Let us talk about E-Contracts (I): Electronic agents and conclusion of online contracts

The advancements in the internet as means of facilitating contract formation does not, at first read, present a situation different from that applicable to a facsimile or telex. An e-contract can be created either via the exchange of e-mails or by the completion of a document as a website which is submitted to another party electronically. While it is true that to the great extent that e-contracts are modernised methods of contract formation but they don’t require any particular changes to the law. Still, there are some particular issues arising from their electronic form. This post will discuss the international instruments that provide legal recognition to e-contracts and very advanced facets of it.

A contract is concluded if the parties intend to be legally bound, and they reach a sufficient agreement. Conclusion of contract with offer and acceptance. A contract can be concluded by the acceptance of an offer.

There are various ways to conclude e-contracts. The significant and interesting ones are as follows:

Forming contracts via electronic communications (such as e-mails)

The simplest e-contract is concluded by the exchange of text documents via electronic communications, such as e-mail. Offers and acceptances can be exchanged totally by e-mails, or can be combined with paper documents, faxes, telephonic discussions, etc.

Acceptance of orders placed on online marketplaces

The vendor/ supplier can offer goods or services (such as air tickets, software, etc.) through his website. The vendee, in such cases, places an order by completing and transmitting the order form provided on the website. The merchandise may be physically delivered later (e.g., in case of outfits, CDS, books, etc) or be immediately delivered electronically (e.g., in case of e-tickets, software, etc).

Online agreements

In some cases, users are required to accept an online agreement in order to be able to avail the services e.g. clicking on ‘I agree’ while installing software or clicking on ‘I agree’ while signing up for an e-mail account.

The electronic data interchange (EDI)

It is the inter-process of communication of business information in a standardised electronic form. That is, they are contracts used in trade transactions which enable the transfer of data from one computer to another in such a way that each transaction in the trading cycle (for example, commencing from the receipt of an order from an overseas buyer, through the preparation and lodgment of export and other official documents, leading eventually to the shipment of the goods) can be processed with virtually no paperwork. In this case, the data is formatted by means of standard protocols, so that it can be implemented directly by the receiving computer. EDI is, frequently, used to transmit standard purchase orders, acceptances, invoices, and other records, and thus, reduces paperwork and the potential for human errors. In this type of contracts, in contrast to the above methods, there is an exchange of information and completion of contracts between two computers and not an individual and a computer.

Through electronic agents/ bots

It is possible for computer users to instruct the computer to carry out transactions robotically. For instance, in today’s supermarket, the computer updates its inventory as items are scanned for sale. When the stock of an item falls to a predetermined level, the computer is programmed, without human involvement, to contact the computer of the supplier and place an order for replacement stock. The supplier’s computer, exclusive of human intervention, accepts the order and the next morning automatically prints out worksheets and delivery sheets for the supply and transport staff.

These electronic agents are programmed by and with the authority of the purchaser and supplier. The legal status of electronic agents has not been clarified by the courts, but the most common view is that like any other piece of equipment under the control of the owner, the owner accepts responsibility. A computer is a tool programmed by or with a person’s authority to put into operation their intention to make or accept contractual offers.

According to Russell and Norving, ‘An agent is anything that can be viewed as perceiving its environment through sensors and acting upon that environment through effectors. A human agent has eyes, ears, and other organs for sensors, and hands, legs, mouth, and other body parts for effectors. A robotic agent substitutes cameras and infrared range finders for the sensors and various motors for the effectors. A software agent has encoded bit strings as its percepts and actions.’

Such electronic agents and devices have features which facilitate humans in their normal interaction and functions, such as, intelligence, autonomy and pro-activeness. The idea of having intelligent systems—to assist human beings with routine tasks, to shift through an enormous amount of information available to a user and select only that which is relevant—is not novel and a lot of work and results have already been achieved in the field of artificial intelligence (‘AI’).

Legal recognition of electronic agents

The E-COMMERCE DIRECTIVE 2000/31/EC of The European Parliament and of the Council of 8 June 2000 does not take in hand the issue of automated transaction made through electronic agents. The explanatory notes of the proposal of the Ecommerce Directive state that the Member States should refrain from preventing the use of certain electronic systems such as intelligent electronic agents for making a contract. But, the final version makes no reference to electronic agents in the main text or in the recital. The deletion of the proposed text furnishes a sign of the EU’s failure to respond to the tremendous growth of e-commerce. It is also not in consonance with the preamble to the Directive, which states that the purpose of the Directive is to stimulate economic growth, competitiveness and investment by removing many legal obstacles to the internal market in online provision of electronic commerce services. However, the exclusion of the provision giving legal recognition to electronic agents is a step backwards and a failure to recognise the role of electronic agents in fostering the development of e-commerce such as lower transaction costs, facilitate technology and adherence to international conventions.

The United Nations Convention on the Use of Electronic Communications in International Contracts 2005 (hereinafter referred to as the ‘UNCUECIC’) contains provisions dealing with issues such as determining a party’s location in an electronic environment; the time and place of dispatch and receipt of electronic communications and the use of automated message systems for contract formation. Art.12 of the UNCUECIC, which deals with the use of automated message systems for contract formation, states, ‘A contract formed by the interaction of an automated message system and a natural person, or by the interaction of automated message systems, shall not be denied validity or enforceability on the sole ground that no natural person reviewed or intervened in each of the individual actions carried out by the automated message systems or the resulting contract.’ The objective behind the adoption of the uniform rules was to remove obstacles to the use of electronic communications in international contracts, including obstacles that might result from the operation of existing international trade law instruments, and to enhance legal certainty and commercial predictability for international contracts and help States gain access to modern trade routes.

In the USA, the Uniform Electronic Transactions Act, 1999 (UETA) expressly recognises that an electronic agent may operate autonomously, and contemplates contracts formed through the interaction of electronic agents and those formed by the interaction of electronic agents and individuals.

Section 14 of the UETA reads as follows:

In an automated transaction, the following rules apply:

(1) A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents’ actions or the resulting terms and agreements.

(2) A contract may be formed by the interaction of an electronic agent and an individual, acting on the individual’s own behalf or for another person, including by an interaction in which the individual performs actions that the individual is free to refuse to perform and which the individual knows or has reason to know will cause the electronic agent to complete the transaction or performance.

(3) The terms of the contract are determined by the substantive law applicable to it.

Section 14 of the UETA, which is based upon Article 11 of the UNICTRAL Model Law on Electronic Commerce, deals with ‘automated transaction’. This Section states that contracts can be formed by machines functioning as ‘electronic agents’ for parties to a transaction. It wipes out any claim that lack of human intent, at the time of contract formation, prevents contract formation. When machines are involved, the requirement of intention flows from the programming and use of the machine. It is quite evident that the main purpose of this provision of the UETA is to remove barriers to electronic transactions while leaving the substantive law, e.g., law of mistake, law of contract formation, unaffected to the greatest extent possible. Also, the Uniform Computer Information Transaction Act (UCITA) also has provisions supporting the ability of electronic agents to make binding contracts.

Recommended Readings

  • Wooldridge & Jennings, ‘Intelligent Agents: Theory and Practice’, Knowledge Engineering Review, (June 1995) Vol. 10 No. 2, Cambridge University Press (1995).
  • Alan Davidson, The Law of Electronic Commerce, Cambridge University Press, (2009).
  • R K Singh, Law Relating To Electronic Contracts (2017)

Simplifying FinTech and FinTech Laws: Key Takeaways for Indian FinTech Industry

The significant advancements in Fintech are directly impacting on the traditional financial sector. The regulators had to be cautious in order to not miss the train and should jump on the wagon of promoting financial innovation and stiff competition in the sector. The newcomers in the sector should be provided certain leniency in form of exemptions from a number of strict compliances which are used to curb the malpractices of the big corporations, for the sake of promoting competition in the market. This post is dealing with key takeaways from reports of different regulators’ committees in India. This is the last post in the series of ‘Simplifying FinTech and FinTech Laws’.

Fintech charged firms and businesses must work in tandem with the regulated entities, e.g. banks and regulated finance providers. The businesses that a bank can undertake are provided under Section 6 of the Banking Regulation Act, 1949 and there is no business outside Section 6 that can operate as the bank. Such provisions, therefore, incentivize banking companies to make fintech innovations in a narrower scope relevant to their operations. The archaic laws make it difficult for banks to undertake fintech innovations that can be of significant utility but are beyond the scope of financial regulation.

The Watal Committee Report noted this, that:

“The current law does not impose any obligation on authorised payment systems to provide open access to all PSPs. This has led to a situation where access to payment systems by new non-bank payments service providers, including FinTech firms, is restricted. Most of them can access payment systems only through the banks, which are also their competitors in the payments service industry. This, according to the Committee, has restricted the fast-paced expansion of digital payments in India by hindering competition from technology firms.”

Forming a comprehensive and non-discriminatory regulatory approach

Regulators and legislators are required to realign their legal approach to the Fintech services. There is a requirement of developing a deeper understanding of various Fintech services and their interaction in a financial environment with other fintech services. To provide the fintech space to work utmost to its potential, it is needed that it gets a level playing field in relation to the traditional banking and non-banking players. The practise of restricting the access of non-bank institutions to payment infrastructure, such as AEPS, has to be reevaluated and the proper steps to be taken. It is required from the end of Government and Regulatory bodies that they should adopt necessary measures in order to provide accessibility to national payment infrastructure and facilities to all fintech firms without any discrimination.

Providing Standards for Data Protection and Privacy

All the fintech companies are required to invest significantly in self-regulating policies to prevent privacy risks. Fintech companies should be provided with the standards of data protection as soon as possible by government and regulators. It is evident that the provisions of the Personal Data Protection Bill, 2019 can significantly affect the growth of Fintech companies. Therefore, the standards adopted for fintech companies by regulators should be reviewed with respect to data protection and privacy concerns. The government and regulators specific to finance of the country should start focusing on the valuation of data that is processed by banking companies and recommend practices to safeguard consumer interests.

Open Data principles should govern the financial sector in order to enhance Competition

The regulators should pay heed to the open data policy among participants of a fintech sector. The regulators should begin with the mandatory norms directing financial service companies to encourage banking institutions to enable participants to access the databases of their rejected credit applications on a specific platform on a consensual basis. The practice of the UK with respect to Open Data Regulations in Banking can be adopted, where banking institutions on the basis of consent framework allow data to be available to banking partners in order to foster competition. Even the RBI Steering Committee on Fintech recommended:

“It also recommends that all financial sector regulators study the potential of open data access among their respective regulated entities, for enhancing competition in the provision of financial services.”

The KYC process should be reformed with respect to the Supreme Court’s Judgment on Aadhaar’s validity

Fintech businesses are the most affected entities due to the striking down of Section 57 of the Aadhaar Act as it invalidated the online KYC process. The online KYC and authentication provided the required efficiency and convenience to fintech firms with respect to their endeavours of on-boarding as many as consumers on their digital platform. It is recommended that alternatives to the mandatory linking to Aadhaar should be adopted in the form of possible video-based KYC, such that the documents as verified must be protected and processed with the prior consent of the consumer.

Other key recommendations

1. It is recommended that the adequate cybersecurity, anti-money laundering and fraud control measures should be adopted by investing in technologies and guidelines that can prevent fraud.

2. Technical innovations should be monitored with respect to the potential risk that innovation carries in operation under the contemporaneous legal landscape of the country.

3. A self-regulatory body to facilitate the needs of fintech is much needed as for the RBI it is still turning out to be difficult to replace the existing regulatory structure. A regulatory mechanism allowing the broader participative consultation approach should be adopted.

4. Regulators should invest in Reg-Tech (“Reg Tech is a sub-set of FinTech that focuses on technologies that facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities. In July 2015 the FCA issued a call for input entitled ‘Supporting the development and adoption of Reg Tech’.”)

5. The majority of economies have adopted the practice of setting up of the regulatory sandboxes catalyzing the fintech innovations. It is recommended that RBI should continue with the introduction of the mechanisms, like regulatory sandboxes, enabling the adaptation of regulatory initiatives which will play a key role in maintaining India’s competitive edge.

Simplifying FinTech and FinTech Laws: Trends and Regulatory Challenges related to FinTech in India

In the second quarter of 2019, Indian mobile payment leader PayTM surpassed China in the number of deals. Such a feat has been achieved while India is still an evolving fintech market in comparison to the developed fintech market like China. Red-tapism and the immense number of laws are the reasons of slow down for the FinTech market in India, but strict regulations are inevitable when it comes to a financial or technological company. The Steering Committee on FinTech related issues constituted by the Ministry of Finance, Department of Economic Affairs, submitted in September 2019 its report indicating various trends and challenges related to FinTech in India. This post discusses the same in brief. This post is the second one in the series of ‘Simplifying FinTech and FinTech Laws’.

Suggestion by the Steering Committee on Issues related to FinTech
Suggestions by the Steering Committee on Issues related to FinTech. Source: Economic Times

Trends related to Fintech in India

The FinTech sector in India is thriving and growing expansively, enabled by a large consumer base, innovatively boosted startups and balanced regulatory policies in the form of ‘Digital India’ programme. The Indian Fintech industry has grown by 282% in the last decade and has reached the valuation of USD 450 million in 2015. Currently, there are more than 400 fintech companies that are working in India and the investments are to be fueled with 170% by 2020. The Indian fintech market is expected to grow by USD 2.4 million by 2020 from the present USD 1.2 billion, as per NASSCOM report. The transactional value of Indian fintech sector is evaluated to be USD 33 billion in approx in 2016 and is further forecasted to reach the point of USD 73 billion by 2020.

Figures based on banks people per bank
Source: Bloomberg

FinTech facilities in India

The primary facilities offered by companies operating in the space of fintech are:

Pre-paid Payment Instruments

Also known as PPIs, this instrument enables the user to engage in the purchase of products that include products relating to financial services as well. To be able to purchase the products, a value entered into the e-wallets in the PPIs so as to make purchases against that value. There are 3 types of PPIs: Closed, semi-closed and open systems. Depending on the type, one may also have the facility to withdraw cash from the PPIs. Other than the banks, they can only be issued by institutions authorized to function in the arena of e-wallets or pre-paid card services.

UPI Payments

Managed by the National Payments Corporation of India, the UPI (Unified Payment Interface) provides a platform for quicker real time-based transactions, facilitating ease for the smartphone users to enter into multiple transactions with a lower cost than what the traditional method demands. Constituting a major part of the consumer behaviour in the market, the UPIs enable universality to the transactions they wish to enter in and engage in the greater number with the traders.

Digital Transactions

In the traditional financial market, it was only the banks that could lend money. However, with the convergence of technology and financial market, loans nowadays are even dispersed by non-banking financial companies, also known as NBFCs. The NBFCs with their interactive and user-friendly applications have attracted wide userbase in the digital arena to enter into credit purchasing, loan system after verification.

Lending Platforms

These lending platforms offered are Peer to Peer based. Such platforms bring together willing lenders and borrowers to enter into regulated transactions. As per the guidelines issued by RBI in this regard, the lending platforms can only be offered by the registered non- banking companies in India.

Online Sale and Purchase

The recent trends amongst many have also been that of online sale and purchase. To facilitate the same there requires to be a system whereby an entity collects payments form the purchases and send it across to the sellers. The entities involved in this function are known as payment aggregators or intermediaries. These entities electronically consolidate the payments done and transfer the same to the sellers.

Banking Services

Once begun as a measure to penetrate into the grassroots level of society the banking system and provide ease to the customers, digital banking services by the payment banks have now become a feature of the payment banks. The RBI has allowed payment banks to offer basic services involved in smooth banking by the customers online. This includes facilities such as accepting deposits (though RBI has placed a limit on it), view transactions, transfer funds, etc. However, this arena remains strictly regulated for not all facilities remain digitally available such as issuing credit cards.

FinTech Investments by US Banks
Source: Bloomberg

Regulatory Challenges to Fin-Tech in India

While in India, digital finance firms are thriving as the government is continuing to issue pro-startup regulations and policies, the central regulatory body for Fintech i.e. the Reserve Bank of India, still suffers due to a traditionally rooted and established infrastructure which cannot be easily replaced with the updated regulatory framework that matches the advancements of technology.
Indian market is already recognized as the conservative and restrictive market and henceforth makes it difficult for Fintech firms to further instil the confidence in adopting the Fintech services in the absence of any concrete regulatory framework.
The commendable steps have been taken by the Indian government and regulatory institutions in a prompt manner, however, policies and regulations have to match the pace with which technological advancements in the finance sector taking place. This is much needed to ensure secure a transparent growth of Fintech in India.

Regulatory Uncertainty in the Fintech Sector

The foremost challenge that the regulator for the fintech sector has to dealt with by it the lack of regulations. Moreover, if there are regulations then to consolidate them is another major challenge. There is a requirement to “to support the formulation of policies that foster the benefits of fintech and mitigate potential risks”. Henceforth, a regulator or policy-maker has to work in the directions of “the modification and adaptation of regulatory frameworks to contain risks of arbitrage, while recognizing that regulation should remain proportionate to the risks.”

Digital On-boarding and Financial Inclusion

The two significant challenges that one can see as the huge mountainous tasks in the Indian context are: firstly, making the fintech platforms accessible to every Indian and secondly, analyzing the risks that are potentially present in trying out a scheme to provide digital onboarding. The Supreme Court recently decided upon the constitutionality of the Aadhaar, the ambitious government project to provide a unified identity. Aadhaar has been held constitutional but Section 57 of the Aadhaar Act was struck off. Section 57 provided the mandatory verification and linking procedure for consumers to avail a company’s service. The judgment is having serious implications on the government’s efforts to provide frictionless onboarding of consumers.

“The judgement impacted the delivery of financial services across verticals including bank account opening, loans, mutual funds and insurance. Though the judgement allows voluntary use of Aadhaar by consumers, there are multiple interpretations of it and the Unique Identification Authority of India (UIDAI) has resorted to safer approaches to avoid any more legal battles and stopped services to private entities altogether.”

Low Credit for Startups

Investors in the market are now hesitant to invest in fintech startups. The investors are baulking as there have been quite a number of bad loan incidents. The big setback to the fintech industry as well as the financial sector came into the form of IL&FS breakdown. The company defaulted against the inter-corporate deposits and commercial papers or borrowings. The incident has affected the whole fintech industry as the crisis included lending businesses that were key to a number of NBFCs as a funding source.

e-NACH crisis

The Apex Court’s judgment brought down to stoppage, another popular mode of financing which is also the foremost mode of debit for lenders, MFs and insurance, as in pulling money from customer’s account. This is yet another judgment that has slowed down the advancement and has promoted the traditional manner of physical registrations.

Data Protection

Both the traditional banking system and the fintech services gather a large number of data records from various of their clients, which contains a profile of behavioural and financial information. Though the utility of such data is positive when it is used for a specific purpose of improving the services, it leads to giving way to a heap of privacy issues as well, especially when the financial service provider engages a third party’s technology services.

The judiciary recognized the risk of data privacy to the banking sector’s consumer in the case of Punjab National Bank v Rupa Mahajan Pahwa, “in which Punjab National Bank had issued a duplicate passbook of a joint savings bank account, held between the petitioner and her husband, to an unauthorized person”.

Other Challenges to the Fintech system in India

In terms of regulatory standards, India lacks in providing a comprehensive cybersecurity framework to reduce the cyber-crime issues. The competition law has also, in some sort of stages, have failed to control the domination of certain advance fintech NBFCs.

Recommended Readings: