The outbreak of the pandemic has not only disrupted daily lives across the globe but has also severely affected the continuity of business. The execution of contracts is critical in the day to day functioning of business and remains a key requirement for accessing financing.
Contracts signed face to face in original physical form (i.e. using wet signatures) are the most preferred mode of execution of contracts in India. The requirement for social distancing has however denied parties the ability to execute contracts in this manner and the task ahead therefore is to consider alternatives while safeguarding the sanctity of the execution.
In considering alternatives, it is pertinent to understand the why of the market’s preference for wet inked documents– it boils down to ‘evidence’. Original physical documents signed under the hand of a party have primary evidentiary value of such execution, i.e. if the validity of the signature is challenged when the document is produced in court, the onus or burden of proof lies on the party so challenging to prove that the document was not duly executed. In the world of financing and leverage, it is usually the lender / bond holder that will initiate legal proceedings and produce financing documentation before a court / tribunal / authority. It is therefore in the lender’s interest that the contract be presumed to have been duly executed unless proven otherwise.
As long as a contract meets the essential elements set out under the Indian Contract Act, 1872 (“Contract Act”) which are, inter alia: (i) lawful offer and acceptance; (ii) lawful object; (iii) lawful consideration; (iv) capacity to contract; and (v) certainty, it will meet the test as a valid and binding contract. A signature is one of the many forms of evidencing the acceptance or execution of a contract by a party. While the original ‘wet ink’ signed document would be primary evidence, a copy of the same would constitute secondary evidence and if challenged by a counterparty, it would fall on the party relying on such document to prove the authenticity of the signatures.
This article discusses a few options for execution of contracts in the age of social distancing.
Validity of contracts formed electronically
The Information Technology Act, 2000 (“IT Act”) recognises contracts in the form of electronic record. The Contract Act does not discriminate between physical, electronic, oral or any other form of contract so long as the requirements mentioned above are met. Contracts may be concluded in electronic form / electronic record, except for (i) negotiable instruments (other than a cheque); (ii) powers-of-attorney; (iii) trust deeds; (iv) wills and other testamentary documents; and (v) contracts for the sale or conveyance of immovable property or any interest in such property, and (vi) contracts requiring registration that need to be executed physically before an authority. Financing documentation such as loan and security documentation (other than an indenture of mortgage over immoveable property which requires physical execution before the relevant sub-registrar) may therefore be executed by electronic means.
Execution of contracts electronically
There are several options available for parties to sign contracts while working from remote locations, some of which are set out below. While the option at point 1 below would qualify as primary evidence, the options set out at points 2 to 4 below would comprise secondary evidence.
1. Digital Signatures– Parties may obtain secure digital signatures with a digital signature certificate issued by a licensed authority of the IT Act and rules (“Digital Signature”). Such a Digital Signature is considered a secure electronic record under the IT Act and the Evidence Act, 1872 (“Evidence Act“). In a proceeding involving a ‘secure’ electronic record, the court presumes, unless the contrary is shown, that such record has not been altered since the specific point of time to which the secure status relates. Except in case of a ‘secure’ electronic record i.e. one signed using a Digital Signature, no automatic presumption relating to the authenticity and integrity of the electronic record will be made by the courts and any other type of e-signing will need to be proved in a court of law. In practice, while most individuals may not already have in place Digital Signatures, directors and company secretaries who require a Digital Signature for certain filings under the Companies Act, will likely have access to Digital Signatures.
2. Sharing scanned copies of wet ink signed contracts– Where the authorized signatory of a borrower does not have a Digital Signature (or despite having been issued such a Digital Signature, does not access to the physical token key required to access the Digital Signature) parties may consider having a copy of the document emailed, printed, wet-ink signed and then scanned and re-sent over email to the sender. The physical originals may post lockdown be collated as original counterparts, forming an original physical wet-inked document forming primary evidence of the execution. The scanned copy will be secondary evidence. To mitigate the risk of the execution being challenged, it would be important to ensure that signatures are verified against existing records and a secure secured encrypted email and document storage system is utilized.
3. Other Electronic Signatures– An electronic signature other than a Digital Signature, including those obtained and used through electronic signature service providers (who may provide other means of authentication such as verification through mobile one-time passwords, Aadhar, etc.,) will need to be proven before the courts as secondary evidence by the party relying on such signature in case the same is challenged. Evidence will need to be lead to prove that the signature was that of the authorized signatory and that the security and integrity of the transmission and storage system was not compromised.
4. Email conveying acceptance of a contract– Parties may also choose to exchange confirmations of acceptance of contracts by email exchange attaching the unsigned contracts. Once again, while such a contract is enforceable, the risk lies in proving due execution in case this is challenged by the counterparty. In addition to the points highlighted above for secondary evidence, parties here will further need to ensure that the language of the email clearly conveys acceptance. The use of secure, tamper-proof encrypted email transmission and storage systems should also be ensured to mitigate the risk of a party disclaiming the attachment (i.e. the contract) to the email confirmation.
Parties considering electronic execution of contracts will also need to consider the position on stamp duty in the relevant state. Under various state stamp duty legislations (for instance Maharashtra, Uttar Pradesh, Gujarat), ‘electronic records’ are included in the definition of the term ‘instrument’ thereby requiring stamp duty to be paid even on such electronically executed contracts. With most stamp duty offices and licensed distributors being closed or running at sub-optimal levels, the practical aspects of obtaining stamp paper / paying stamp duty and registering / perfecting security documentation will need to be considered and analysed.
Anand Shah, Senior Partner
Hufriz Wadia, Partner
Moitreyee Banerjee, Senior Associate
We do hope the above is helpful. Please do not hesitate to reach out to the authors, Anand Shah (email@example.com), Hufriz Wadia (firstname.lastname@example.org) and Moitreyee Banerjee (email@example.com) for any clarifications.