Execution of contracts in a time of uncertainty – what are the options?
The current pandemic situation created by COVID-19 across the world has caused significant disruptions to the way the world does business.
As the workforce is increasing telecommuting and working remotely, there is difficulty being faced in the execution of contracts.
This alert addresses the various ways of execution of contracts that can be availed in situations where the traditional method of execution of contracts are not available.
The execution of contracts refers to affixing signatures to a contract, thereby bringing about a valid, legal and contractual relationship amongst the parties. It indicates that both parties agree to the terms of the contract and promise to fulfil their obligations. Execution is the final step towards formalization of an agreement.
The Indian legal setup recognizes various methods of execution of contracts.
Execution of contracts
The parties to a contract can use any of the following mechanisms to execute their contracts.
Traditional wet signatures
This is the most common way of executing contracts. It involves the physical signing of documents by all of the parties to the contract. While this is the traditional method of execution, there may be challenges in light of the current situation.
Usually contracts contain a ‘counterparts’ clause which allows parties to sign separate copies of the same contract. This clause can be invoked in the cases where parties to a contract are unable to be physically present together to sign the contract. Accordingly, each party can sign a different, but an identical, copy of the same contract from their respective locations.
Digital/ electronic signatures
(i) Meaning: A digital or an electronic signature means the digital equivalent (that is the electronic format) of physical signatures that can be used for the authentication of electronic records of a document.
(ii) Obtaining a digital/ electronic signature: Under Indian laws, certain organizations, called certifying authorities, have been granted the authority to issue digital signatures. In order to obtain a digital signature, an application along with supporting documents is required to be made to a certifying authority. Some of the certifying authorities are IDRBT certifying authority, e-Mudhra, (n) code solutions and National Securities Depository Limited (NSDL). Once a digital signature is obtained from one of these certifying authorities, it may be used for execution and authentication of documents.
Digital signatures can also be obtained by foreign nationals from the certifying authorities for effecting transactions in India. In such a scenario, the supporting documents required to be submitted to the certifying authority may also need to be apostilled/ notarized as the case may be.
It may be noted that these digital signatures are already being used in relation to submission of filings with the registrar of companies under the Companies Act, 2013.
(iii) Legal validity of digital/ electronic signatures: The documents authenticated by affixing digital/ electronic signatures are legally valid and treated at par with documents executed by affixing wet signatures.
(iv) Non-applicability of digital/ electronic signatures: Indian laws prescribe that the following documents cannot be executed by fixation of electronic/digital signatures:
(a) A negotiable instrument (other than a cheque);
(c) A trust deed;
(d) A will, including any other testamentary disposition by whatever name called; and
(e) Any contract for the sale or conveyance of immovable property or any interest in such property.
These documents can only be executed by means of a physical/ wet signature.
Email acceptance of contract
There may be situations where parties to a contract are unable to affix their signatures (whether electronic or wet) for the acceptance of the contract. In such cases, parties usually resort to providing email acceptances of contracts.
It is established law that a binding contract is capable of being spelt out from a correspondence between the parties if the expressions used in such correspondence indicate that there has been meeting of minds that has actually reached an agreement, upon all material terms.
The Information Technology Act 2000 recognizes the communication, acceptance or revocation of proposals (as the case may be) in electronic form or by means of an electronic record for contract formation.
Accordingly, a contract cannot be deemed to be unenforceable on the ground that electronic form or means were used for its formation.
In light of the above, email acceptance of a proposal given over email may give effect to a binding contract between the parties if the email correspondence unequivocally sets out the meeting of minds and the intention of the parties. Parties should ensure that the language used in communicating the offer and its acceptance is clear and unambiguous.
As good practice, it may be useful to obtain a physically signed hard copy of such a contract once it is practicable.
The Indian legal framework provides for multiple ways of executing contracts.
Wherever physical/ wet signatures are not an option, parties may rely on electronic signatures or even email acceptance of contracts with the assurance that such execution has the same effect in law as a physical/ wet signed contract.
These methods can turn out to be extremely helpful in light of the current situation as well as going forward as we transition to a truly digital world.