India is witnessing a digital revolution with internet becoming an integral part of its population and availability of internet in the mobile phones. With the decrease in the prices for using internet, change in lifestyle in urban areas and the convenience that internet has brought has supported this revolution. The business activity conducted through electronic means falls within e-commerce. Though there is no specific definition provided in any statute, it encompasses all business conducted by computer networks, be it B2B, B2C, C2C, C2B or B2B2C. The services that are offered does not begin or end with providing an online platform but involves efficient delivery system, proper payment facilitation and an effective supply chain and service management. So, the business is not simple as it may seem and also involves a lot of legal issues.
The government has considerably liberalized Foreign Direct Investment ("FDI") and as per the regulations framed under the Foreign Exchange Management Act, 1999, 100% FDI is allowed on an automatic basis in e-commerce activities. However, FDI is not permitted in Indian entities that carry out single brand retail or multi-brand retail via e-commerce. Under automatic route no prior approval of the Ministry of Commerce and Industry would be required. This bulletin will discuss certain legal issues that troubles business in online environment and also simultaneously try to analyze if there are solutions available to those problems.
1. E-contracts: Electronic contracts are governed by the basic principles provided in the Indian Contract Act, 1872 ("ICA"), which mandates that a valid contract should have been entered with a free consent and for a lawful consideration between two adults. Section 10A of the Information Technology Act, 2000 ("IT Act") provides validity to e-contracts. So, both ICA and IT Act needs to be read in conjunction to understand and provide legal validity to e-contracts. Further, section 3 of the Evidence Act provides that the evidence may be in electronic form. The Supreme Court in Trimex International FZE Ltd. Dubai v. Vedanta Aluminum Ltd.1has held that e-mails exchanges between parties regarding mutual obligations constitute a contract.
In an online environment, the possibility of minors entering into contracts increases, more so with the increasing usage of online medium among teenagers (read minors here) and their preference to shop online or purchase online goods/services. It becomes crucial for an online business portal to keep such possibility in consideration and qualify its website or form stating that the individual with whom it is trading or entering into the contract is a major.
Stamping of contracts is yet another issue. An instrument that is not appropriately stamped may not be admissible as evidence unless the necessary stamp duty along with the penalty has been paid. But payment of stamp duty is applicable in case of physical documents and is not feasible in cases of e-contracts. However, as the payment of stamp duty has gone online and e-stamp papers are available, it can become a possibility later that stamp duty might be asked on e-contracts as well.
The other crucial issue is the consent and the way offers are accepted in an online environment. In a click wrap and shrink wrap contract, the customers do not have any opportunity to negotiate the terms and conditions and they simply have to accept the contract before commencing to purchase. Section 16(3) of the ICA provides that where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. So, in cases of dispute over e-contracts the entity carrying out the e-commerce will have the onus to establish that there was no undue influence. Further, section 23 of the ICA provides that the consideration or object of any agreement is unlawful when it is forbidden by law, or is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent, or involves or implies injury to the person or property of another, or the Court regards it as immoral or opposed to public policy.
Interface with payment gateways is yet another challenge in online transactions. In 1995, the EFT, a retail funds transfer system enabling customers to transfer funds from one account to another and from one region to another, without any physical movement of instruments was introduced. The banks were permitted to offer internet banking facilities based on the Board-approved internet banking policy without prior RBI approval. As a step towards risk mitigation in the large value payment systems, the RTGS was made operational by the RBI in March 2004, which enabled settlement of transactions in real time, on a gross basis. The RTGS System is operated by the RBI. In 2005, NEFT was introduced which was a more secure, nation-wide retail electronic payment system to facilitate funds transfer by the bank customers, between the networked bank branches in the country. The enactment of the Payment and Settlement Systems Act, 2007 empowered the RBI to regulate and supervise the payment and settlement systems in the country, give authority to permit the setting up/continuance of such systems and to call for information/data and issue directions from/to payment system providers. The IT Act provided legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly known as "electronic commerce", which involve the use of alternatives to paper-based methods of communication and storage of information.2 Some of the initiatives taken so far to a secured e-transaction include: The IT (Amendment) Act 2008, RBI's guidelines on Mobile Banking and pre-paid Value Cards, Guidelines on Internet Banking and Mobile banking guidelines. Essentially, the IT Act has laid the foundation for strengthening cyber security and data protection in India with introduction of section 43A that mandates body corporate to implement "reasonable security practices" for protecting "sensitive personal information".3 The IT Act formally introduces the concept of data protection in Indian law, ushers in the concept of "sensitive personal information" and provides for fixation of liability on a body corporate to preserve and protect such sensitive personal information.4 It also provides for civil and criminal liability for failure to protect personal data and information.5 Further, the RBI has mandated a system of providing additional authentication based on information encrypted on the cards but not visible for all online transactions. Banks have also to put in place alert systems to keep a tab on online activity. Since an e-commerce website relies on an online mode of payment, several requirements imposed by the RBI do impact them but essentially the payment gateways. However, while engaging such payment gateways the contractual obligations on data protection and usage should be clearly defined.
3. Intellectual Property Rights ("IPR"): There are enormous possibilities of trade mark, copyright or patent infringements in online medium. E-commerce websites are designed and made by other parties and often the content is also created by third parties. Unless the agreements between the parties specifically provide the IP rights, there can be serious ownership issues of IPR. Any usage of third party IPR should have valid approvals in place. In interactive websites, the disclaimer and IPR policy should clearly spell out these issues and goods/service providers should also keep a watchful eye on the usage of their websites regularly. Domain names have trade mark protection and deceptively similar domain names can give rise to disputes. In Satyam Infoway Ltd v. Sifynet Solutions Pvt Ltd., the Supreme Court had held that "a domain name may pertain to the provision of services within the meaning of section 2(z) of the Trade Marks Act."
4. Efficient delivery system and an effective supply chain and service management: It is important to always keep consumer protection issues in consideration in e-commerce. The Consumer Protection Act, 1986 ("CPA") governs the relationship between consumers and goods & service providers and there are no specific provisions related to online transactions. Liability for a goods/service provider arises when there is "deficiency in service" or "defect in goods" or occurrence of "unfair trade practice". The CPA specifically excludes from within scope any service rendered free of cost. So, if only the actual sale is taking place in the online medium, the users will be considered as consumers under the CPA. The goods/service providers may be asked to remove defects/deficiencies, replace the goods, return the price already paid, compensate and discontinue the unfair trade practice or the restrictive trade practice and not repeat them.
5. Advertising: Advertising is an important and legitimate means for a seller to awaken interest in his products. For long, advertisements were regulated by the courts, government, tribunals, or police that depended upon the nature of each case. Additionally, absence of a single comprehensive legislation created a lot of confusion in terms of a proper code to follow by the industry and the authority to regulate or guide the pattern of advertising. In 1985, the Advertising Standards Council of India ("ASCI"), a non statutory tribunal, was established that created a self regulatory mechanism of ensuring ethical advertising practices. ASCI entertained and disposed off complaints based on its Code of Advertising Practice ("ASCI Code"). On certain occasions, however, the ASCI orders were set aside by courts as ASCI being a voluntary association was considered usurping the jurisdiction of courts when it passed orders against non-members. Gradually, the ASCI Code received huge recognition from the advertising industry. The warnings issued by ASCI to the advertisers against the misleading advertisements were gradually being accepted by the advertisers and the advertisements were actually stopped being aired or were modified significantly to comply with the prescribed ASCI Code. The advertisements should make truthful and honest representations and avoid false and misleading claims, should not be offensive to public decency or morality, not promote products which are hazardous or harmful to society or to individuals, particularly minors, observe fairness in competition keeping in mind consumer's interests and avoid obscene or harmful publication and indecent representation of women.
6. Competition: E-commerce has already generated a lot of competition with ever increasing players and acquisition of several old players in the market and has enabled development of new services, new distribution channels, and greater efficiency in business activities. Creation e-hubs where significant market share lies can lead to certain competition issues if they appear to have developed sustainable market power resulting from network effects and/or engaging in strategic acts to preserve or maintain their market power. Potential issues for e-commerce players would be price fixing or tacit collusion or anti-competitive discrimination or refusal of access to third parties. E-commerce players should refrain from collusion and excessive pricing. Options for parties to use same web platform for different kinds of products/services can give rise to different intermediaries and that can lead to collusive behavior. Market transparency should be encouraged.
E-commerce websites should lay down purchasing and payment process in sequence with absolute clarity and regular updating/monitoring of information provided. The terms and conditions should not be generic but specific depending upon the nature of the goods & services offered and they should be brought to the sufficient attention of the consumers and provide ample opportunity to read and then accept. E-commerce players should ensure reasonable efforts to prevent unauthorized transaction. E-commerce business is in nascent stage but the growth has been exemplary. It is crucial for e-commerce players to work towards capacity building by training employees and alarming them against the risks discussed above. Working and more crucially implementing the risk management policy and strategy for overall risk mitigation of the company is critical. Constant monitoring and evaluating the consumer behavior (like by keeping track of their footprints on their websites, which can also serve as an evidence at a later stage) for risk assessment and taking further initiatives for a strategic & dynamic approach to the digital economy is crucial. At the end of the day, e-commerce is more about strategy and business management than it is about technology. The online platform should not only provide innovative infrastructure but also innovative and proprietary information structures with sufficient protections and safeguards for its users. This will ensure the problems will remain at bay or at least the companies would be prepared with a strategy to tackle them.
2 For details regarding banking regulations and its evolution, please see our bulletin of September 2008 - http://www.psalegal.com/upload/publication/assocFile/IPR&TECHNOLOGYBULLETIN-ISSUEIX.pdf.
3 For details regarding the risk involved in e-transaction and steps taken by RBI, please see our bulletin of August 2009 - http://www.psalegal.com/upload/publication/assocFile/BANKING-LAWS-BULLETIN-ISSUE-II_1288782887.pdf.
4 Section 43A of the IT Act.
5 Refer to sections 43A and 72A, newly introduced. For details please see our bulletin of December 2010 - http://www.psalegal.com/upload/publication/assocFile/ENewslineDecember2010.pdf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.