Challenges and Issues in E-contracts | Aasil Singh and Tanisha Agrawal

Electronic contracts have made e-commerce possible and are a boon for the economy, but some issues can arise while using them. Some commonly encountered issues are jurisdictional issues, determining the rules for offer and acceptance for different modes of communication, determining the time of dispatch and receipt of a data message, the validity of each different type of online agreement, differentiating between an offer and an invitation to treat in e-commerce, establishing rules for when errors occur in e-contracts, and protecting consumers from unfair terms in electronic standard form contracts. The law on several of these topics has been discussed in previous chapters; this chapter will focus on jurisdictional issues, differentiating between an offer and an invitation to treat, and consumer protection.

?Jurisdictional Issues

Determining the law which governs a contract and the Court which is to be approached in case of a dispute is necessary for all contracts, but these questions are highlighted by the increasing use of e-contracts; numerous contracts are concluded where the offeror and offeree are in different countries or different states within the same country.

?In the US, before a Court can exercise personal jurisdiction over a party to a suit, it must be established that the party has some minimum contacts with the forum state (the state in which the Court sits)[1]. Traditionally, a party’s presence in a state had to be established for the exercise of personal jurisdiction, however, in International Shoe Co. v. Washington, the Supreme Court observed that the requirement for physical presence had become flexible due to the development of faster modes of travel and communication[2]. In this case, the Court developed the minimum contacts test, holding that a Court can exercise personal jurisdiction in cases where a defendant has minimum contacts with the forum state which are either continuous or systematic or are so related to the lawsuit that the exercise of jurisdiction does not offend traditional notions of fair-play and substantive justice[3].

The minimum contacts test has been expanded upon and refined by subsequent judgements. In Burger King Corp. v Rudzewicz, the US Supreme Court held that if personal jurisdiction is to be exercised over a non-resident defendant, it must be shown that he purposefully directed his activities towards residents of the forum state, thereby purposefully availing himself of the protection of the forum state’s laws[4]. In Ballard v Savage, the 9th Circuit Court held that the claim in question must have a nexus with the activities of the non-resident party with the forum state, and the exercise of jurisdiction must be reasonable[5].

With regards to websites, two groups of cases have emerged in the US: Cases where Courts exercised jurisdiction over non-residents on the ground that their internet activity was substantially interactive, and cases where Courts refused to exercise jurisdiction merely because of the usage or creation of a website[6].

CompuServe Inc v Patterson is a landmark case representing the first group[7]. In this case, Patterson, a resident of Texas, entered into a click-through agreement with CompuServe on their website[8]. The website was hosted on a server in the state of Ohio; Patterson would upload some software he programmed to it, which would be distributed by the website to its users[9]. The agreement stated that the contract would be governed by Ohio law and that disputes would be settled in Ohio Courts[10]. The issue of jurisdiction came up when a dispute arose between the two parties, and the trial court in Ohio refused to exercise jurisdiction over Patterson, stating that the electronic link between him and the state of Ohio was too tenuous[11]. However, the Court of Appeals reversed this decision, observing that Patterson had purposefully contracted to distribute his product in multiple states, with Ohio-based CompuServe acting as his distributor[12]. Therefore, the Court held that sufficient contacts had been established for it to exercise personal jurisdiction over Patterson[13].

Bensusan Restaurant Corp v Richard King is one of the cases belonging to the second group[14]. In this case, a jazz club called the Blue Note in the state of Missouri had set up a website for advertising, which also contained a disclaimer stating that the club had no relation to another club of the same name in New York City[15]. When the New York Club brought a suit for trademark infringement in New York, the Court refused to exercise jurisdiction over the Blue Note in Missouri, stating that their website only provided information and did not sell tickets, and that 100% of their visitors were from Missouri, therefore, the website did not establish sufficient contacts with New York[16].

These approaches were affirmed in Zippo Manufacturing v Zippo Dot Com, Inc, which is the leading case on the subject [17]. Zippo Manufacturing was based in Pennsylvania, and Zippo Dot Com was based in California[18]. Zippo Dot Com operated a website which had some advertisements and information, and also allowed visitors to pay and subscribe to an online news service[19]. The only link Zippo Dot Com had with Pennsylvania were its news service subscribers in the state, which numbered 3000 at the time of the suit[20]. When a suit for trademark infringement was brought against Zippo Manufacturing in Pennsylvania, the Court held that it could exercise jurisdiction over Zippo Dot Com, and described a sliding scale that can be used to determine whether a website results in sufficient contacts with a foreign state[21]. There are 3 points on the scale: 1. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of files over the internet, personal jurisdiction is proper[22]. 2. If a defendant has simply made a website accessible to users of a foreign jurisdiction that does nothing more than host some information, then personal jurisdiction cannot be exercised[23]. 3. In the middle are interactive websites where a user can exchange information with the host; in these cases, the exercise of jurisdiction is determined by examining the level of interactivity and the commercial nature of the website[24]. On application of the scale, Zippo Dot Com’s website fell in the first group[25].?????????????????????????????????????????????????????????

While the two extremes on the sliding scale are fairly straightforward, the middle ground is ambiguous and requires a court to analyse the facts of the case before it and to see if there is something which indicates that the defendant purposefully directed its internet activities towards residents of the forum-state in a substantial manner[26].

In India, provisions of the Code of Civil Procedure, 1908, and the Information Technology Act, 2000, are used to determine the territorial jurisdiction of courts in domestic contractual disputes. According to section 20 of the CPC, a suit arising from a contract can be instituted in where the defendant resides or carries on business, or where the cause of action arises[27]. According to section 13(3) of the IT Act, unless otherwise agreed to by the originator and addressee, an electronic record is dispatched at the place where the originator has his place of business and received where the addressee has his place of business[28]. If a party has more than one place of business, his principal place of business will be used, and if he has no place of business, his residence can be used instead[29].

PR Transport Agency v Union of India [sp1]?is a case where the Allahabad High Court determined whether it had territorial jurisdiction to hear a suit arising out of an e-contract[30]. In this case, a contract was formed through an exchange of e-mails, and the petitioner, PR Transport Agency, had filed a suit in the Allahabad High Court alleging a breach by the respondent[31]. The respondent argued that no part of the cause of action arose in Uttar Pradesh, hence, the High Court did not have territorial jurisdiction. However, the Court reasoned that the place where a contract is concluded is a part of the cause of action, and because the contract was concluded through an e-mail of acceptance sent to the petitioner, the place of the conclusion would be his place of business, as provided by the IT Act[32]. The petitioner’s place of business was in Uttar Pradesh, hence, the Court held that it did have jurisdiction to hear the case[33].

When the parties to a contract are from different countries, a conflict arises as to which is the proper law of the contract, that is, the law that governs the contract[34]. To avoid confusion, international contracts almost always contain a forum selection clause that specifies the country or arbitral tribunal by which disputes will be heard and a choice of law clause which provides for the country whose law will govern the contract[35]. According to the Code of Civil Procedure, foreign judgements can be conclusive in India[36]. The Supreme Court of India has held that parties cannot agree to confer jurisdiction on an Indian Court which would not naturally exercise jurisdiction over their suit under the CPC[37]. However, parties in an international agreement can confer jurisdiction upon a foreign Court and can choose to be governed by foreign law, as long as it is not against the public policy and statutory provisions in India[38]. If the parties to a contract have not expressly included the necessary clauses, their intention to be governed by the law of one country or the other is derived from the terms and nature of the contract, and the circumstances of the case[39].

Consumer Protection

Ever since standard form contracts have existed, so has the problem of parties incorporating unfair terms into them for their own benefit. This problem has been exacerbated in the era of e-commerce; consumers are usually contracting with multinational corporations who have much more bargaining power than they do. The problem is made worse by the fact that consumers are conditioned to expect speed and efficiency from e-commerce, and barely any of them actually read entire online contracts before clicking on, “I Agree.”[40]. Service providers seize this opportunity to hedge terms in their favour, and even get creative with font sizes and placement of terms to further deter consumers from finding out about the more controversial terms they are agreeing to[41]. Further, even if a consumer read the terms and found them problematic, he couldn’t simply go to a competitor instead, because competitors usually have similar terms[42].

In the US, contracting parties have statutory protection from unconscionable contracts[43]. Section 2-302 of the Uniform Commercial Code states that if the Court finds a contract or clause which is unconscionable, the Court may refuse to enforce it, or limit its application[44]. An unconscionable term is one opposed to good conscience[45]. This is a broad definition, but unconscionable terms are usually those which are agreed to between parties who have highly imbalanced bargaining power, and the terms themselves are unreasonably unfavourable to the weaker party, showing that he had no meaningful choice[46].

In the European Union, the Directive on Unfair Terms in Consumer Contracts has been in force since 1993, and protects consumers from unfair terms in contracts[47]. The Directive states that a standard form term will be unfair if it causes a significant imbalance in the parties’ rights under the contract, to the detriment of the consumer[48]. Importantly, the Directive states that when a contract is in writing, it must be in plain language, and if the language is ambiguous, the interpretation which favours the consumer will be used[49]. The Directive also describes 17 unfair terms, however, this list is not exhaustive[50].

So far, there is no provision in the Indian Contract Act which comprehensively invalidates unfair terms. However, some courts have tried to give relief to those aggrieved by unfair terms in two ways: By declaring a contract unconscionable using section 16 of the Indian Contract Act, or by declaring it opposed to public policy under section 23 of the Act[51]. According to section 16, a contract is induced by undue influence if the relations subsisting between the parties are such that one of them is in a position to dominate the will of the other, and uses it to gain an unfair advantage[52]. Section 23 states that that the consideration or object of a contract is unlawful if it is forbidden by law, or would defeat the provision of any law, or involves injury to a person, or if the Court regards it as immoral, or opposed to public policy[53]

However, there are drawbacks to these two approaches. First of all, for a contract to be declared unconscionable under Section 16, a relationship such as the one described in the section must be proved[54]. Even if a contract contains unconscionable terms, it cannot be invalidated unless undue influence played a role in its formation[55]. As for Section 23, the orthodox view on public policy argues that there are some well-settled heads of public policy, such as contracts in restraint of trade or marriage, and the scope of public policy should not be expanded further[56]. Therefore, some terms in modern commercial contacts could be unfair, but would not be opposed to public policy. In its 199th Report, the Law Commission of India stated that these provisions of the Indian Contract Act are inadequate to protect parties from unfair terms, and recommended new legislation on the subject[57].

The Commission drafted the Unfair (Procedural and Substantive) Terms in Contract Bill, 2006, to fill the gaps left by the Indian Contract Act; the Bill’s scope extends to all contracts formed in India[58]. As the name suggests, the Bill maintains a distinction between procedural and substantive unfairness. A procedurally unfair term is defined as one which has resulted in an unjust advantage or unjust disadvantage to one party on account of the conduct of the other party or the manner or circumstances under which the terms have been fixed or the contract has been entered into[59]. On the other hand, substantive unfairness refers to a contract or term which is harsh, oppressive, or unconscionable to one of the parties[60]. More specifically, exclusion clauses which restrict a party’s liability for negligence, or breach of express or implied terms of a contract without adequate justification have been expressly deemed to be substantively unfair by Section 9 of the Bill[61]. Also, Section 11 of the Bill clarifies that choice of law clauses which apply the law of a foreign country despite it having no connection to the contract are substantively unfair[62]

Section 6 provides the Courts with several guidelines to assist them in assessing whether a contract or term is procedurally unfair[63]. They include, but are not limited to[sp2]?, the knowledge and understanding of the promisee in relation to the meaning of terms, the relative bargaining strength of the parties, whether the terms were negotiated or standard, whether the aggrieved party could have reasonably rejected the standard terms, and whether the contract contains fine print which is difficult to read[64].

Similarly, Section 13 provides helpful guidelines for determining whether a contract or term is substantively unfair[65]. Some of them are, whether the term is unreasonably difficult to comply with, whether the contract is standard form, whether the term has resulted in a substantially unequal exchange of monetary value between the parties, and whether the benefits received by one party are disproportionate[66].

Significantly, the Bill empowers the Court to raise an issue of unfairness, even if none of the parties in a suit have raised it[67]. Finally, Section 17 states that if a contract or term is found to be unfair, the Court can refuse to enforce it, declare the contract void, remove the unfairness, refund consideration, award damages, award an injunction, or grant any other relief required in the interests of justice[68]. Multiple reliefs can be granted in one case[69].

The Law Commission’s draft Bill ensures that any person aggrieved by an unfair contract, including consumers, has a remedy. The guidelines for determining unfairness are relevant even to online contracts, as they expressly refer to fixed terms, imbalanced relative bargaining power, and the use of fine print, which are often found in online agreements. The Bill also empowers Indian Courts to invalidate contracts simply for being unconscionable or unfair, which is a ground present in many countries but excluded from the Indian Contract Act.

The Bill was introduced in the Rajya Sabha in June 2019, but has not been enacted[70]. However, some aspects of the Draft Bill’s guidelines have been incorporated into the Consumer Protection Act, 2019, which defines an unfair contract as follows:

46)?"unfair contract" means a contract between a manufacturer or trader or service provider on one hand, and a consumer on the other, having such terms which

—cause significant change in the right of such consumer, including the following, namely:—

(i) requiring manifestly excessive security deposits to be given by a consumer for the performance of contractual obligations; or

(ii) imposing any penalty on the consumer, for the breach of contract thereof which is wholly disproportionate to the loss occurred due to such breach to the other party to the contract; or

(iii) refusing to accept early repayment of debts on payment of applicable penalty; or

(iv) entitling a party to the contract to terminate such contract unilaterally, without reasonable cause; or

(v) permitting or has the effect of permitting one party to assign the contract to the detriment of the other party who is a consumer, without his consent; or

(vi)?imposing on the consumer any unreasonable charge, obligation or condition which puts such consumer to disadvantage.”[71]

The scope of this Act is more restrictive than what the Commission envisioned, as it only applies to consumer contracts. However, it is a step in the right direction, and the definition of unfairness is still quite open-ended. The Act empowers Commissions for Consumer Protection to declare unfair terms null and void[72]. One limitation is that an aggrieved person has to make a consumer complaint before a Commission for a remedy. In the Draft Bill, the Court hearing an ordinary contractual dispute could itself assess terms for unfairness without being prompted by the parties.

Differentiating Between an Offer and an Invitation to Offer

E-commerce websites on the internet are capable of advertising their wares to millions of people around the world at the same time, and often seem to merge the processes of advertising and selling, which can raise the question of what differentiates an offer from an invitation to offer, also known as an invitation to deal or invitation to treat[73]. Anything which advertises goods for sale, such as a display in a store window, a newspaper advertisement, or a catalogue is usually considered to be an invitation to offer, and not an offer which can be accepted to form a valid contract[74].

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) is an English judgement where the Court of Appeals held that goods displayed on the shelves of a self-service shop constituted an invitation to offer, and not an offer[75]. The contract was not completed when a customer picked up a product, because he could still change his mind about purchasing it[76]. An offer was made when a customer took a product to the till for purchase, and the pharmacist operating the till accepted it by accepting the customer’s money, thereby completing the formation of the contract of sale[77]. In Fisher v Bell, another English judgement, the Court held that displaying a product in a shop window accompanied by its price also constituted an invitation to offer[78].

Online stores are analogous to brick-and-mortar stores in many ways, therefore, these principles can be similarly applied to them. Such a view is taken by the UNCITRAL in Article 11 of the UN Convention on the Use of Electronic Communications in International Contracts, which states that a proposal which is not addressed to specific parties, and is generally accessible is to be considered an invitation to offer, unless the contrary is indicated by the proposer’s intentions[79]. While drafting this provision, the Commission noted that treating online stores in the same manner as physical stores would maintain neutrality between the two modes of commerce[80]. It also observed that the provision would protect traders from being at risk of entering binding contracts without having adequate stock[81]

In the case of Chwee Kin Keong v Digilandmall.com Pte Ltd[82], the Court of Appeals in Singapore observed that advertising on a website is effectively the same as advertising in a newspaper, catalogue, billboard, or shop window; the internet integrates conventional advertising and shopping into one screen[83]. Therefore, just as it is for offline merchants, the products for sale displayed on a website will constitute an invitation to offer, and an offer would be made by the customer placing the order[84]. However, the Court cautioned that this is just the general rule, and the true test is the intention of the merchant, which is gathered from the language used on the website[85].

Lefkowitz v Great Minneapolis Surplus Store is an American case which illustrates how the language used by a merchant in an advertisement can be construed to be an offer[86]. The store published a newspaper advertisement stating that certain products were available on a first come first serve basis in specified quantities, and were priced at 1 dollar each[87]. The store later refused a customer, stating that the advertisement did not constitute an offer. However, the Court held that the advertising was a binding offer as it was clear, definite, explicit, and left no room for negotiation[88].

Therefore, with the wide range of transactions happening over the internet, an online store can use language which could be construed to be an offer, and most websites contain a disclaimer identifying their advertisements as invitations to offer just to avoid such an eventuality[89].

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Twelfth in the series of articles on E-contracts by our interns?Tanisha Agrawal?and?Aasil Singh, BA LLB?#lawstudents?of?Maharashtra National Law University Mumbai

[1] Michael J. Weber, Jurisdictional Issues in Cyberspace 36 Tort and Insurance Law Journal 803 (2001).

[2] 326 US 310.

[3] Id.

[4] 471 US 462, 472 (1985).

[5] 65 F.3d 1495, 1498 (9th Cir. 1995).

[6] Carl Pacini, et al., To Agree or Not to Agree: Legal Issues in online Contracting 45 Business Horizons 43.?

[7] 89 F 3d 1257 Court of Appeals, 6th Circuit 1996.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] 126 F.3d 25 (2d. Cir.) (1997).

[15] Id.

[16] Id.

[17] 952 F Supp. 1119 (WD Pa. 1997).

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Weber, supra note 325.

[27] Code Civ. Proc., §20.

[28] The Information Technology Act, 2000, Gazette of India, pt. II sec. 1, §13(3), June 9, 2000.

[29] Id, §13(4).

[30] AIR 2006 All 23.

[31] Id.

[32] Id.

[33] Id.

[34] V.G. Ramachandran, Conflict of Laws as to Contracts 12 JILI 269 (1970).

[35] Pacini, et al, supra note 330.?

[36] Code Civ. Proc., §§13 & 44-A.

[37] Modi Entertainment Network v W.S.G. Cricket Pvt Ltd., Civil Appeal No. 422 of 2003.

[38] Id.

[39] Ramachandran, supra note 363.

[40] David Berreby, Click to Agree with What? No one Reads Terms of Service, Studies Confirm, The Guardian (March 3, 2017), available at https://www.theguardian.com/technology/2017/mar/03/terms-of-service-online-contracts-fine-print.

[41] Robert A. Hillman, "Consumer Internet Standard Form Contracts in India: A Proposal," 29 National Law School of India Review70-85 (2017)

[42] Id.

[43] U.C.C, §2-302.

[44] Id.

[45] Central Inland Water Transport Corporation Ltd. v Brojo Nath Ganguly AIR 1986 SC 1571.

[46] Id.

[47] Council Directive 93/13/EEC on Unfair Terms in Contracts (1993), Official Journal L 95, page 29. (Hereinafter, ‘Unfair Terms Directive’)

[48] Id, art. 3.

[49] Id, art. 5.

[50] Id, Annex.

[51] Singh, supra note 58, at 229.

[52] The Indian Contract Act, 1872, §16, No. 09, Acts of Parliament, 1872.

[53] Id, §23.

[54]?Law Commission of India, Report on Unfair (Procedural and Substantive) Terms in Contract, Report no. 199 (2006).

[55] Id.

[56] Gherulal v Mahadeodas AIR 1959 SC 781.

[57] Law Commission of India, Report on Unfair (Procedural and Substantive) Terms in Contract, Report no. 199 (2006).

[58] Id.

[59] Id, at 231.

[60] Id, at 236.

[61] Id, at 235.

[62] Id.

[63] Id, at 231.

[64] Id.

[65] Id, at 236.

[66] Id.

[67] Id, at 238.

[68] Id.

[69] Id.

[70] Unfair (Procedural and Substantive) Terms in Contract Bill, 2018, Bill no. 58 of 2018, available at https://164.100.47.4/billstexts/RSBillTexts/AsIntroduced/unfair-E-21619.pdf.

[71] The Consumer Protection Act, 2019, Gazette of India, pt. II sec. 1, §2(46), August 9, 2019.?????????

[72] Id, §§49 & 59.

[73] Sylvia Mercado Kierkegaard, E-Contract Formation: U.S. and EU

Perspectives, 3 Shidler J. L. Com. & Tech. 12 (2007), available at https://www.researchgate.net/publication/228199208_E-Contract_Formation_US_And_EU_Perspectives,

Megha Nagpal, Analysis of the Legal Issues Involved in Electronic Contracts Under Indian Law with Reference to Business-to-Consumer Model of E-Commerce 3 International Journal of Law and Legal Jurisprudence Studies 43, available at https://ijlljs.in/wp-content/uploads/2016/11/22.pdf.?

[74] Nolan Donal, Offer and Acceptance in the Electronic Age in Contract Formation and Parties (Andrew Burrows and Edwin Peel eds.) (2010 Oxford University Press) 61-87.

[75] (1953) 1 QB 401.

[76] Id.

[77] Id.

[78] (1961) QB 394.

[79] United Nations Convention on the Use of Electronic Communications in International Contracts, 1 March 2013, art. 11, 2898 U.N.T.S. 50525.

[80] United Nations Commission on International Trade Law, United Nations Convention on the Use of Electronic Communications in International Contracts (United Nations Publications, 2007), Explanatory Notes para 199.

[81] Id, para 204.

[82] (2004) SGHC 71.

[83] Id.

[84] Id.

[85] Id.

[86] 86 NW 2d 689 (Minn 1957).

[87] Id.

[88] Id.

[89] Donal, supra note 398.

?

?[sp1]This case has been discussed elaborately in page 9 and repitition can be avoided.

?[sp2]Redundant, as the sentence suggest only inclusive nature not constitutive.