How Online Contract Is Formed?

Updated: Aug 17


Online contract also known as an e-contract. An e-contract is the result of the interaction of two or more electronic agents that have been designed to recognize the existence of a contract, or even a deal that takes place via the internet. The formation of an e-contract in Malaysia is governed by Contracts Act 1950 and must be read in conjunction with the Digital Signature Act 1997 and Electronic Commerce Act 2006.


Does Online Contract Have A Legal Effect?

The legality of an online contract can be referred to section 7(2) of the Electronic Commerce Act 2006. It stated that the formation of a contract by way of the electronic message has a legal effect.

So, how does the online contract form?


What Are The Requirements For Online Contract Formation?

Several requirements need to be fulfilled to ensure the legality of the online contract which are:


1. Offer

Offer is an act of a person who indicates a willingness to do or abstain from doing something with the purpose to get the assent of another person as in reference to section 2(a) of Contracts Act 1950.

However, displaying products with a price on a website may be more of an invitation to treat (ITT) than an offer.ITT is when a person invites someone to make an offer. When a customer shops online, the customer makes an offer when he or she approaches the vendor to purchase the items. Thus, the customer sends the offer when pressing the order button.


2. Acceptance

An acceptance is the final indication of assent to the terms of the offer by virtue of section 2(b) of the Contracts Act 1950.

In online shopping, acceptance is transmitted via electronic means. Therefore, the receipt rule is applied. The receipt rule states that an acceptance must be conveyed to the offeror via digital means and that the acceptance is only effective and legal when the offeror is aware of it.In this situation, if the vendor's website serves as an invitation to treat and the customer makes the offer, the contract is formed upon the acceptance of the customer's offer by the vendor.


3. Consideration

A consideration is that the promisee must provide something in exchange for the promisor's promise. It can be referred to section 2(d) of the Contracts Act 1950.

It means with the aim of the contract to be valid, each of the parties has to exchange something for the other to profit. So when a customer shops online, it consists of the customer's payment and the vendor's delivery of goods. There is no doubt that an online transaction in which commodities and money are transferred satisfies the contractual criterion for consideration.


4. Intention to create legal relations

The Contracts Act of 1950 is silent on the issue of intention to create legal relations, but there is no disagreement that the parties must have such intention to enter into a contract.

As for an online contract, the existence of intention is normally automatic. When the customer clicks the agree on button or ticks the terms and conditions box, it indicates that both parties have given their approval and have the intention to create legal relations.

However, this purpose can be withdrawn if a customer is duped into signing an undesirable contract by a confusing or dishonest website.


5. Capacity

A person is competent to contract if he is of the age of majority, of sound mind and not disqualified from contracting as according to section 11 of the Contracts Act 1950.

A contract entered into by someone who lacks the element of capacity is null and invalid.It may be difficult to tell whether a contract is entered by the designated competent person when purchasing online. To avoid this problem, the seller can utilize digital signatures that are verified by a certification authority.


Conclusion

In conclusion, each of the parties must take note of the elements to enter into the online contract to avoid any liabilities or issues occurring. This is to safeguard both parties’ rights.

Generally, knowledge of the elements of contract as either it is online of offline should not be taken into granted. Do ensure the elements of contract are fulfilled because parties will be protected by our law only when the contract is validly formed.

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