By Nihit Nagpal and Anuj Jhawar
An arbitral clause or arbitration agreement is sine qua non to initiate arbitration proceedings. According to Section 7(4) of the Arbitration and Conciliation Act, 1996 (“A&C Act”), the agreement must be in writing and it must be signed by the parties. While electronic contracts are made in writing, they are not signed physically by the parties. The most commonly used e-contracts are Shrink-wrap contracts, Click-wrap contracts, Browse-wrap contracts and Individually negotiated contracts through electronic mode. Such contracts also include arbitral clause and often become the point of debate whenever a dispute arise between parties.
Amendment of Arbitration Act for inclusion of Electronic Contracts
In order to do away with this issue, Section 7(4) (b) was amended in 2016 by way of the Arbitration and Conciliation (Amendment) Act, 2015 (“2016 amendment”) and inserted the expression “including communication through electronic means”. The implication of this amendment was that an agreement containing arbitral clause shall be valid even if it is executed through an electronic mode. However, issues like execution of contracts through exchange of emails containing reference to arbitration, and enforceability of arbitral clause in electronic standard form of contracts requires a revisit by the Supreme Court in a much comprehensive manner.
Validity and enforceability of arbitral clause where agreement is executed through exchange of emails
Any contract is said to be valid if it satisfies the rigours of Section 10[1] of the Indian Contract Act of 1872. Section 7(4)[2] of the Arbitration and Conciliation Act, 1996 states that exchange of letters would constitute a valid arbitration agreement. However, in cases of exchange of emails, the requirement of physical signatures is not met with and accordingly such agreements are challenged for the want of proper signature.
Electronic Signatures under the Information Technology Act
Electronic signatures are recognized under Section 3A of Information and Technology Act, 2000[3] (“IT Act”) and a presumption in favour of electronic signatures also exist under Section 85B of the Indian Evidence Act, 1872 (“IEA”)[4]. Further, Section 10A of the IT Act states that an electronic contract shall not be deemed to be unenforceable merely because an electronic mode was used for the execution of the contract.[5]
A contract executed through exchange of e-mails was recognized by the Hon’ble Apex Court in Trimex International Fze Limited, Dubai v Vedanta Aluminum Ltd.[6] (“Trimex case”), wherein the Hon’ble Court opined that for a contract (whether electronic or otherwise) to be valid, it must fulfil the essentials of Section 10 of Indian Contract Act, 1872. The same applies to an arbitration agreement as well. In Vidya Drolia v. Durga Trading Corpn.,[7] (“Vidya Drolia”) the Hon’ble Supreme Court held that the validity of an arbitration agreement depends upon the fulfillment of statutory requirements under the Indian Contract Act and Arbitration and Conciliation Act. In Trimex case, the Apex Court further recognized the validity of arbitral clause if the agreement was executed through exchange of e-mails. The court held that even in the absence of a signed agreement between the parties, it would be possible to infer a concluded contract from various documents duly approved and signed by the parties in the form of exchange of e-mails, letter, telex, telegrams and other means of telecommunication.
In Shakti Bhog Foods Limited v Kola Shipping Limited,[8] (“Shakti Bhog”) the Apex Court gave a purposive interpretation to Section 7 of Arbitration Act, and held that an inference has to be drawn from exchange of e-mails, letters or fax even if the agreement was not signed by the parties. In view of the ratios laid down in Trimex and Shakti Bhog cases, it can be inferred that if an electronic arbitration agreement fulfils the rigours of Arbitration Act, then the same can be considered valid and will be enforceable.
Validity and enforceability of Arbitral Clause in electronic standard form of contracts
Standard form of contracts are “take it or leave it contracts”, which leave the other party with almost no bargaining power. Such contracts are also known as adhesion contracts. Parties belonging to various sectors such as non-banking financial companies (NBFCs), software companies, banks, etc. require their customers to sign the standard form of contracts. These contracts are even made through electronic mode and give more power to one party over the other. Recently, in M/S Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors.[9] (“Texco”), the Apex Court has taken a critical view of the standard form of contracts and has observed that “freedom to contract” is lost in such cases. This problem aggravates when such contracts are executed in electronic form and contains an arbitral clause. In such cases, the validity of arbitral clause is also questioned when it stipulates for a unilateral appointment of sole arbitrator or for the want of proper consent or signature by the party. When a challenge is based on the ground of unilateral appointment of arbitrator, the courts have mostly set aside the arbitral awards in such cases. In Envirad Projects Pvt. Ltd. v. NTPC Ltd.[10] the Hon’ble Delhi High Court held that unilateral appointment of arbitrator is non-est. The Apex Court has also reprimanded the practice of unilateral appointment of arbitrator in Perkins Eastman Architects DPC v. HSCC (India) Ltd.[11] and Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Ltd.[12] Such clauses exists in electronic adhesion contracts. Enforceability becomes difficult where electronic adhesion contracts give more power to one party to appoint arbitrators because it fails to fulfil the equitable and legal principles of a valid contract as enshrined under the Arbitration and Conciliation Act, 1996 and Indian Contract Act, 1872.
Conclusion
In view of Trimex and Shakti Bhog judgments, it is apposite to say that electronic arbitration agreements find their validity and enforceability in the Indian legislative framework. The Apex Court has given purposive interpretation to the provisions of Arbitration and Conciliation Act while ensuring that interference of courts are minimized. Where an arbitration agreement is executed through exchange of emails and it fulfills the requirements of Arbitration and Conciliation Act and Indian Contract Act, then enforceability of such electronic arbitration agreement becomes easy. Enforceability of electronic arbitration agreement is the need of hour. The recent trail of judgments are progressive and are in consonance with the objectives of Arbitration and Conciliation Act, 1996, that is, expeditious disposal of cases in a cost-effective manner. This will instill confidence in new startups and businesses relying heavily on e-commerce.
[1] As per Section 10 of the Indian Contract Act- all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. —All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” Nothing herein contained shall affect any law in force in 1[India], and not hereby expressly repealed, by which any contract is required to be made in writing 2or in the presence of witnesses, or any law relating to the registration of documents.
[2] Arbitration and Conciliation Act, 1996, s. 7(4).
[3] The Information and Technology Act, 2000, Section 3A states: “Electronic signature.- (1) Notwithstanding anything contained in section 3, but subject to the provisions of sub-section (2), a subscriber may authenticate any electronic record by such electronic signature or electronic authentication technique which- (a) is considered reliable; and (b) may be specified in the Second Schedule.”
[4] Indian Evidence Act, 1872, Section 85B states: “Presumption as to electronic records and [electronic signatures]. – (1) In any proceedings involving a secure electronic record, the Court shall presume unless contrary is proved, that the secure electronic record has not been altered since the specific point of time to which the secure status relates.”
[5] The Information and Technology Act, 2000, Section 10A states: “Validity of contracts formed through electronic means- Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic records, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.”
[6] Trimex International Fze Limited, Dubai v Vedanta Aluminum Ltd., (2010) SCC 1 (Civ) 570
[7] Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1
[8] Shakti Bhog Foods Limited v Kola Shipping Limited, (2009) 2 SCC 134.
[9] M/S Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors.,Civil Appeal No. 8249 of 2022.
[10] Envirad Projects Pvt. Ltd. v. NTPC Ltd., (2022) SCC Del 151.
[11] Perkins Eastman Architects DPC v. HSCC (India) Ltd., 2019 SCC OnLine SC 1517
[12] Voestalpine Schienen GmBH v. Delhi Metro Rail Corporation Ltd., (2017) 4SCC 665.
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