedanta stating that they would have to agree on the technical
specifications of the Bauxite cargo and once reached an agreement on the same,
they would reach an agreement on the freight.

10.10.2007 Vedanta apparently (by email) asked Trimex to improve upon their proposal,
which was refused (by email) by Trimex on the same day. Vedanta relented, but
asked Trimex to give two proposals- one for two lakh metric tonnes and the
other for a merely two shipments of bauxite. Trimex was asked by Vedanta to
give separate proposals on CIF basis and on FOB basis.

15.10.2007 Trimex made a proposal (Proposal) to supply Bauxite (through email).


Trimex further stated that it would remain open until 12 PM on 16.10.2007, in
view of the continuous increase in freights. The Proposal also provided for
certain conditions of sale, including those relating to price conditions, liability,
payment of interest, governing law and dispute resolution. The Term regarding
dispute resolution read: arbitration in Mumbai courts (Though this clause
seems to suggest reference of disputes to arbitration, such a clause carries a
great deal of risk because a court may refuse reference to arbitration if it is
contended by the other party that parties intended the disputes to be referred to
courts and not arbitration.. Parties need to be a bit more careful when they
propose a dispute resolution clause) Vedanta made certain comments on the
Proposal and requested Trimex to provide the rates on FOB basis. On the same
date, Trimex responded rejecting the acceptability of Vedantas comments and
refused to provide quotes on FOB basis.
16.10.2007 Vedanta responded, requesting Trimex, inter alia, to provide rates CIF
Kakinada and the break up of price quoted. Trimex stated that they had
extended the time for acceptance by one hour and asked Vedanta if they were
willing to accept their offer. After further correspondences, Vedanta agreed to
the Proposal of Trimex but also stated that they would like to have an option to
terminate the contract after two shipments of bauxite. However, despite the time
having expired, Vedanta wrote to Trimex accepting Trimexs proposal for all the
five shipments.

17.10.2007 Trimex, relying on the agreement with Vedanta, approached a Bauxite


supplier inAustralia who agrees to provide the shipments and entered into a
Charter Party with a ship owner at Oslo, Norway. On the same date, Vedanta
informed Trimex that their agent was not taking enough initiative to handle the
first shipment of the cargo.

20.10.2007 Trimex provided the schedule of shipments, as agreed with the Ship owners,
to Vedanta and stated that they would have to execute an agreement with
Vedanta and agree on the modalities of a Letter of Credit. Further Trimex also
requested Vedanta to provide a draft agreement

26.10.2007 Meeting held between Trimex and Vedanta where, as per the Minutes of the
Meeting, Vedanta recognised the acceptance of Trimexs Offer. The Minutes
provided, inter alia, [a]s per Trimex offer No. TID/F/223/2007 dated 15th
October 2007 and accepted by VAL [Vedanta], the price is on CIF-FO basis. As
per Trimex under such a situation the berthing responsibility should be with
VAL Further, the Minutes provided that parties would finalize the contract.

30.10.2007 The terms of the contract were provided by Trimex to Vedanta

02.11.2007 Trimex sent the terms of the Charter Party as received from the owners of the
ship to Vedanta. Further, Trimex requested Vedanta to finalise the contract and
the Letter of Credit.
08.11.2007 Formal agreement was sent by Vedanta to Trimex which contained, inter alia,
the following arbitration clause.

29. Arbitration

The Parties hereto shall endeavour to settle all disputes and differences relating
to and/or arising out of the Contract amicably.

In the event of the Parties failing to resolve any dispute amicably the same shall
be referred to Arbitration in accordance with the Arbitration and Conciliation
Act 1996, as is prevalent in India. Each Party shall be entitled to nominate an
Arbitrator and the two Arbitrators so nominated shall jointly nominate a third
presiding Arbitrator. The Arbitrators shall give a reasoned award.

The place of arbitration shall be Mumbai, Maharashtra in accordance with


Indian Law and the language of the arbitration shall be English.

The Parties further agree that any arbitration award shall be final and binding
upon both the Parties."

The Parties hereto agree that the Seller shall be obliged to carry out its
obligations under the Contract even in the event a dispute is referred to
Arbitration.

On the same day, Trimex gives certain clarifications on the draft contract.
However, Trimex had no comments on the above arbitration clause

09.11.2007 Formal Bauxite Sales Agreement with Rio Tinto, Australia for the supply of
225000 tonnes of Bauxite

12.11.2007 According to Vedanta, Vedanta asks Trimex to hold the next consignment of
Bauxite till further notice. Trimex replied stating that Vedanta would have to
indemnify Trimex for any claims from the ship owner for any delay/
cancellation of the shipments.
13.11.2007 Trimex said that it was impossible to hold the consignment and asked Vedanta
to purchase the same.

Meanwhile, the ship owners nominated the ship for loading the material on
28.11.2007

16.11.2007 Trimex terminated the contract and reserved its right to claim damages against
Vedanta

18.11.2007 Trimex gave a formal notice to ship owners informing them about the
termination of the Charter Party

19.11.2007 The ship owner made a claim for US $ 1 million

30.11.2007 Trimex asked Vedanta to pay US $ 1 million as compensation for loss because
of the estimated loss for the shipments and US $ 0.8 million as compensation
for loss of profit and other costs due to the termination of the contract. Vedanta
rejected the claim for the compensation.

27.02.2008 and 31.03.2008 Trimex and the ship owner agreed on a mutual settlement.
According to the settlement, Trimex agreed to pay US $ 600,000 in two
instalments. The said instalments were paid on 27.02.2008 and 31.03.2008

01.09.2008 Trimex called upon Vedanta to pay compensation to it and treat the notice as a
notice invoking arbitration under Cl. 29 of the Formal Agreement if Vedanta
failed to pay the same. Trimex nominated Justice Shiv Shankar Bhatt, a retired
Judge of the Karnataka High Court as the arbitrator from its side and requested
Vedanta to nominate its own arbitrator.

14.11.2008 Vedanta rejected the notice invoking arbitration on the ground that there was
no concluded contract between the parties.
Hence, Trimex approached the Supreme Court under Section 11(6) of the Act
for the appointment of arbitrator.

When an application is made to a court under Section 8 or 11 of the Act, and the
same is contested, the threshold question that the court has to decide is whether
there was an agreement to refer any dispute to arbitration or not arbitration.

In such cases, the respondent usually raises an objection the application


contending that there was no arbitration agreement between the parties. In the
instant case, Vedanta raised such an objection. It contended that there was no
contract between the parties because:

the email dated 15.10.2007 and acceptance thereof could not be construed
as a contract because the terms of the agreement were vague and ambiguous.
Further, the parties had not even agreed upon various essential terms such as
price, delivery point, insurance, time schedule, transfer of title, demurrage etc.

it was always the intention of the parties that a formal contract would be
signed between the parties.

Decision:The Contract was concluded on 17.10.2007 when, in terms of Section


4 of the Indian Contract Act, 1872, the acceptance was communicated to
Trimex. Section 4 of the Indian Contract Act, 1872 reads:

Section 4 of the Indian Contract Act, 1872 states:

Communication when complete.-The, communication of a proposal is


complete when it comes to the knowledge of the person to whom it is made.
The communication of an acceptance is complete,-
as against the proposer, when it is put in a course of transmission 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.

Against contention of ambiguity, the court held that there was an agreement on
essential terms. The court held that commercial parties often enter into an
agreement on material terms and enter into a formal agreement later. Simply
because parties intended to enter into a formal agreement does not prevent the
contract reached from being enforced. The court relied on decisions of the Court
of Appeal and the Privy Council and held that the Indian Law was no different
from English Law on the said point.

In view of the fact that there was an arbitration agreement between the parties,
the Court appointed, pursuant to Clause 6 of the Proposal, Justice B.N.
Srikrishna as arbitrator and fixed Mumbai as the venue of arbitration.

Appraisal:
Broadly, there are two aspects to this case: one, whether there was a concluded
contract between Trimex and Vedanta; two, whether there was an arbitration
agreement between the parties.

Existence of a Contract: To recount the facts briefly, on 15.10.2007 Trimex


made a proposal for supply of bauxite on certain terms such as price conditions,
liability, payment of interest, governing law and dispute resolution. Vedanta
needed more information on price. Hence, it requested Trimex to give more
information on the price. After making some comments on the terms, which
were not accepted by Trimex, Vedanta agreed to the Trimexs proposal on
16.10.2007. At this stage, the parties seemed to have reached a consensus. Now,
the question here would be whether this consensus would constitute a contract.
According to Trimex, it did; but from Vedantas point of view, it did not,
because the terms of the proposal were vague and ambiguous. The court decided
that there was no vagueness or ambiguity in the terms.

The contention in this case that there was no contract because the terms of the
Proposal were vague is not correct for two fundamental reasons. One, the
contract law does not mandate the parties to agree any specific term. It only
necessitates that the agreement between the parties must not be uncertain.
Section 29 provides:

Agreements void for uncertainty: Agreements, the meaning of which is not


certain, or capable of being made certain, are void.
Illustrations
(a) A agrees to sell to B " a hundred tons of oil ". There is nothing whatever to
show what kind of oil was intended. The agreement is void for uncertainty.
(b) A agrees to sell to B one hundred tons of oil of a specified' description,
known as an article of commerce. There is no uncertainty here to make the
agreement void.
(c) A, who is a dealer in cocoanut-oil only, agrees to sell to B "one hundred.
tons of oil". The nature of A's trade affords an indication of the meaning of the
words, and A has entered into a contract for the sale of one hundred tons of
cocoanut-oil.
(d) A agrees to sell to B " all the grain in my granary at Ramnagar ". There is no
uncertainty here to make the agreement void.
(e) A agrees to sell B " one thousand maunds of rice at a price to be fixed by C
". As the price is capable of being made certain, there is no uncertainty here to
make the agreement void.
(f) A agrees to sell to B " my white horse for rupees five hundred or rupees one
thousand". 'There is nothing to show which of the two prices was to be given.
The agreement is void.

In fact, the Indian Contract Act seems to indicate that the subject matter of the
contract must be capable of being identified and the price must be capable of
being made certain. (See the illustrations to Section 29 above) The parties may
agree not to agree on certain aspects and leave it either for the law to decide the
same or for negotiation between them if and when situation necessitates so. In
this regard, contract law performs the important function of reducing the
transaction costs of the parties by supplying default rules, which the parties
have an option to contract around. [Ian Ayres and Robert Gertner brought an
important insight into the law, in general, and contract law, in particular- the
dichotomy of default rules and mandatory rules. According to them, contract
law provides for certain rules which could be contracted-around by parties
willing to do so. Mandatory rules are those rules which cannot be contracted-
around. See, Ian Ayres and Robert Gertner, Filling Gaps in Incomplete
Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87 (1989)].

One of the critical functions of the default rules is to supply default rules to
govern the rights and liabilities of the parties who do not wish to incur costs in
contracting-around the default rules and providing for elaborate contracts. (This
transaction cost reduction function of laws is, in many cases, inadequate for the
parties because of several reasons. For example, the nature of a business might
necessitate contract performance to be in a particular manner, or the risks in a
particular business might warrant additional protection to a party. Standard
Contracts play a major role in addressing these inadequacies of default rules). In
the instant case, there was an agreement between Trimex and Vedanta as to the
quantity to be supplied and the price. That alone was sufficient for the court to
enforce the contract. Hence, the court decided, and rightly so, that there was a
contract between Trimex and Vedanta when the email accepting the proposal of
Trimex was complete, and a contract was formed when the said email was
opened by the personnel of Trimex.

Two, businesses, in practice, hardly wait for lawyers to haggle on the


notwithstandings and the whearases. After a bidder (in case of contracts
entered into after inviting bids) submits the bid and the successful bidder is
chosen, the fact is communicated to the bidder through a Letter of Intent or a
Letter of Acceptance containing commercial and other significant terms of the
transaction. Such Letter of Intent or Acceptance is usually taken as the
document governing the rights and liabilities of the parties till a formal contract
is entered into by the parties. However, it may so happen that it becomes
necessary for the parties to come to a consensus. In such cases, even issuing a
Letter of Intent or Letter or Acceptance becomes a drawn-out exercise. In such
cases, parties simply agree on a few terms that they consider important. An
agreement, thus reached, does not in any way fall short of a formal contract in
terms of enforceability. Contract law does not, and courts should not shun from
such contracts simply because they are not elaborate- the common example
being purchase of a ticket in the bus. Except for the passenger providing the
destination and the bus ticket providing for the price, there hardly exists any
term of contract exchanged between the parties. Yet, such a transaction is
recognised as a contract.

It was well within the knowledge of Vedanta that Trimex had to enter into a
contract with the ship owner for the delivery of Bauxite to Vedanta. Trimex had
urged Vedanta to confirm the latters acceptance so that it could enter into a
contract with the ship owner. Hence, the intention of the parties to bind each
other for their respective promises before Trimex entered into a contract with
the ship owner was clear. Relying on the consensus between Trimex and
Vedanta, the former entered into with the ship owner. The fact of existence of
the contract between Trimex and the ship owner was communicated to Vedanta.
Hence, the court was right in rejecting the contention of Vedanta that there was
no contract in existence.

It is surprising to note that the court did not cite even a single decision of the
Supreme Court on certain issues that arose in the instant case. On the issue as to
as to whether there was a contract in existence in furtherance of exchange of
correspondences between the parties, the Supreme Court had, in Rickmers
Verwaltung GNBH v. Indian Oil Corporation Limited (AIR 1999 SC 504:
(1999) 1 SCC 1: MANU/SC/0726/199), clearly contemplated that possibility of
exchange of correspondence amounting to contract between parties (Perhaps,
the proposition was so well established that the court did not deem it important
to cite a case on the said point). On the issue as to whether a bargain between
the parties who intend to enter into a formal agreement subsequently is binding
or not. a three judge Bench of the Supreme Court had, in Kollipara Sriramulu v.
T. Aswathanarayana and Ors. (AIR 1968 SC 1028: MANU/SC/0019/1968),
held:

[A] mere reference to a future formal contract will not prevent a binding
bargain between the parties. The fact that the parties refer to the preparation of
an agreement by which the terms agreed upon are to be put in a more formal
shape does not prevent the existence of a binding contract. There are, however,
cases where the reference to a future contract is made in such terms as to show
that the parties did not intend to be bound until a formal contract is signed. The
question depends upon the intention of the parties and the special circumstances
of each particular case.

Instead the court, at first, cited few decisions of the English courts and, after
suggesting that the Indian law has not evolved a contrary position, then held
cited a Privy Council decision on the above propositions. Usually, it would be
expected of the court to cite the most relevant decision in the Indian law on the
point (Citing all the decisions of the Supreme Court on the said issues may not
be prudent practice. But the court could have cited at least one or a few of the
Supreme Court decisions that had either established the said principles or had
been extensively dealt with the said issue) and then cite judgements of courts of
other jurisdictions.

Arbitration Agreement: On 01.09.2008, a claim-cum-notice invoking


arbitration under Clause 29 of the Formal Agreement was served upon Vedanta,
wherein Trimex appointed a retired Judge of the Karnataka High Court as one
of the arbitrators and asked Vedanta to appoint an arbitrator so that the two
arbitrators so nominated could, in terms of the said Clause 29, appoint the third
arbitrator. Trimex had contended before the court that there was an arbitration
agreement between the parties because Vedanta had no comments to offer on the
arbitration clause in the Formal Agreement. It is true that the terms of the
Formal Agreement were never agreed upon. While negotiations were taking
place between the parties on the Formal Agreement, Vedanta had no comment to
offer on the arbitration clause. Yet, there was no arbitration agreement between
the parties in terms of Clause 29 of the Formal Agreement because the
Agreement was still under negotiations. The rationale for the same ought to be
understood in the context of how negotiations take place between commercial
entities. During negotiations, parties might want to revisit and renegotiate
certain clauses despite having reached a prior consensus on the same. Causes
for such renegotiation may be manifold. For instance, a party might have used
the arbitration clause to bargain for a better term. But if the other party does not
agree for the latter term, the former party might want to get an arbitration clause
which is in its favour. It is possible that such renegotiation to occur. In the
instant case, though there was no deviation by Vedanta on the clause suggested
by Trimex, there was no arbitration agreement between the parties in terms of
Clause 29 of the Formal Agreement because Clause 29 was not finally agreed to
between Trimex and Vedanta, and therefore, there was no arbitration agreement
between the parties in terms of Clause 29 of the Formal Agreement. Hence the
court, rightly, found that the arbitration was to be conducted not in terms of the
arbitration clause found in the Formal Agreement but in terms of the agreement
reached between the parties by email.

Conclusion:Contract law, for that matter, business law in general, must take
into consideration the practices of business and law must be expounded by the
legislature and the courts to implement the business decisions between
consensual parties. Hence, the concepts of contract law and their legal
consequences should ideally represent business practices, unless the overt intent
of the law is to a secure a specific consequence

Introduction

An interesting factor emerging in the world of computer technology has been


the rising of India as a major player in the computer software 2 and resources
sector.3 The economics of this factor has baffled economists worldwide. A third-
world country which ranks almost at the bottom of the development
index4 could rise to such potential in one of the worlds most hi-tech and
growth-oriented sectors is indeed remarkable. The study of this aspect, although
inviting, is beyond the scope of this paper.

According to recent surveys, the trends in the software industry appear to be


repeating themselves in the virtual world. Indias position in the internet
industry makes it really explosive. India will have the largest number of
internet-users in Asia by this year end, implying a yearly growth rate of over
273%.5 The e-commerce scenario is also bullish. 6 This unprecedented growth of
internet, the concomitant regulatory fears that go with it and the need for
providing a legal framework for e-commerce in India forms the background in
which the Information Technology Act, 2000 (the Act) needs to be appreciated.

The jurisprudence behind regulation

Before embarking upon the study of the issues arising in the Act, it would be
worthwhile to ponder for a moment on the jurisprudence of regulation in the
virtual world. The early thoughts on cyberspace were of an ideal libertarian
society a society where freedom would be the law and the presence of law
and regulation, a crippling of this freedom. Cyberspace, the story went, could
only be free. Freedom was its very nature.7

However dj vu the thought might be, regulation of IT throughout the world


has been more conspicuous by its presence than its absence. The reasoning
being simple the true fruits of freedom in any sphere cannot be enjoyed
unless the State builds a structure and a platform upon which the liberties and its
concomitants can play.8 And therefore, a vast paradigm of legal rules have been
created to facilitate the reaping of utmost results and prosperity by the use of IT.
This legal framework ranges from facilitation of e-commerce, protection of
privacy, the regulation of computer crime, computer misuse and regulating
illegal content on the net. This short paper focuses only on a few contractual
issues which arise in the IT Act relating to electronic commerce.

I. Validity of online contracting


The validity and the formation of contracts forms the kernel of ecommerce law.
This section would try and analyse the issues which arise therefrom and the
treatment to the same by the IT Act.

The Indian Contract Act, 1872 gives a statutory effect to the basic common law
contractual rule that a valid contract may be formed if it is made by free consent
of the parties, competent to contract, for a lawful consideration and for a lawful
object and which is not void ab initio. 9 The Contract Act does not prescribe or
favour any particular way of communicating offer and acceptance. It may be
done by word of mouth, writing or even by conduct. 10 Thus, there is no requisite
of writing for the validity of contracts except for cases which are specifically
required by law to be in writing.11

It would appear that even in the absence of any specific legislation validating
online contracts, the validity of online contracts cannot be challenged solely on
such technical grounds.12 Therefore, the IT Act avoids incorporating any
specific provision giving validity to online contracts.13

II. Time of formation of contract

The importance of time of formation of contract is well known to any student of


law viz. to decide priorities between competing claims, to determine the law
applicable to the contract etc. The time aspect of contract formation is also
important in ascertaining the place aspect of contract formation. If the contract
is classified as one where the postal rule applies, then the place of formation of
contract would be the place where the acceptor commits his acceptance. On the
other hand, if it is classified as one to which receipt rules would apply, then the
place where the contract would be formed would be the place where the offeror
receives acceptance.14
Thus, it is essential that the law determines the when of contract formation.
The Model Law guidelines state that the Model Law does not intend to define
the when and where of contract formation. 15 The Model Law only lays
down a framework of rules regarding dispatch and receipt of electronic records.
The principles of formation of contract are to be arrived at by a combined
application of the domestic contractual principles and the relevant provisions of
the Model Law.16

Before embarking upon the study of the provisions in the IT Act reflecting the
Model Law, it would be pertinent to have a brief survey of the rules relating to
contract formation in the real world. The rules regarding formation of contract
can be broadly grouped into two categories:

(a) mailbox rule or postal rule which is applicable when the means of
communication is non-instantaneous like post, telegraph etc. which states
that a contract comes into effect when the acceptor commits his acceptance
to the post.17 The rule is designed to remove uncertainty from the contract-
formation process. It provides the offeree with the confidence that an
acceptance once posted will be effective even if postal system delays
delivery of the acceptance beyond the offer date,18 and

(b) receipt rule which is applicable when the communications are


instantaneous like telephone, telex or fax. 19&20 It lays down that a contract is
complete when the acceptance is received by the offeror.

Reverting back to the IT Act, Section 13 provides the framework for


understanding the principles of contract formation in the cases of electronic
contracts. It lays down inter alia, that, unless otherwise agreed:

(1) the despatch of an electronic record occurs when it enters a computer


resource outside the control of the originator;
(2) the time of receipt of an electronic record is the time when record
enters the designated computer resource (if the addressee has a designated
computer resource);

(3) if the electronic record is sent to a computer resource of the addressee


that is not the designated computer resource, receipt occurs at the time when
the electronic record is retrieved by the addressee;

(4) if the addressee has not designated a computer resource along with
specified timings, if any, receiptoccurs when the electronic record enters the
computer resource of the addressee.

However, the above rules do not tell us anything more than when dispatch and
receipt of electronic records takes place.21&22 Therefore, in order to understand
the rules relating to electronic contract formation, the principles of the Indian
Contract Act will have to applied in this context. Section 4 of the Contract Act
lays down the following rules regarding communications of offers and
acceptances:

(1) The communication of a proposal is complete when it comes to the


knowledge of the person to whom it is made.

(2) The communication of an acceptance is complete, as against the


proposer, when it is put in a course of transmission 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.
(3) The communication of a revocation is complete as against the person
who makes it, when it is put into a course of transmission to the person to
whom it is made, so as to be out of the power of the person who makes it; as
against the person to whom it is made, when it comes to his knowledge.

A combined application of Section 4 of the Contract Act and Section 13 of the


IT Act would reveal the following law for contract formation in the case of
electronic contracts in the event that nothing contrary has been agreed to
between the parties in their contract:

(a) The communication of an offer becomes complete at the time when


the electronic offer enters any information system designated by the offeree
for the purpose, or, if no system is designated for the purpose, when the
electronic offer enters the information system of the offeree, or, if any
information system has been designated, but the electronic offer is sent to
some other information system, when the offeree retrieves such electronic
record.23

(b) The communication of an acceptance is complete as against the


offeror when the electronic acceptance is dispatched such that it enters a
computer resource outside the control of the acceptor.24

(c) As against the acceptor, the communication of acceptance would be


complete when the electronic acceptance enters any information system
designated by the offeror for the purpose, or, if no system is designated for
the purpose, when the acceptance enters the information system of the
offeror, or, if any information system has been designated, but the electronic
record is sent to some other information system, when the offeror retrieves
such electronic acceptance.
(d) The communication of revocation (of an offer or acceptance) is
complete as against the person who makes it when the electronic record is
dispatched such that it enters a computer resource outside the control of the
person making such offer or acceptance.

(e) As against the person to whom it is made, such revocation is complete


when it comes to his knowledge i.e. Rule (2), (3) or (4) of Section 13
enunciated above would apply.

To sum up, a binding contract would take place once the acceptor dispatches the
electronic record such that it enters a computer resource outside the control of
the acceptor.25

However, the above proposition may not hold good in all types of electronic
contracts. The Supreme Court in Bhagwandas v.Girdharlal26 following the
English decision in Entores Ltd. v.Miles Far East Corpn.27 has held that Section
4 of the Contract Act is only applicable in cases of non-instantaneous forms of
communication and would not apply when instantaneous forms of
communication are used. The Court observed that the draftsman of the Contract
Act did not contemplate the use of instantaneous means of communications.
Hence, where proposal and acceptance are made by instantaneous means of
communications like the telephone, telex etc., the postal rule does not apply and
the contract is made where the acceptance is received. Therefore, the default
rules elucidated above may have a relevance only in non-instantaneous forms of
contract formation.

In the electronic context, the following two situations need to be considered: (a)
E-mail contracts. (b) Web-click contracts.

(a) E-mail contracts: Though e-mail communication has some of the trappings
of instantaneous communication, nevertheless, it is a fragmented process
involving many stages. The e-mail message is split into various packets and sent
via different routes. Further, unlike in instantaneous forms of communication,
the sender does not know if the transmission of the e-mail is successful, for
even though he gets a delivery receipt, it only signals delivery to the mailbox
and does not indicate that the other party has the knowledge of the receipt.
Thus, e-mail messages would come under the category of non-instantaneous
form of communication. The default rules enunciated above would apply to e-
mail contracts.

(b) Web-click contracts: The case of web-click or click-wrap contracts is


different as such contracts are formed instantaneously:

The main difference between click-wrap contracts and e-mail is that


communications between web clients and servers, unlike e-mails is
instantaneous. The best way to imagine the transfer of data between
computers is to treat it as a telephone conversation, just one between
computers rather than individuals. If either party goes offline at any point,
the other will be aware of the change in status. This is because all
communications between clients and servers have an inbuilt self-checking
mechanism called a check sum.28

Applying the ratio of Bhagwandas26 and Entores27 cases it would seem that in
web-click contracts a contract is completed when the offeror receives the
acceptance in contradistinction to the postal rules applicable to e-mail contracts.
Further, communication of an offer or acceptance in the web-click mode is
complete when the addressee is in receipt of the electronic record as defined in
Section 13(2) of the IT Act.

III. Revocation of offers and acceptances


Under Section 5 of the Contract Act, an offer may be revoked at any time before
the acceptor dispatches his acceptance. The legal position on this issue will be
the same when we consider revocation of offers in electronic contracts. An offer
could be revoked at any time before the acceptor has dispatched his acceptance
i.e. before the electronic acceptance is dispatched by the acceptor such that it
enters a computer resource outside the acceptors control.

However, several practical problems arise when we consider revocation of


acceptances.29 In real-world contracts it is possible for the acceptor to revoke
acceptance of the offer before it comes to the knowledge of the offeror. This
would seem highly unlikely considering the almost instantaneous nature of
virtual-world contracts. So where an acceptance is sent via an electronic record,
it may not be possible for the acceptor to revoke it before it comes to the
knowledge of the offeror.

However, there may be one possibility where revocation may still take place i.e.
when the acceptance is sent by an electronic record and the same is sent to a
computer resource which is not the designated computer resource of the offeror
[see Section 13(2)(a)(ii)]. In such situations the acceptor can revoke his
acceptance at any time before the acceptance is retrieved by the acceptor. Save
this situation, the concept of revocation of acceptance in online contracts seems
to have only academic value. Further, it is not clear what would prevail when
both the acceptance and the revocation are retrieved by the offeror at the same
time.

IV. Battle of forms and the IT Act

Indian courts following the traditions of common law have developed the
doctrine of last-shot rule. This cardinal rule states that an acceptance should
be unqualified and absolute and any acceptance even with little variation is no
acceptance at all.30 A varied acceptance is a counter-proposal which if accepted
by the other party becomes a concluded contract. Thus in a situation where there
is a multitude of counter-offers, if there is a contract at all then it is one on the
basis of the final unqualified document of acceptance. And therefore, it is often
called the last-shot doctrine.

In the virtual world, two scenarios have to be considered in the above context.
Firstly, the case of web-click contracts such contracts are usually standard-
term contracts with the customer having little or no choice to alter its terms. The
incidence of a battle of forms situation in such cases appears remote. However,
in the second scenario of e-mail contracts this battle of counter-offers is more
likely, the reasons for which require little elucidation.

The Vienna Convention on International Sales of Goods drafted by UNCITRAL


needs to be considered at this point. The Convention provides that

a reply to an offer which purports to be an acceptance but contains


additional or different terms which do not materially alter the terms of the
offer constitutes an acceptance, unless the offeror, without undue delay,
objects orally to the discrepancy or dispatches a notice to that effect. If he
does not so object, the terms of the contract are the terms of the offer with
the modifications contained in the acceptance.31

The guidelines on the Model Law on e-commerce state that the courts and other
national authorities when implementing the Model Law in their domestic
legislation should interpret the Model Law with reference to its international
origin in order to ensure uniformity.32 If the parties involved are domestic
parties then the courts would have no hesitation in applying the aforesaid last-
shot rule. However, in cases with an international element a question would
arise whether the doctrine will be applicable or is it to be replaced by the rules
in the international context33 i.e. whether the courts need to abandon their
common law rule and adopt the UNCITRAL CISG Rules. The situation is not
clear but the author would prefer the international-context approach for such
an approach would be consistent with the intention of the Model Law to ensure
universal uniformity in electronic transactions.

V. Place of contract and the jurisdiction of court

Under the traditional rules of contracts in the real world, the place where a
contract is concluded is the place where the letter of acceptance is posted
(where the postal rule is applicable) and in the case of instantaneous contracts it
is where the offeror receives the acceptance.

The IT Act proposes that the place of the dispatch and the place of receipt is the
place where the originator and the acceptor have their respective places of
business. This means that irrespective of the place from where the electronic
record is sent or received, the place of contract would be either a place where
business of the offeror or the acceptor is.34

This would lead to some contradiction with the Civil Procedure Code which in
Section 2035 lays down that a suit may be brought up in the place where the
defendant has his place of business or where the cause of action arises. The
place where the cause of action occurs may be the place where the contract
takes place or where the performance takes place. The IT Act appears to have
fused these two concepts of place of business and the place where the contract is
formed. The situation may be summed up as under:

That in the case of e-mail contracts the place of contract formation will be the
place where the acceptor has his place of business and in the case of web-click
contracts, the place of contract will be the place where the offeror has his place
of business.36 Thus, by fusing the concepts of place of contract formation and
the defendants place of business, the jurisdictional avenues available to the
aggrieved party appear to have been limited.

VI. Questions of agency

Some commentators on the IT Act have argued about the validity of electronic
contracts in the absence of an immediate legal personality in some virtual-world
contracts. For example, a consumer and a dynamic HTML page or an e-
commerce server of the seller may enter into personal dialogue with the visitor
and exchange information of various kinds. While the buyer may be personally
supervising the purchase at his end, the seller is by common practice not
personally intervening in the conclusion of the sale contract. It is argued that
unless the server is the authorised agent of the seller, the contract between the
buyer and the seller is void ab initio. Taking the proposition further, it is put
forth that agents should have a personality, legal or natural in order to bind their
principals and that in the absence of any sanction by law, computers have no
personalities, legal or natural. Therefore, such contracts are invalid.37

In the opinion of the author the proposition proceeds from a wrong premise that,
computers have to be agents of parties in the traditional sense in order to enter
into contracts. The concept of electronic agent is unlike an agent in the
traditional sense. The term electronic agent is more akin to the idea of
extension of personality than the concept of agency. The acts of the computers
are attributed to the person for whom it is acting. 38 Even otherwise, in the
matters of contract formation, the objective test of agreement is adopted. The
law will attribute to a person an intention which that persons conduct bears
when reasonably construed by a person in the position of the person to whom it
is addressed.39 Article 2-B of the Uniform Commercial Code in the US also
echoes a similar view.40
However, there is some merit in the argument that the Act binds a legal
personality to the acts of mechanical devices and needs to be addressed. While
we are familiar with the concept of a human agent and being bound by the acts
of a human agent, the use of automated devices for transacting on our behalf
presents new risks. For example, we may find ourselves being bound by an
unintended act of the programmed device arising from a software defect or
otherwise.41 This risk is highlighted by Argos case in the UK where by some
inadvertence the price of television sets was described as 3 instead of 200. A
vast number of orders were placed and the question was whether the Company
could be bound by the inadvertent 3 offer.42

The IT Act lays down a rather strict rule of attribution of all e-records to the
originator if the originator programmed the information system or was
programmed on his behalf to function automatically.43 Thus the originator seems
to have been unduly burdened.

However, the Model Law seems to have a more moderate approach. The
following safeguards have been provided inter alia, 44 that the electronic record
will not be attributed to the originator and the addressee cannot rely on the
record as that from the originator when the addressee receives a notice from the
originators disclaiming the same and the addressee had reasonable time to act
accordingly or at any time the addressee knew or should have known, had it
exercised reasonable care or used any agreed procedure, it would have known
that the data message was not that of the originator or that there was some error
in the data received. In the absence of any express safeguards in the Act, 45 it is
doubtful if the courts would adopt the test of reasonableness to give succour to
the originator in such cases.

VII. Authentication of electronic records


The importance of legal recognition of digital signatures in the facilitation of e-
commerce needs little mention. The Act provides legal recognition to digital
signatures and also envisages a scheme of Digital Signature Certificates to be
issued by third parties. However, the litera legis of the definition of digital
signatures in the Act could give rise to several problems.

The Model Law offers a broad definition of digital signatures and is


technologically neutral.46 However, the IT Act in Section 3 while trying to
define digital signature seeks to circumscribe it within certain technological
limits. It provides that authentication of electronic record can only be effected
by the asymmetric crypto system and hash function.47

In the virtual world where rapid change and progress is the norm, it is absurd to
restrictively legalise the use of a particular technology in the form of
asymmetric crypto system.48

VIII. Consumer protection and e-commerce

A serious omission from the Act has been the absence of any provision
clarifying/protecting the interests of the consumer in e-commerce contracts. The
position of a consumer in virtual-world contract is vulnerable for he has no
ready means either to verify the authenticity of the seller or the enforceability of
his rights against the seller in the case of breach or fraud especially when the
seller is situated in a foreign country.49

IX. Error or loss in transmission of electronic records

The Act does not provide any solution to situations where the electronic records
are lost due to technical errors. This may create several pertinent questions on
which party is to bear the responsibility in such cases. 50 It may be noted that the
Uniform Computer Transactions Act (UCTA) in the US has provided rules for
allocation of responsibility in such situations.51

Conclusion

Infallibility not being a human characteristic, it is unlikely that any legislative


Act can be completely free of blemishes. This is particularly so in the case of
cyberspace which in its present form is barely a few decades old. The problems
which it throws up will have to be dealt with slowly and cautiously. Lessons
will have to be learnt and legislators will have to be ever aware of the new
challenges posted by cyberspace. Moreover, enforcement machinery will have
to gear up to answer the challenges thrown by the new technology. Lastly, a
lasting and effective IT regulation can take place only by international
consensus and harmonisation. It is only when the legislators worldwide
appreciate that the global nature of cyberspace makes it but imperative that any
successful attempt in regulating it has to be but global, only then can one
achieve real regulation of IT. Individual and heterogeneous attempts at
regulation by nations cannot and would not be complete and fool proof by
themselves.

1. Associate, Fox Mandal & Co., New Delhi. Return to Text

2. India enjoys an 18.5 per cent market share in the global market for
customized software. NASSCOM survey reveals that software and services
exports from India generated revenues of Rs 9100 crores in Q3 of 2001-02.
This was up from Rs 7270 crore for the corresponding period in the previous
year, and represented a growth of 25%. Available at:
http://www.nasscom.org/articles/q3 indian sw logs.asp Return to Text

3. India has the second-largest pool of software engineers after the US. Return
to Text

4. India has been ranked at 115th position out of total of 161 countries in the
2001 UNDP Human Development Report, available at:
http://www.undp.org.in/NEWS/PRESS/ press214.htm Indias position in
technological development is 63rd in a total of 72 countries according to the
UNDP Technological Index available at: http://www.undp.org.in/media/misc/
14072001dc.htm Return to Text

5. Though India still lags behind stalwarts like China, Japan and Taiwan in
terms of internet usage yet the gradual quickening in the pace of Indias
internet growth can be judged by the India Internet Logbook, 2000, which
reports over 1.8 million subscribers (and more than 5.5 million users). And
the estimated figure by 31-12-2003 is a whopping 50 million! Available at:
http://www.nasscom.org/it industry/indian scenario.aspReturn to Text

6. The total volume of e-commerce transactions in India was about Rs 450


crores in 1999-2000. The NASSCOM survey revealed that e-business
transactions in India are expected to exceed Rs 2300 crores in 2000-01 and
go up to a whopping Rs 40,000 crores in 2003-04. Available at:
http://www.nasscom.org/it industry/ecomm survey.asp As per a NASSCOM-
McKinsey Study, 1999, India has the potential to earn revenues worth US $
10 billion by 2008 from e-business solutions. (Both the domestic and export
markets put together.) Available at: http://www.nasscom.org/it
industry/ecomm in india.aspReturn to Text

7. Lessig, Lawrence: Code is Law, at p. 5. Return to Text


8. It may be noted that there is a preponderant school of thought which is of the
view that although controls in cyberspace are needed, the same cannot be
brought about by regulation but by the architecture of cyberspace itself.
However this view is beyond the scope and purview of the present paper. See
Lessig, Lawrence:Code and Other Laws of Cyberspace. Return to Text

9. Section 10, Indian Contract Act, 1872. Return to Text

10. Section 3, Indian Contract Act, 1872. Return to Text

11. See Section 10, Indian Contract Act, 1872. Return to Text

12. Some commentators have viewed otherwise. They have opined that e-
commerce in India had no legal validity before the enactment of the IT Act.
See Indias cyber law comes into force, available at:
http://www.legalserviceindia.com/cyber/indian cyber law.htm Return to Text

13. However, the UNCITRAL Model Law has a specific provision regarding
validity of contracts: Return to Text

Article 11. Formation and validity of contracts.(1) In the context of contract


formation, unless otherwise agreed by the parties, an offer and the acceptance
of an offer may be expressed by means of data messages. Where a data
message is used in the formation of a contract, that contract shall not be
denied validity or enforceability on the sole ground that a data message was
used for that purpose. Return to Text

14. See infra. Return to Text

15. The author derived the idea of these words from Prof. Andrew Murray:
Entering into Contracts Electronically : The Real W.W.W., in Law and the
Internet (Edward and Waelde Edn.). Return to Text
16. See para 78 of the guidelines to Article 15 of the Model Law. Return to Text

17. The postal rule is one of the exceptions to the general rule that an
acceptance must be communicated and received by the offeror in order to
conclude the contract. See Dunlop v. Higgins (1848) 1 HL Cas 381;Harris
case (1872) LR 7 Ch App 587; Brogden v.Directors of the Metropolitan
Railway Co. (1877) 2 App Cas 666. Return to Text

18. See Downing and Harrington: The Postal Rule in E-commerce: A


Reconsideration, see fn 33, infra. Return to Text

19. Although where a contract is made by post acceptance is complete as soon


as the letter of acceptance is put into the post box, where a contract is made
by instantaneous communication e.g. by telephone, the contract is complete
only when the acceptance is received by the offeror, Lord Denning
in Entores Ltd. v.Miles Far East Corpn., (1955) 2 QBD 327 : (1955) 2 All ER
493; also see Brinkibon Ltd. v. Stahag Stahl, (1983) 2 AC 34 : (1982) 1 All
ER 293. Return to Text

20. However, some authors question the applicability of postal rules and receipt
rules on the basis of categorisation of communication as instantaneous or
non-instantaneous. Instead they hold that the postal rule would be applicable
when the communications are delivered via an agent or a trusted third party.
See Davies: Law and the Internet (L. Edward and C. Waelde Edn.) (Hart,
Oxford, 1997). Return to Text

21. Dr Farooq Ahmed in his paper on electronic commerce, argues that Section
13 of the Act has modified the substantive rules for communication of offer
and acceptance in India. He holds that Section 13 is a half-way house
between the postal and the receipt rules. In the opinion of the author this view
is unfounded. Section 13 does not attempt to either prescribe rules for
contract formation nor does it seek to define the meanings of communication
of offers and acceptance. The provision merely clarifies the concepts of
dispatch and receipt in the case of electronic records. The existing rules of
contract formation i.e. either the mailbox rules or the receipt rules will have
to be applied to decipher when a contract has been concluded. Para 78 of the
guidelines to Article 15 of the Model Law seem to reinforce the views of the
author. Return to Text

22. The EU e-commerce directive also does not provide for express rules
regarding contract formation but only indicates when orders and
acknowledgements from customers and service- providers are deemed to be
received. See Articles 9-11, available at: http://europa.eu.int/eur-
lex/pri/en/oj/dat/2000/1 178/1 17820000717en00010016.pdf Return to Text

23. See Section 13(2) of the IT Act. Return to Text

24. See Section 13(1) of the IT Act. Return to Text

25. Unless the acceptor intends to revoke his acceptance.Return to Text

26. AIR 1966 SC 543 Return to Text

27. (1955) 2 QBD 327 : (1955) 2 All ER 493. Return to Text

28. See Murray: Entering Into Contracts Electronically: The Real W.W.W.,
Chapter 2 of Law and the Internet(Edwards and Waelde Edn.), 2nd Edn.; also
see Bainbridge: An Introduction to Computer Law, 4th Edn., Chapter 21.
Also see Dickie: When and Where are Electronic Contracts Concluded?
(1998) 49 NILQ 332. Downing & Harrington: The Postal Rule in Electronic
Commerce: A Reconsideration, 2000 (2) Communications Law 43. Return
to Text
29. Doctrine of split acceptance. Return to Text

30. Section 7(1), Indian Contract Act. Return to Text

31. See Article 19 of the Convention available at:


http://www.cisg.law.pace.edu/cisg/ text/treaty.htmlReturn to Text

32. Para 42. The purpose of para (1) (of Article 3) is to draw the attention of
courts and other national authorities to the fact that the provisions of the
Model Law (or the provisions of the instrument implementing the Model
Law), while enacted as part of domestic legislation and therefore domestic in
character, should be interpreted with reference to its international origin in
order to ensure uniformity in the interpretation of the Model Law in various
countries. Return to Text

33. See Ahmed, Farooq: E-commerce: An Indian Perspective, International


Journal of Law and Information Technology, Vol. 9, No. 2 available at:
http://www3.oup.co.uk/inttec/hdb/Volume 09/Issue
02/pdf/090133.pdf. Return to Text

34. Depending upon whether it is an e-mail contract or a web-click contract.


See supra. Return to Text

35. See Section 20 of the Civil Procedure Code, 1908. Return to Text

36. The authors proposition does not comprehend a situation where a breach of
contract may also be sued upon where the performance of the contract takes
place.Return to Text

37. See ITA-2000 and Creation of Agency, available at:


http://www.naavi.org/cl editorial/edit 28oct00 1.htmReturn to Text
38. See Section 11(3) of the Act. Further the guidelines to the Model Law state
in unequivocal terms that data messages that are generated automatically by
computers without direct human intervention should be regarded as
originating from the legal entity on behalf of which the computer is
operated. Return to Text

39. Paal Wilson & Co. v. Partenreederei, (1893) 1 AC 854Return to Text

40. Available at http://www.law.upenn.edu/bll/ulc/ucc2/2b498.pdf Return to


Text

41. See Internet Effects III: The Information Technology Act, 2000 available
at: http://www.tata.com/0 forum/20001027 net effects3(b).htm Return to Text

42. The dispute was amicably settled between parties outside court. Return to
Text

43. See Section 11(c) of the Act. Return to Text

44. Article 13 of the Model Law. Return to Text

45. Several jurisdictions enforcing the Model Law have given effect to such
safeguard, see Section 17. Errors that occur while dealing with electronic
agents Electronic Transactions Act (Canada). Also see Section 13(4),
Singapore Electronic Transactions Act, 1998, available at:
http://www.ida.gov.sg/Website/IDAContent.nsf Return to Text

46. Article 7. (1) Where the law requires a signature of a person, that
requirement is met in relation to a data message if: Return to Text

(a) a method is used to identify that person and to indicate that


persons approval of the information contained in the data message; and
(b) that method is as reliable as was appropriate for the purpose for
which the data message was generated or communicated, in the light of
all the circumstances, including any relevant agreement.

47. Section 3(2) of the Act: 3. (2) The authentication of the electronic
record shall be effected by the use of asymmetric crypto system and hash
function which envelop and transform the initial electronic record into
another electronic record. Return to Text

48. See Abhilash, C.M.: SALSA Conference Paper, 2002Return to Text

49. Legislation in the EU and the US have imposed several duties on sellers on
the internet. Return to Text

50. See EU E-Commerce Directive, Uniform Computer Information


Transactions Act (USA). For a detailed discussion on consumer issues, see
Brownsword and Howells When Surfers Start to Shop, (1999) 19 Legal
Studies 287. Return to Text

51. See Section 1633.10 of UCTA, available at: http://caselaw.lp.findlaw.com/


cacodes/civ/1633.1%2D1633.17.html

INTRODUCTION

What Are Contracts?

The term contract is defined in sec 2(h) of the Indian contract act ,1872 as AN
AGREEMENT ENFORCEABLE BY LAW IS A CONTRACT; thus for the
formation of a contract there must be

1. An agreement, and
2. The agreement should be enforceable by law.[i]

What are e-contracts?

E-Contract is an aid to drafting and negotiating successful contracts for


consumer and business e-commerce and related services. It is designed to assist
people in formulating and implementing commercial contracts policies within e-
businesses. It contains model contracts for the sale of products and supply of
digital products and services to both consumers and businesses.

An e-contract is a contract modeled, 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

An electronic or digital contract is an agreement drafted and signed in an


electronic form. An electronic agreement can be drafted in the similar manner in
which a normal hard copy agreement is drafted. For example, an agreement is
drafted on our computer and was sent to a business associate via e-mail. The
business associate, in turn, e-mails it back to us 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. Since a traditional ink signature isnt possible
on an electronic contract, people use several different ways to indicate their
electronic signatures, like typing the signers name into the signature area,
pasting in a scanned version of the signers signature or clicking an I Accept
button and many more.
E-Contracts can be categorized into two types i.e. web-wrap agreements and
shrink-wrap agreements. A person witnesses these e-contracts everyday but is
unaware of the legal intricacies connected to it. Web-wrap agreements are
basically web based agreements which requires assent of the party by way of
clicking the I agree or I accept button e.g. E-bay user agreement, Citibank
terms and conditions, etc. Whereas Shrink-wrap agreements are those which are
accepted by a user when a software is installed from a CD-ROM e.g. Nokia pc-
suite software

Law governing e-contract :-

Section (11) of information technology Act, 2000[ii]

An electronic record shall be attributed to the originator

(a) if it was sent by the originator himself;

(b) by a person who had the authority to act on behalf of the originator in
respect of that electronic record; or

(c) by an information system programmed by or on behalf of the originator to


operate automatically.

Section(12) of information technology Act, 2000[iii]

Acknowledgement of receipt-

(1) Where the originator has not agreed with the addressee that the
acknowledgment of receipt of electronic record be given in a particular form or
by a particular method, an acknowledgment may be given by

(a) any communication by the addressee, automated or otherwise; or


(b) any conduct of the addressee, sufficient to indicate to the originator that the
electronic record has been received.

(2) Where the originator has stipulated that the electronic record shall be
binding only on receipt of an acknowledgment of such electronic record by him,
then unless acknowledgment has been so received, the electronic record shall be
deemed to have been never sent by the originator.

(3) Where the originator has not stipulated that the electronic record shall be
binding only on receipt of such acknowledgment, and the acknowledgment has
not been received by the originator within the time specified or agreed or, if no
time has been specified or agreed to within a reasonable time, then the
originator may give notice to the addressee stating that no acknowledgment has
been received by him and specifying a reasonable time by which the
acknowledgment must be received by him and if no acknowledgment is
received within the aforesaid time limit he may after giving notice to the
addressee, treat the electronic record as though it has never been sent.

Section (13) of the information technology act[iv] :-

Time and place of despatch and receipt of electronic record.-

(1) Save as otherwise agreed to between the originator and the addressee, the
dispatch of an electronic record occurs when it enters a computer resource
outside the control of the originator.

(2) Save as otherwise agreed between the originator and the addressee, the time
of receipt of an electronic record shall be determined as follows, namely :

(a) if the addressee has designated a computer resource for the purpose of
receiving electronic records,
(i) Receipt occurs at the time when the electronic, record enters the designated
Computer resource; or

(ii) If the electronic record is sent to a computer resource of the addressee that is
not the designated computer resource, receipt occurs at the time when the
electronic record is retrieved by the addressee;

(b) If the addressee has not designated a computer resource along with specified
timings, if any, receipt occurs when the electronic record enters the computer
resource of the addressee.

(3) Save as otherwise agreed to between the originator and the addressee, an
electronic record is deemed to be dispatched at the place where the originator
has his place of business, and is deemed to be received at the place where the
addressee has his place of business.

(4) The provisions of sub-section (2) shall apply notwithstanding that the place
where the computer resource is located may be different from the place where
the electronic record is deemed to have been received under sub-section (3).

(5) For the purposes of this section,

(a) If the originator or the addressee has more than one place of business, the
principal place of business, shall be the place of business;

(b) If the originator or the addressee does not have a place of business, his usual
place of residence shall be deemed to be the place of business;

(c) usual place of residence, in relation to a body corporate, means the place
where it is registered.[v]

Digital signature:- when a contract is entered into through the mode of


computer internet, it is necessary for the enforcement of such contract to
establish the genuineness of the transaction to prove that the proposal emanated
from the originator and acceptance was signified by the acceptor from the
appropriate persons. The signature of the parties is taken into consideration. It is
a personalised thumb print and it is the encryption of an electronic document
using a private key .It performs three different functions in order to ensure the
security of the system and genuineness of the transaction[vi] :-

1. Data integrity-A digital signature discloses if there have been any data
tampering of the file or the message.

2. Data authentication-A digital signature helps in verifying the initials of


the person signing the message.

3. No chance of disown-No message signed and sent could be disowned by


the receiver.[vii]

Case:- Mehta v J Pereira Fernandes S.A [viii]

Facts of the case:-

There was an appeal against a District Court judgment which awarded the
plaintiff company JPF a sum of nearly 25,000. The amount was awarded on
the grounds that the defendant Mehta had personally guaranteed the amount.
Mehta appealed on the grounds that the alleged guarantee was not enforceable
since it did not comply with the requirements of the Statute of Frauds.

The alleged guarantee arose from an email sent by Mehta to JPFs solicitors.
The email was in the following terms:

I would be grateful if you could kindly consider the following. If the hearing of
the Petition can be adjourned for a period of 7 days subject to the following:
A Personal Guarantee to be given in the amount of 25,000 in favour of your
client together with a list of my personal assets provided to you by my
solicitor.

The email was unsigned but the headers indicated that it was
from Nelmehta@aol.com. This email address also appeared on other, signed,
emails sent to JPFs solicitors. Mehta acknowledged that the email had been
sent, with his authority, by an employee.

JPFs solicitors telephoned Mr Mehta and accepted the proposal. Although they
also sent him a written agreement, this was never signed by Mr Mehta.

Judgement:-

The court of chancery held that the offer sent through an unsigned e-mail
communication is not sufficient and the e-mail address of the defendant cannot
be deemed as his signature.

Legal issues involved in e-contracts

1. How can an electronic record be attributed to the originator?

Solution:-

According to sec (11) the electronic record can be attributed to the originator
where:

It could be determined that the electronic record or electronic data is sent


by the originator himself.

It could be determined that the electronic record has been sent by a


person who has the authority to act on behalf of the originator.
An electronic record has been sent by an information system programmed
by or on behalf of the originator.

2. How to determine the acknowledgement of an electronic record when


the originator has not agreed with addressee regarding
acknowledgement of receipt?

Solution:-

According to sec (12)(i) the acknowledgement of the electronic record when


the originator has not agreed with the addressee regarding acknowledgement of
receipt in particular form can be done in the following manner:

Any communication by the addressee to the originator either


electronically or otherwise. OR

Through any conduct sufficient to communicate to the originator that the


electronic record has been received by the addressee.

Case law: The United States case Corinthian Pharmaceutical Systems Inc. v.
Lederle Laboratories[ix] serves as a guide. In that case, an order tracking
number issued by an automated telephone ordering system was found to be
merely an acknowledgment of the order, rather than an acceptance which
formed a binding contract. Applying the same reasoning to common electronic
commerce practices, this could mean that a computer-generated message
acknowledging receipt of an electronic order may not be sufficient to create a
binding contract. The purpose of the message may be solely to confirm receipt
of the order. It does not necessarily signify acceptance.

3. How to determine time and place of dispatch of an electronic record?


Solution :- section 13 deals with the time and place of despatch of electronic
records as if the originator or addressee has or has not agreed ,the the dispatch
of an electronic record is complete when it enters the computer resource of the
addressee as to outside the control of the originator.

According to section 13 (2) the time of receipt of an electronic record can


be determined in the following ways :-

(a) if the addressee has designated a computer resource for the purpose
of receiving electronic records.

(i) Receipt occurs at the time when the electronic, record enters the designated
Computer resource.

(ii) If the electronic record is sent to a computer resource of the addressee that is
not the designated computer resource, receipt occurs at the time when the
electronic record is retrieved by the addressee;

(b) If the addressee has not designated a computer resource along with specified
timings, if any, receipt occurs when the electronic record enters the computer
resource of the addressee.

According to section 13(4) :-

the place where the computer resource is located may be different from
the place where the electronic record is deemed to have been received
under sub-section (3).

According to section 13(5) :-

(a) If the originator or the addressee has more than one place of business, the
principal place of business, shall be the place of business.
(b) If the originator or the addressee does not have a place of business, his usual
place of residence shall be deemed to be the place of business.

(c) usual place of residence, in relation to a body corporate, means the place
where it is registered.

CASE: P.R. Transport Agency vs. Union of India & others[x]

Background of the case

Bharat Coking Coal Ltd (BCC) held an e-auction for coal in different lots. P.R.
Transport Agencys (PRTA) bid was accepted for 4000 metric tons of coal from
Dobari Colliery The acceptance letter was issued on 19th July 2005 by e-mail to
PRTAs e-mail address. Acting upon this acceptance, PRTA deposited the full
amount of Rs. 81.12 lakh through a cheque in favour of BCC. This cheque was
accepted and encashed by BCC. BCC did not deliver the coal to PRTA. Instead
it e-mailed PRTA saying that the sale as well as the e-auction in favour of PRTA
stood cancelled due to some technical and unavoidable reasons. The only
reason for this cancellation was that there was some other person whose bid for
the same coal was slightly higher than that of PRTA. Due to some flaw in the
computer or its programme or feeding of data the higher bid had not been
considered earlier. This communication was challenged by PRTA in the High
Court of Allahabad.

Issues raised by PRTA :-

1. The communication of the acceptance of the tender was received by the


petitioner by e-mail at Chandauli (U.P.). Hence, the contract (from which
the dispute arose) was completed at Chandauli (U.P). The completion of
the contract is a part of the cause of action.
2. The place where the contract was completed by receipt of communication
of acceptance is a place where part of cause of action arises.

Points considered by the court

1. With reference to contracts made by telephone, telex or fax, the contract


is complete when and where the acceptance is received. However, this
principle can apply only where the transmitting terminal and the receiving
terminal are at fixed points.

2. In case of e-mail, the data (in this case acceptance) can be transmitted
from anywhere by the e-mail account holder. It goes to the memory of a
server which may be located anywhere and can be retrieved by the
addressee account holder from anywhere in the world. Therefore, there is
no fixed point either of transmission or of receipt.

3. Section 13(3) of the Information Technology Act has covered this


difficulty of no fixed point either of transmission or of receipt.
According to this section an electronic record is deemed to be
received at the place where the addressee has his place of business.

4. The acceptance of the tender will be deemed to be received by PRTA at


the places where it has place of business. In this case it is Varanasi and
Chandauli (both in U.P.)

Decision of the court

1. The acceptance was received by PRTA at Chandauli /Varanasi. The


contract became complete by receipt of such acceptance.
2. Both these places were within the territorial jurisdiction of the High Court
of Allahabad. Therefore, a part of the cause of action had arisen in U.P.
and the court had territorial jurisdiction.

3. What in case the acceptance is not communicated to the offerer?

Solution:

According to Section(12) :-

Acknowledgement of receipt-

(1) Where the originator has not agreed with the addressee that the
acknowledgment of receipt of electronic record be given in a particular form or
by a particular method, an acknowledgment may be given by

(a) any communication by the addressee, automated or otherwise; or

(b) any conduct of the addressee, sufficient to indicate to the originator that the
electronic record has been received.

(2) Where the originator has stipulated that the electronic record shall be
binding only on receipt of an acknowledgment of such electronic record by him,
then unless acknowledgment has been so received, the electronic record shall be
deemed to have been never sent by the originator.

(3) Where the originator has not stipulated that the electronic record shall be
binding only on receipt of such acknowledgment, and the acknowledgment has
not been received by the originator within the time specified or agreed or, if no
time has been specified or agreed to within a reasonable time, then the
originator may give notice to the addressee stating that no acknowledgment has
been received by him and specifying a reasonable time by which the
acknowledgment must be received by him and if no acknowledgment is
received within the aforesaid time limit he may after giving notice to the
addressee, treat the electronic record as though it has never been sent.

Case: - J.K. Enterprises V. State of Madhya Pradesh and Ors.[xi]

According to the plaintiff he made an offer to the defendant, for the purchase of
Tendu Leave of lot No. 1095 at the rate of Rs. 30/- per standard bag. It is the
stand of the plaintiff that he was never informed that his offer has been
accepted.

He made the offer on 11-1-1993 and when he did not get the acceptance till 3-
3-1993, and thus by a fax message sent on 3-3-1993 he withdrew his offer.

In the return filed on behalf of defendant it has been stated that the offer of the
plaintiff dt. 11-1-1993 was accepted and communication under registered cover
on the address disclosed by the plaintiff itself, was sent by letter dt. 12-2-1993,
which was returned as the address was incomplete.

Defendant further stated in their return that the alleged fax message dt. 3-3-1993
withdrawing the offer was not received by the defendant as it was sent on the
wrong fax no.

Thus, according to the above mentioned facts the court held that as the
communication of acceptance of the offer made by the plaintiff was never made
by the defendant and as the defendant failed to communicate his acceptance
within the given time period the offeror can withdraw his offer.

5. Is e-contract a valid contract?

Contract law does not, as a general rule, set any requirements for the form of a
contract in order for a contract to be valid. Both oral and written contracts are
legally valid. Only certain types of contract are required to be made in writing.
In contract law, entering into an electronic contract is considered equivalent to
entering into a written contract. This means that even an offer sent by e-mail
and an approval received in response are considered a legally valid contract that
binds the parties. The terms of such a contract are based on the e-mail
correspondence between the parties and on the laws applicable to the type of
transaction.

Clickwrap :-

The term clickwrap refers to agreements that obtain a users affirmative


acceptance electronically. You see clickwrap contracting virtually every time
you install a piece of software. During the installation, you are usually presented
with check boxes to either accept the terms of the License Agreement or not
accept the terms of the License Agreement along with a link to view the text of
the end-user license agreement.

But, the use of clickwraps is not limited to software. They are often used for
acknowledgements of assent to contracts for online services, too. In those cases,
the text usually invites the user to click to accept the terms of a service
agreement covering the online offering.

Courts have treated clickwrap agreements as valid and enforceable contracts.

Case: Rudder v. Microsoft Corporation:-

The plaintiffs commenced a class action lawsuit alleging breach by Microsoft of


certain payment related terms of Microsofts MSN Member Agreement. The
Member Agreement was an on-line click-wrap agreement that required each
prospective member to scroll down through several pages of terms and
conditions and then indicate their agreement to the terms by clicking an I
Agree button before being provided with access to the services. Although the
plaintiffs wished to rely on several terms of the Member Agreement, in bringing
the action the plaintiffs disputed the choice of law and forum selection clauses
that the defendant Microsoft sought to enforce. The plaintiffs asserted that
because not all of the Member Agreement was visible at one time they did not
receive adequate notice of such provisions and that as a consequence they were
not enforceable. The court determined that the Member Agreement was
enforceable stating that scrolling through several pages was akin to having to
turn through several pages of a multi-page paper contract and to not uphold the
agreement would lead to chaos in the marketplace, render ineffectual electronic
commerce and undermine the integrity of any agreement entered into through
this medium

CONCLUSION

Today with the recent advancement in the areas of computer technology,


telecommunications technology, software and information technology have
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.
With the growth of e-commerce, there is a rapid advancement in the use of e-
contracts.

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, saves
time, fasten customer response and improve service quality by reducing paper
work, thus increasing automation. And on the other hand the law governing e-
contract lacks certain provisions like -There is nothing to determine the
intention of the parties to enter into a legally enforceable contract.

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.

Edited By Amoolya Khurana

[i] Singh Avtar,law of contract &specific relief,10th ed, pg no.3

[ii] Information technology act,2000

[iii] id

[iv] id

[v] Information technology act,2000

[vi] T.S.Venketesh Iyyers law of contract and specific relief with special
chapter on e-contract, ed 1

[vii] [2006] EWHC 813 (Ch) (07 April 2006)

[viii] Id.

[ix] 5 (1989) 724 F. Supp. 605 (S.D. Ind.)

[x] AIR2006All23, 2006(1)AWC504

[xi] AIR1997MP68

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