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)

COVID-19 crisis is changing Tech related Law and Policy: Surveillance, Fake news, Telemedicine, and Internet

As I view things and events around the world from the comfort of my home, this blog is my take on how regulations related to technology will get impacted due to the COVID-19 pandemic. As they say, sudden and unexpected events often lead to systematic and permanent changes.  Work from home is a mandate now, as the fear of personal contact and surface contact is prevalent, everyone has uncertainty about the impact of infection. There are even doubts on the globalization given the infection is spreading from one corner of the world to another.

Given the fact that COVID-19 is a pandemic, the authorities have commanded us to practice ‘social distancing’ (trending buzz word on social media) under the twenty-one days lockdown. Hence, there is an unwillingness to engage socially among masses now. As there are shifts in perceiving the world now, there is a shift in the understanding of technology as well. Governments around the world are now valuing its role more than ever and understanding the need for the well-drafted technology policy, as they rush to contain the spread of COVID-19.

Following are the potential changes that we can see in the technology policy of India during and after the COVID-19 crisis.

Increase in the adoption of internet services

With the reach of the internet increasing up to 500 million users and over 660 million broadband subscriptions, internet penetration in India is much evident. However, the present situation is proof that it has been a boon for us that Jio entered the market and made the internet more accessible than ever. The internet is an essential service and something that has kept the masses engaged and sane in their homes during the nationwide lockdown. India has the cheapest internet access in the world, but still, as the crisis gets over, the government will definitely consider more options of making internet services more accessible to the poor of the country which is largely suffering in this crisis. In the present lockdown state, it is important to mention the situation that exists in Kashmir where just the 2G internet is available with the speed which is good for nothing.

India has the cheapest mobile data in the world with 1GB costing just Rs 18.5 (USD 0.26) as compared to the global average of about Rs 600, research by price comparison site Cable.co.uk showed. Average Wireless Data Usage per wireless data subscriber per month is 10.37 GB.

Work from Home

Zoom, a video-meeting app, has seen a significant rise in its download over the last week. With employees are unable to attend offices, video conferencing services that work over the internet has become significant. Again, such applications make access to internet an essential service for operating the business online (a fundamental right). As the employment laws are being discussed these days to understand the place of Work from Home in the law, post the crisis policymakers will definitely deliberate on this and provide a permanent solution for it.

Certain important points for reference of readers from the advisory issued by the government in relation employment laws:

The Ministry of Labour & Employment, Government of India advised on March 20, 2020, that all public and private organizations are to refrain from terminating the services of their employees or reducing their wages.

The Ministry of Labour & Employment has extended the deadline for filing the Unified Annual Return for 2019 under eight laws that were filed on the Shram Suvidha Portal to April 30, 2020 (the previous deadline was February 1, 2020). The notification further states that authorities are not to take action against any entity that did not meet the earlier deadline.

The Employees’ State Insurance Corporation (ESIC), through its communication dated March 16, 2020, has extended the dates for filing of ESI contribution and payment. Accordingly, all contributions for the months of February 2020 and March 2020 can be filed and paid up to April 15, 2020 and May 15, 2020, instead of March 15, 2020 and April 15, 2020, respectively.

The Government of India will contribute the employer contribution (on behalf of companies) and employee contribution (on behalf of employees of those companies) towards the Employee Provident Fund Organization (EPFO) for the next three months for establishments with up to 100 employees meeting certain base salary thresholds.

All EPFO members (employees) will now be able to withdraw up to 75 percent of their total EPFO fund or an amount equivalent to three months of their salary, whichever is lower. The amount withdrawn from EPFO shall be non-refundable, and the employees do not need to return the same to their EPFO account.

Streaming services and regulations

In the process of home quarantine, the dependence on the streaming services is so much that the internet service providers have asked streaming platforms like Netflix and Amazon Prime to reduce the bits rate, in order to lower the stress on networks. The streaming platforms have duly conceded to this demand considering the continuous requirement of providing services to consumers. Consumers are realizing the benefits of streaming platforms and hence there is going to be a potential increase in subscriptions going forward, converting to paying users. In terms of policy-making, if streaming services have the potential to displace traditional entertainment services, the Indian government will look for regulating the content more than ever. Government is already in consultation with the stakeholders regarding options of self-regulation or government regulation.

Increase in demand for spectrum to meet the consumer demand

The percentage of connections that are based on a wireless medium is a staggering 96% approx. Therefore, in the light of increased adoption of the internet for continuous entertainment and work at home has led to increased stress on telecom operators. Therefore, with the 20% sudden increase in demand, telecom operators have sought more spectrum allotment from the government.

A new perspective for e-commerce

The government has rightly considered E-commerce as the provider of essential services during the present situation. Their adequate performance under the lockdown can provide them with a deep sigh of relief, as for the past few months, their food and grocery delivery services have been under the strict supervision of the government. There are several lobbies representing the brick and mortar retailers of groceries and food that have targeted e-commerce market and posed it as a threat to the business of offline retailers across the country. The opportunity for them to legitimize the need for online service during the lockdown has done what demonetisation did for digital payments.

Offline print becomes the victim

Online media channels are also opportunists that are gaining certain traction in terms of consumers. The newspaper industry seems to have been hurt by contact to contact the spreading nature of the COVID-19. Various online posts and WhatsApp threads are flowing in the online media that newspapers are potential vectors of COVID-19. In one of the cases, the Times Group has sent a legal notice to The Print for an article which suggested that COVID-19 can potentially spread through newspapers as well. Therefore, there could be a rise in online media usage and could lead to a rift between offline and online media.

A struggle to contain fake news or misinformation

The sensational way in which COVID-19 crisis has led to the nationwide lockdown is much due to the sensationalized content related to COVID-19 which is spreading through the social media across the country faster than the virus itself. The amount of misinformation spreading about COVID-19 is at large scale, and platforms are struggling to deal with it, especially given the lack of continuous moderation by social media platforms which are not warranted legally. This has given several blows to the effectiveness of lockdown given the people believed on certain misinformation such as cow urine is the cure of COVID-19, the religious congregation will protect from the disease etc, which led to people not take lockdown seriously. Understanding the struggles with automatic moderation of the content on the internet, the government can sooner than before enforcing its strict moderation policy which undermines the right to free speech.

The twenty-one days lockdown recently faltered when an exodus of the large number of migrant workers from urban cities like Delhi and Jaipur came in light. The Supreme Court’s division bench in a hearing on Tuesday, while reviewing the steps that the central government has taken to provide relief to the poor migrant workers during the lockdown, expressed serious concern over spread of fake news or misinformation regarding lockdown’s duration on social, electronic and print media causing the mass exodus of migrant worker from cities to their homes in villages. Read the SC’s order here. Centre in this light has sought direction from SC that no media stakeholders should publish COVID-19 news without ascertaining facts with government. Although, The constant and close monitoring has been held as not warranted by law as per various precedents of Indian courts.

Privacy, necessity and proportionality

While the right to free speech could be threatened in the future due to the present crisis, the right to privacy has already dealt with several blows. Considering the situation of emergency and lack of any comprehensive law protecting the privacy, the privacy of a number of citizens have been compromised. The health status of quarantined/ or infected is open to all as their homes are being marked and personal details are being made public on social media. Governments are openly surveilling quarantined people for ensuring the enforcement of quarantine and inviting bids from technology companies to procure technology that can make continuous surveillance more effective. In India, several governments are already tracking citizens by keeping a tab on their phones or utilizing geofencing. The crisis has legitimized much longing plans of the government to create an infrastructure which can assist in surveilling its citizens whenever the need arises. Given the opportunity, the Department of Science and Technology has invited proposals and has set up a task force for building surveillance, AI and IoT tools.

As several privacy activists have opinions against the government’s plan to keep track of infected persons. If litigation arises, the question is whether the present circumstances will meet the necessity and proportionality test in order to justify the violations of privacy?

Drones as part of law enforcement

Drones, in some cities, are being used for surveillance to ensure that the current curfew is not violated. Drones allow the police to surveill and document, in a low risk manner. In cities like Chennai, they are being used to disinfect areas. If all goes well in these difficult times of crisis, then expect that police will place more orders for drones going forward, and many tasks will be automated.

Telemedicine guidelines

One of the prime examples of the proposition that experience of COVID-19 crisis will pace up the policy-making with respect to regulate technology is the rollout of a set of guidelines for telemedicine or remote delivery of medical services. Telemedicine practice means that doctors will now be allowed to use information and communication technologies as per guidelines for the exchange of valid information for diagnosis and treatment of ailments with patients. In order to assure steady and quick medical services during the nationwide lockdown, Ministry of Health and Family Welfare finally sanctioned the guidelines that have been proposed ten years ago. Globally, telemedicine has emerged as a front-line weapon against the COVID 19 pandemic. The situation under present crisis motivated the government to provide the concept of telemedicine among masses explaining that the unnecessary exposure of people involved in the delivery of healthcare can be avoided using telemedicine, as patients can be screened remotely.

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: All the laws that govern digital payments and transactions in India

Over the years, the financial services industry has become increasingly regulated in terms of adoption of technologies for facilitation and disintermediation of transactions. The extensively fragmented laws and regulations certainly make it difficult for any person and entity to objectively find the mandatory requirements that a law imposes upon them. This post will give you a brief overview of fintech laws and the various ways in which they govern our digital transactions. This post is the third one in the series of ‘Simplifying FinTech and FinTech Laws’.

The legal topography that regulates the Fintech services in India is majorly distributed, and there is not a single comprehensive regulation or legislation that governs the Fintech industry in the country. The lack of a complete and comprehensive single set of guidelines or regulations makes it hard to refer to actual authorities that are supposed to govern the Fintech in India. The legislative or regulatory, whichever it is, primarily comprises of:

The Payment and Settlements Act, 2007

The sources of law that actually governs payment in Indian jurisdiction are the Payment and Settlement Systems Act, 2007 (PSS Act) and the Payment and Settlement Systems Regulations, 2008 and rules as issued thereunder. Basically, these are the statutes from which India’s central bank, the Reserve Bank of India, derives power to function and regulate payment and settlement system in India. In accordance with the PSS Act, the RBI has wide discretionary powers to issue orders, directions and rules to financial systems established in India. There are several recommendations (pending), to change the PSS Act and form a new regulatory board named as the Payments Regulatory Board (PRB), while the necessary amendments to the PSS Act still await.

As per the PSS Act, any person inclusive of the non-banking financial companies (NBFCs) which want to undertake the operation of a payment system, may do so as upon taking the authorization by the RBI. The Act provides several eligibility criteria that are required to be fulfilled by that person or company wishing to operate as a payment system. Further, technology facilitators between merchants and banking institutions (that process and settle the transactions), are known as ‘Gateway Service Providers’, doesn’t have to acquire any authorization from RBI. For instance, common gateway service providers are BillDesk, RazorPay, InstaMojo etc.

The PSS Act is the primary legislation that governs the regulation pf [ayments in India. The PSS Act provides the definition of the “payment system” such that:

“a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service of all of them, but does not include a stock exchange”.

Master Direction on Issuance and Operation of Prepaid Payment Instruments

Prepaid Payment Instruments (PPIs) that are pre-loaded values (basically your PayTM or Freecharge wallets) and in some cases that value can be utilized for a specified purpose only as payment (basically Ola Money). PPIs provide the value to existing in a specified form which facilitates the payment for goods and services also in certain cases person to person remittance transactions of money for eg. sending money to your friends or family members. As defined in Rule 2.3 of the Master Directions:

“PPIs are payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments. PPIs that can be issued in the country are classified under three types viz. (i) Closed System PPIs, (ii) Semi-closed System PPIs, and (iii) Open System PPIs.”

The Master Directions were issued by the RBI on October 11, 2017, and amended from time to time. It provides the eligibility criteria that is required to be followed by the PPI issuers, provides the thresholds for debits and credits that can be done using PPIs, and also provides the other operational obligations that are required to be fulfilled by a PPI issuer at the time of issuing such instruments to its customers in India. PPIs come into the ambit of the term ‘payment system’ as provided under the PSS Act and henceforth have to comply with the PSS Act and the Master Directions, both. PPIs include brand-specific gift cards, e-wallets like PayTM wallet, Freecharge, Mobikwik, shopping or travelling cards as issued by the Banks themselves, etc.

NPCI Guidelines governing the UPI Payments

UPI payments are governed through the Procedural Guidelines related to UPI and Operating and Settlement Guidelines related to UPI, as issued by the NPCI. As per the contemporary governing framework, the Banks only have the scope to provide UPI payment services to consumers. Banks are authorized to integrate the UPI platform into their payment systems. They operate over the UPI platforms by engaging the services of a technology provider, in such circumstances the Guidelines subject such technology providers and the Banks to strict compliance with certain norms as prescribed by the NPCI.

“The Unified Payment Interface enables architecture and a set of standard Application Programming Interface (API) specifications to facilitate digital payments using a mobile phone.”

Regulations related to Non-Banking Financial Companies (NBFCs)

The primary document of legislation that governs the NBFCs is the Reserve Bank of India Act, 1934 and subsequent to other secondary master directions and rules and guidelines and circulars which regulates the licensing and operation of such companies in India. The RBI has formed a set of thresholds that are required to be fulfilled in order to determine whether a business entity is to classified as a “financial services company” which also requires a license. Majority of lenders that operate digitally fall under the ambit of the term ‘NBFCs’. The most important regulation that holistically governs NBFCs is the Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016, and Master Direction – NBFC – Acceptance of Public Deposits (Reserve Bank) Directions, 2016.

Master Directions related to P2P lending platforms

The Master Directions- NBFC- Peer to Peer Lending Platform Directions 2017 incentivized a whole lot of activities for P2P platforms. It provided the P2P platforms to act as an intermediary, such that it has to comply with certain strict legal requirements and has to conduct proper due diligence of participants that are using the platform to finance or borrow. The Master Directions make it mandatory for P2P portals to check the creditworthiness in a form of an assessment and perform risk profiling of the borrower’s business or project, and actively share the disclosures with the potential investors or lenders. Further, RBI regulations bar the P2P platforms from lending or raising deposits or cross-sell any product over the portal. They are not required to facilitate any credit guarantee or secured loans. Cross-jurisdictional flows of funds are barred as per the Master Directions. Therefore, in toto, the Directions prescribe the norms that govern lender exposure and aggregate borrowing thresholds in the context of workings of P2P lending platforms in the country.

Guidelines to govern Payment Aggregators/Intermediaries

The RBI’s circular related to“Directions on opening and operation of Accounts and Settlement of Payments for Electronic Payment Transactions involving Intermediaries” as on November 24, 2009, (“Payment Intermediary Circular”), which lays down the legal framework that applies to the operation of payment gateways and intermediaries in India. Such intermediaries are strictly subjected to be in compliance with guidelines related to the operation of intermediary systems in Inda as provided under the Payment Intermediary Circular.
According to the RB I’s recent discussion papers, it has been suggested that the payment gateways and aggregators form a significantly critical link in the transaction flow, and henceforth it is required to regulate the activities as fall under the ambit of the PSS Act, 2007. The RBI has provided that the established contemporary guidelines governing payment intermediaries and gateway providers have to be reviewed in its Monetary Policy Statement for 2018-19.

RBI Guidelines on Payment Banks

The Guidelines on operation of Payment Banks and Guidelines for Licensing of Payment Banks as provided under the RBI’s governing framework elucidates that the governing regulations and measures related to licensing and operation of payments banks in India. The guidelines, among others, lays down the criteria for eligibility for registration or permissible operation and further other such guidelines that govern the working of payment banks. The Reserve Bank of India provides the purpose of setting-up Payment Banks such that:

“Reserve Bank of India says ―The objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.”

Anti-Money Laundering (AML) Regulations and Know Your Customer (KYC) Regulations

Know Your Customer (“KYC”) is a term that indicates the customer identification process. The KYC norms include the prudential efforts made to ascertain the identity and ownership source of accounts, source of funds, the nature of customer’s business, and accountability of operations in the account in connection to the customer’s businesses etc which further assists banking institutions to manage the risks reasonably. The purpose of the KYC guidelines is to avoid and prohibit banks from being used, specifically as criminal essential of money laundering.

The Reserve Bank of India issued the guidelines to banks under Section 35A of the Banking Regulation Act 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005.

The key takeaway regulatory guidelines that prescribe anti-money laundering (AML) norms for fintech services in India are part of the PMLA, the PML Rule and the KYC norms included in the Master Directions.

Data Protection Regulations and Rules

Fintech is a data-driven industry due to which it faces a challenge or risk related to the data ownership and its security. Such a risk can be superseded by taking certain legal and technical measures only. There are choices of cybersecurity measures that data labelling, optional information sharing and identified data shareholding, which can be the response to various data-driven challenges that the fintech space is facing.
Unauthorized access to customers’ data is a threat to data privacy, which actually violates the fundamental right to privacy, and therefore a significant challenge to the Fintech platforms engage in gathering and storing several forms of financial and behavioural data. India, right now, doesn’t have any comprehensive legislative or regulatory framework that governs data protection. The Information Technology Act 2000 and the IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011, contemporarily provide for the obligations of corporations or businesses to take reasonable measure in order to protect the personal data of consumers.

Further, the draft Personal Data Protection Bill, 2018, that is in pipeline can be best described such that:

“The draft Personal Data Protection Bill (2018) contains provisions that go beyond just the requirements of the IT Rules. The Bill specifies a notice and consent framework with explicit consent in the case of sensitive personal data. Explicit consent is understood as consent that is informed, clear, and specific along with being free and capable of being withdrawn.”

Recommended Readings:

  1. Aayush Rathi and Shweta Mohandas, Fintech in India: A study of privacy and security commitments, The Centre for Internet and Society, at https://cis-india.org/internet-governance/files/Hewlett%20A%20study%20of%20FinTech%20companies%20and%20their%20privacy%20policies.pdf (last accessed on 12/10/2019).
  2. Dr. R Srinivasan and Prof. M. Subramanian, Payment Banks in India – Demystified, SSRG-IJEMS, Vol. 2 Issue 12 (December 2015).
  3. Department of Payment and Settlement Systems, Discussion Paper on Guidelines for Payment Gateways and Payment Aggregators, Reserve Bank of India, at https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=943 (last accessed on 12/10/2019).
  4. Latha Ramesh and Yashika Gandhi, Reserve Bank Regulations for P2P lending platforms, Deccan Herald, at https://www.deccanherald.com/business/economy-business/reserve-bank-regulations-p2p-718950.html (last accessed on 12/10/2019).
  5. Rahul Gochhwal, Unified Payment Interface- An advancement in Payment Systems, American Journal of Industrial and Business Management Vol.7 Iss.10, 1174-1191, at https://www.researchgate.net/publication/320661583_Unified_Payment_Interface-An_Advancement_in_Payment_Systems (last accessed on 12/10/2019).
  6. Shilpa M. Ahluwalia & Himanshu Malhotra, Fintech 2019 in India, Golbal Legal Insights, at https://www.globallegalinsights.com/practice-areas/fintech-laws-and-regulations/india (last accessed on 12/10/2019).
  7. Shaikh Zoaib Saleem, What are prepaid payment instruments?, Livemint, at https://www.livemint.com/Money/Wq5AT6vx1JklC0lRSMbnSI/What-are-prepaid-payment-instruments.html (last accessed on 12/10/2019).

A Step Ahead: Analysing Indian Arbitration Law in the Context of International Technology Disputes

[This article was first published on the Mapping ADR Blog as authored by Aryan Babele,  you can read this article at http://mappingadr.in/a-step-ahead-analysing-indian-arbitration-law-in-the-context-of-international-technology-disputes/]

Technology-based enterprises are becoming the leaders of the global market in its every aspect. No industry has experienced such explosive growth as has been experienced by the industry of technology-based enterprises; especially in the context of globalization of the economy and the complementary expansion in international trade in recent years. The technology industry is indeed an international sphere due to its components, viz international supplying and distributing networks that have enabled manufacturers to provide their technology products/services to consumers at a global scale. For instance, Biotechnology is high in demand at global scale due to its influence in multiple spheres- medical, environmental, industrial etc., which are facilitated by processes like manufacturing, licensing and distributing. The global economy has given a significant boost to the demands on flexible dispute resolution, including international arbitration, as a means for resolving technology business disputes. This characteristic of technology business has become one of the main driving forces to the fact that the technology industry is progressively adopting arbitration as a dispute resolution method for international transactions where the base of its customers, suppliers and resources is established across multiple jurisdictions. As the competition to become a leader for the proper seat of technology-arbitration is becoming stiffer among nations, it is interesting to note that why arbitration is better than litigation for technology disputes. Further, considering India’s huge Information Technology industry, it is important to analyse the preparedness of the arbitration law of India to handle the international technology arbitrations.

In the technology industry, the contracts between two parties are most often based on the objective to provide services such as to acquire, sell or finance a high-tech business or project; manufacture, distribute and/or deliver; license patents or other intellectual property rights (IPRs); and purchase insurance policies covering risks associated with the production or operation of high-tech assets.[1] Therefore, difficulty with litigation in technology disputes, that arises out of a contract is that it involves multi-faceted issues related to different rights- acquisition, patent, know-how, trade secrets, etc. Fulfilment of liabilities established by such rights needs certain assurances from the national law regarding neutrality, speedy and flexible procedures, fulfilment of intentions and needs of the parties, confidentiality protection, experts’ decision etc.

DISADVANTAGES OF LITIGATION IN INTERNATIONAL TECHNOLOGY DISPUTES

In litigation, the major disadvantage to the parties in a technology dispute is the decision by an inexpert who is not able to appreciate the technicalities of a scientific testimony with little or no knowledge of relevant legislation and regulations. Players in fast-paced technology markets cannot afford to have progress stalled for lengthy and expensive litigation due to unexpected adjournments and options of appeal to higher courts.[2] Public nature of judicial proceedings makes the preservation of confidentiality a problematic task in litigation, which is extremely significant for technology-based enterprises. In litigation there arises a situation where legal actions for a dispute are submitted across multiple jurisdictions simultaneously, leading to uncertain and risky results. In such a scenario, even the litigators find it very uncomfortable to litigate abroad surrounded by unfamiliar foreign laws, regulations, customs, or language. Therefore, given the risks, it is not reasonable for technology-based enterprises to always opt for litigation in order to get resolve the international business disputes.

ARBITRATION: A SUITABLE DISPUTE RESOLUTION MECHANISM

As litigation is not always the best resolution method for the disputes which involve technology-based enterprises, there is a need to explore an alternative dispute resolution mechanism. In an international dispute, the greatest concern for both the parties is the favourability of the substantive and procedural laws of a particular jurisdiction to one or the other party. International arbitration provides the autonomy to the parties to decide the law and the forum which will govern the procedural and substantive aspects of the dispute resolution. As the pace of settling a dispute is given major consideration in commercial disputes, especially for technology business, the inherent characteristic of arbitration proceedings being a cheaper and a quicker process makes it an attractive approach to resolve disputes. As there is no appeal on the merits in arbitration, it is another reason for it being a swifter process than litigation.[3] Even if such an appeal to the Courts for the enforcement of the final award, that is too a streamlined process with time limits on the decision.[4] Arbitration, in contrast to the litigation, assures the confidentiality privilege pursuant to the agreement as it is a private procedure. Further, the availability of uniform rules for international commercial arbitration better meets the requirement of parties in the context of international technology disputes. For example, the success of the New York Convention, 1958, that has been ratified by 145 nations, boosts the confidence in the parties to afford the international arbitration as a mechanism for dispute resolution. Therefore, it is amply clear that all the usual advantages of arbitration in commercial disputes are applicable to the technology disputes making it a more efficient and effective dispute resolution alternative to litigation.

ANALYSING THE ARBITRATION AND CONCILIATION ACT, 1996 IN THE CONTEXT OF INTERNATIONAL TECHNOLOGY DISPUTES

After a lot of serious bureaucratic deliberations and political-intellectual debates, comprehensive overhauling of the Arbitration Act of 1940 resulted in the enactment of the Arbitration and Conciliation Act, 1996. With recent amendments in 2015, considering judgements of the Apex Court of India in cases of Bhatia International v. Bulk Trading[5]and BALCO v. Kaiser[6]it consolidated the domestic as well as international law of arbitration to make it suitable to the international commercial disputes in a better way than ever before. It further reflects the standards of the UNCITRAL model law on international commercial arbitration to promote the neutral and independent arbitral proceedings in India. Almost every provision of the Act 1996 takes into consideration the intent of the parties in one form or another. It also stresses the significance of arbitration agreement providing the instrument for parties to choose the expert decision makers and their powers as arbitrator in the arbitral proceedings.[7]

Privacy is a major concern for the technology disputes and constant interference of the national courts in arbitral proceedings subject it to broader public scrutiny, due to which not only confidentiality but also flexibility, procedural predictability, and informality of arbitral proceeding gets fragmented. The Act of 1996 provides a very limited number of circumstances in which national courts can intervene in arbitral proceedings, allowing arbitrations to take place according to its natural flow. The Act considers the principle of ‘party autonomy’ as the essence of the arbitration. It provides for an arbitral tribunal with power to rule on its own jurisdiction and determine the rules of proceedings[8], in order to ensure proper and expeditious conduct of the arbitration between parties, preserving the party autonomy. It further excludes the intervention from national courts by allowing the continuation of arbitral proceedings and making of final awards, thereby eliminating prospects for the delay.[9] To keep parties responsible towards the arbitral proceedings, the tribunal has powers to further delineate procedural duties on each party that comes with certain obligations such as security for costs and dismissal of the claim, in order to avoid any inordinate delay.[10]

In technology disputes, one of the most sought-after reliefs is interim reliefs as most of the international technology disputes arise from the contracts/license agreements. In such disputes, at the time of any deadlock, it is the aim of the licensor to pause the exploitation of technology and trade secrets. The Act has given the power to the tribunal to order such relief on a provisional basis but that is highly subjected to the scrutiny of national courts.[11] Also, it provides power to the tribunal to make an interim arbitral award at any time of the proceedings.[12] For technology arbitrations, there is a requirement of more specific and clearer provisions. The Act is supposed to confer such power on the arbitral tribunal with more substantiated provisions elaborating on the situations and conditions in which the tribunal can grant such injunctive reliefs.

Further, the Act is also required to make broader provisions regarding the protection of privacy and confidentiality of the details of parties and subject of the arbitral proceedings. It is certainly a big requirement for technology disputes that there be a provision related to blanket cover for issues of protecting the confidentiality. Therefore, particularly in relation to international technology disputes, the Act 1996 is needed to provide greater assurance and discretion to parties in terms of choice of arbitration institution, choice of an expert for arbitration (especially expertise in Telecommunication, Media and Technology laws), and IP infringement disputes.[13]

CONCLUSION

Technology-based enterprises drive the major transformations of the world by providing solutions to some of the greatest conventional anomalies. As there will be more and more research and development of technologies, they would result in more commercial contracts. Trodding the same path, there would soon be a separate pile-up of technology disputes in national courts. Hence, it is the need of the hour for parties to consider other dispute resolution mechanisms that are more expeditious and flexible.

Technology companies are themselves starting to anticipate this and increasingly choosing arbitration to resolve the international disputes, as stated by SVAMC as well.[14] Western nations and developed nations from Pacific Rim t have also understood the significance of resolving the technology disputes in a more speedy manner and have already taken specific actions for rectifying the concerns.

For India, there is a stiff competition ahead to stand as a centre for the arbitration in international technology disputes. There is no doubt that the Arbitration and Conciliation Act, 1996 provides an attractive framework for the resolution of international commercial disputes; but for technology disputes, there is a need to take a step ahead and to incorporate in the Act broader provisions relevant to interim reliefs, more flexible confidentiality clauses, e-case management, efficient e-disclosure review etc. Given India’s established law of arbitration in place and booming IT industry, there is a great opportunity for India to play a leader’s role in resolving international technology disputes.

 

 

[1] Raymond G. Bender, Arbitration- An Ideal Way to Resolve High-Tech Industry Disputes, Dispute Resolution Journal Vol. 65 (4), https://svamc.org/wp-content/uploads/2015/08/Arbitration-An-Ideal-Way-to-Resolve-High-Tech-Industry-Disputes.pdf.

[2] Sandra J. Franklin, “Arbitrating Technology Cases—Why Arbitration May Be More Effective than Litigation When Dealing with Technology Issues,” Mich. Bar J. 31, 32 (July 2001).

[3]Supra note 1.

[4]§34, The Indian Arbitration and Conciliation Act, 1996, Act no. 26 of 1996, Acts of Parliament. (India). https://indiankanoon.org/doc/536284/

[5] (2002) 4 SCC 105. https://indiankanoon.org/doc/110552/

[6] (2012) 9 SCC 552.https://indiankanoon.org/doc/173015163/

[7]§§ 7, 11, Supra note 5.

[8] §§ 16, 19, id.

[9] § 16(5), id.

[10] §§ 9(ii)(b), 4(b), id.

[11] §17, id.

[12] § 31(6), id.

[13] Norton Rose Fulbright, Arbitration in technology disputes, International Law Office, (Nov. 9, 2017), https://www.internationallawoffice.com/Newsletters/Arbitration-ADR/International/Norton-Rose-Fulbright-US-LLP/Arbitration-in-technology-disputes

[14] Gary L. Benton, Technology Dispute Resolution Survey Highlights US and International Arbitration Perceptions, Misperceptions and Opportunities, Kluwer-Arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2017/10/28/technology-dispute-resolution-survey-highlights-us-international-arbitration-perceptions-misperceptions-opportunities/