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Use of Electronic Signatures in Commercial Transactions and Their Validity

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It has been a common practice for the last several years for the parties (residing in different jurisdictions), to a contract, to sign agreements and exchange scanned copies thereof to conclude a contract. During the pandemic when the movement of people got limited to a large extent, several Indian companies had to adapt to changing circumstances which inter-alia included execution of agreements such as employment contracts, non-disclosure agreements, licensing agreements, etc., electronically either by way of e-signatures, scanned signatures or signatures availed through web based service providers such as DocuSign and Adobe sign, etc. Several years back, the Government of India had mandated use of digital signature by Limited Liability Partnerships (LLPs) and companies in India for most of the filings under the Companies Act, 2013, GST laws, and income tax laws, etc. This was later extended to execution of web-forms, e-procurement and e-tendering, etc. Given the increasing use of electronic signatures in India, it is a matter of several enquiries whether such signatures are allowed in India and validity of contracts concluded electronically. Recognition of Electronic Contracts and Electronic Records Recognition of electronic contracts is provided under various laws in India such as the Information Technology Act, 2000 (“IT Act”) and the Indian Evidence Act, 1872. IT Act provides that a contract where communication of proposals, acceptance thereof and revocation of proposals are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that an electronic form or means was used for that purpose. Further, Indian Evidence Act, 1872 provides that electronic contracts are admissible as evidence in a court of law, subject to certain standard tests and protocols. Under the IT Act, ‘electronic record’ is defined as “data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche”. For the purpose of authentication of electronic records, IT Act provides that any subscriber may authenticate an electronic record by affixing his digital signature which shall be effected by use of asymmetric crypto system and hash function which envelop and transform the initial electronic record into another electronic record. Section 5 of IT Act provides that where any law provides that information or any other matter shall be authenticated by affixing a signature or any document shall be signed or bear the signature of any person, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied, if such authentication is done by means of electronic signature, affixed in such manner as may be prescribed by the Central Government. Under the IT Act, ‘electronic signature’ means authentication of any electronic record by a subscriber by means of electronic technique specified in its Second Schedule and includes ‘digital signature’. A ‘digital signature’ is an electronic signature that can be used to authenticate the identity of the sender of a message or the signer of a document, and to ensure that the original content of the message or document that has been sent is unchanged. It is a combination of 0 & 1 created using crypto algorithms. IT Act provides that any person by the use of a public key (meaning the key of a key pair used to verify a digital signature) can verify the electronic record. As per the IT Act, “verify” means, in relation to a digital signature, electronic record or public key, with its grammatical variations and cognate expressions, to determine whether– (a) the initial electronic record was affixed with the digital signature by the use of a private key corresponding to the public key of the subscriber; (b) the initial electronic record is retained intact or has been altered since such electronic record was so affixed with the digital signature. List of documents not admissible in evidence if executed by electronic signature IT Act contains description of documents or transactions to which the IT Act shall not apply meaning that in such cases electronic signatures are not admissible as evidence. Such excluded documents or transactions include: 1. A negotiable instrument (other than a cheque) as defined in section 13 of the Negotiable Instruments Act, 1881. 2. A power-of-attorney (POA) as defined in section 1A of the Powers-of-Attorney Act, 1882. 3. A trust as defined in section 3 of the Indian Trust Act, 1882. 4. A Will as defined in clause (h) of section 2 of the Indian Succession Act, 1925. 5. Any contract for the sale or conveyance of immovable property or any interest in such property. Therefore, all other documents/transactions, except for the above types of documents, the digital signature or electronic signature would be admissible under the IT Act. Recognised Forms of electronic signatures Presently there are two prevalent types of electronic signature formats that are available under Indian laws: (1) Digital Signature Certificate or DSCs: To obtain a digital signature, a person needs to apply to one of the Certifying Authorities (CAs), recognised by Controller of Certifying Authorities (CCA) under the Ministry of Electronics and Information Technology (MEIT), to issue a DSC which is, essentially, a secure digital key (USB token based) that certifies the unique identity of the individual signatory who is e-signing the document. Under the IT Act, a party may sign a document using a ‘digital signature’ which is created by an asymmetric crypto-system and hash function. (2) Electronic Signatures: Electronic signatures include any electronic authentication techniques or procedures specified in the Second Schedule of IT Act. At present, the Second Schedule specifies the following: 1. Biometric and One-Time-Password (OTP) based Aadhaar e-KYC (Know Your Customer). An example of this is also known as Aadhaar e-Sign (e-Sign); and 2. Other e-KYC services apart from online Aadhaar e-KYC. These include Offline Aadhaar e-KYC, Organizational e-KYC or Banking e-KYC. Electronic Signatures offered by private third party applications (TPAs) A growing trend has been to use cloud based TPAs, such as Adobe or DocuSign, etc., for the purpose of execution of contracts between the parties. Such signatures are not provided for under the IT Act similar to DSC or electronic signature as mentioned under the Second Schedule (of IT Act). Admissibility as evidence As signatures offered by TPAs such as DocuSign, Adobe, etc., are not explicitly mentioned under the Second Schedule, they are not per-se recognised under IT Act, however, they could be admissible and used for confirmation of an electronic contract and such contracts should not be seen legally invalid (solely on the ground that an agreement was formed electronically). It may be relevant to mention that the Indian Evidence Act, 1872 (‘Evidence Act’) provides that electronic records are admissible as evidence in a court of law. Significantly, Evidence Act does not distinguish between DSCs and other forms of electronic signatures (such as issued by TPAs) in terms of validity, enforceability and evidentiary value. The admissibility of electronic signature in an e-contract as ‘evidence’ would be governed under Section 3 of the Evidence Act which recognizes electronic records as ‘documentary evidence’ and categorizes presumption of validity of documents in two categories: (i) documents which are presumed valid (i.e. if any party refutes the validity, it has the onus to prove the same); and (ii) documents that are to be proved as valid (i.e. the party relying on the document has to establish its validity). As per Section 65B of the Evidence Act, any information contained in an electronic record is deemed as a document and will be admissible as evidence in any proceedings without further proof of original, if it is accompanied by a certificate stating that: • the computer through which the electronic record was produced, was in regular use by a person having lawful control over the system at the time of producing it; • the information contained in the electronic record was stored or received in the said computer during the ordinary course of activities; • the output computer was in a proper operating condition, or, operational difficulties, if any, with the computer must not have affected the accuracy of the data entered; and • the information contained in the electronic record reproduces information fed into the computer in the ordinary course of activities. In case any contract (having signatures issued by TPAs) is challenged, the burden of proof would lie on the party challenging the authenticity of such a signature. A conjoined reading of IT Act and Evidence Act makes it clear that in terms of validity, enforceability and evidentiary value, electronic signatures through TPAs would have presumptive value similar to wet ink signatures under Evidence Act for execution of all other documents/transactions except the aforesaid documents/transactions listed in IT Act.
Anhad Law’s Perspective
With the sharp increase in businesses and transactions happening online, there is a growing requirement for a more robust environment to encourage use of e-signatures in India. It is needed that the Ministry of Electronics and Information Technology considers amending the Second Schedule of IT Act to include other modes of authentication such as by TPAs to give more credibility to such signatures. Given that there are several other important aspects such as payment of stamp duty on such documents (e-signed) and registration of certain documents, that are mandatorily required to be registered, it may be appropriate that the steps are taken by the Government of India, in consultation with the State governments (since stamp duty is a State subject in some cases) to ensure that such documents (e-signed) could be recognised and registered under the applicable laws by several States (besides States such as Rajasthan, Maharashtra, UP and Karnataka which have included electronic instruments in the definition of instruments under the local Stamp Acts). Another important aspect would be to ascertain the need of uniformity in the rates of stamp duty or providing a maximum threshold to ensure and encourage parties to confirm compliance with the payment of stamp duty and registration of relevant documents. In fact if government provides preference to e-signed documents, it is possible that not only the government may prevent loss of revenues to government exchequer but rather see a possible growth thereof owing to the exponential increase in numbers of electronic documents in general trade and commerce. Manishi Pathak, Founding Partner and Ranjan Jha, Partner Disclaimer: The contents of the above publication are based on understanding of applicable laws and updates in law, within the knowledge of authors. These are personal views of authors and do not constitute a legal opinion, analysis or interpretation. This is an initiative to share developments in the world of law or as may be relevant for a reader. No reader should act on the basis of any statement made above without seeking professional and up-to-date legal advice.

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