Introduction to Contracts and their Formalities
The formalities of a contract under traditional contract law are well understood - the ingredients being:
1. an offer by a party;
2. an acceptance by a counterparty; and
3. consideration in form of money; goods or services exchanged by both parties.
Subsequent to this, depending on the type of contract, the document may need to be registered and the requisite stamp duty (if any) paid; and thereafter the original contract stamped (unless statutorily exempt from stamp duty under the Stamp Duty Act).
These fundamentals apply to all kinds of contracts ranging from loan agreements, sale of land agreements and security agreements including charges and mortgages etc.
What is an Electronic Contract (E-Contract) in Kenya?
An electronic contract is a contract formed in the course of transactions between parties using electronic means such as email or a text message. It also includes a contract executed/concluded with an electronic signature using a digital signature such as DocuSign and similar certificated and licensed signature software.
While previously all contracts which needed to be in writing required a physical/hard copy writing, Kenyan Law now provides that the requirement of writing is satisfied if such an agreement is rendered in an electronic form that is accessible for future reference. This now validates digitally signed contracts or contracts made solely by email and even text messaging and renders such electronic contracts to be legally enforceable.
The Existing Legal Framework on Electronic Contracts in Kenya
Section 83J of the Kenya Information and Communication Act (‘KICA’) provides that save for statutorily exempt contracts, a contract shall be valid and enforceable even when the contract is formed electronically.
Recently, in an effort to provide an effective legal framework for the practical implementation of Section 83 of the Kenya Information and Communication Act on electronic contracts and electronic transactions; in March 2020, Kenya enacted the Business Laws Amendment Act to buttress the KICA statute. This 2020 Amendment inter alia solidified and aligned the statutory provisions under KICA as pertains to electronic contracts and electronic signatures with other existing statutes relating to land; registration of documents and stamp duty as follows:
1. Amending the Land Registration Act to provide that instruments for the disposition of interests in land may be in electronic form (i.e. electronic contracts).
2. Amending the Law of Contract Act to provide that where a contract related to the disposition of an interest in land requires a signature by any signatory, this shall be fulfilled by an electronic signature. This effectively allows electronic real estate contracts (i.e. electronic signatures in addition to wet ink signature).
3. Amending the form in which signatories may register documents/contracts; signatories may now file their documents for registration in electronic form.
4. Amending the Stamp Duty Act to allow for electronic stamping of documents that have been assessed with stamp duty tax (i.e. removing the need to take the original hard copy document for physical stamping by the office of the Commissioner for Stamp Duty).
When can Electronic Signatures (E-Signatures) be used?
Parties in Kenya may now use an e-signature where any contract is required to be signed and such signature shall only be valid if an advanced electronic signature is used. An advanced electronic signature means a digital signature using a signature creation software whose authenticity can be authenticated as follows:
1. The signature data is linked to each signatory and no other person (this is best indicated through the electronic signature certificate created after each signatory has signed).
2. The signature data was under the control of the signatory and no other person.
Checklist for your Electronic Contract
Check the following issues before entering into an electronic contract:
· What does the governing law relating to your contract say about contracts relating to the subject matter of your contract? For instance, negotiable instruments such as promissory notes and cheques are still required to be in hard copy as they are specifically exempt from the law on electronic transactions under Section 83B of KICA.
· Am I using an advanced electronic signature? Make sure that the electronic signature system that you use can stand up to scrutiny and tests of authenticity by a licensed certification service provider in Kenya.
· Do I need to have the documents commissioned or notarized?
Foreign and Local Parties: Cross Border Electronic Contracts
Where the contract relates to a cross border transaction, it is absolutely essential for the enforceability of your contract to check whether the jurisdiction where the counterparty is domiciled AND the jurisdiction where you will seek recognition and enforcement of the contract also recognize electronic contracts and electronic signatures.
If a signatory is unclear about these competing laws, it is best to err on the side of entering into a wet ink contract rather than an electronic contract.
Evidentiary Issues of Electronic Contracts
Electronic contracts are just as liable as traditional contracts to be disputed both in terms of validity and enforceability. The Evidence Act of Kenya (Cap 80) has standards on propounding electronic or digital proof and failure to maintain proper electronic records of the electronic contract to specified standards, may diminish the persuasiveness of the electronic contract, render it inadmissible or even negate its validity.
It is important when using electronic signatures, to only use an advanced electronic signature that can be authenticated if ever presented to a certification provider licensed in Kenya. This entails use of a legitimate and proprietary digital signature software which the party is authorized to use under a valid licensing agreement.
In the event of a dispute, the aggrieved signatory ought to be able to provide an electronic record of proof of any electronic contract. Therefore, good e-document storage and high cyber security is important to avoid distortion of information relating to your electronic contract.
Do Parties need to pay Stamp Duty on Electronic Contracts in Kenya?
Yes, they do if the documents are subject to stamp duty as assessed under the Stamp Duty Act. However, and positively, the March 2020 statutory amendment now provides for electronic stamping of documents that have been assessed with stamp duty tax and the mechanism is being put in place by the Commissioner for Stamp Duty.
The provision of general advice herein does not constitute an advocate-client relationship with any reader. All information, content, and material in this article are for general informational purposes only. Readers of this article should get in touch with us to obtain advice with respect to any particular legal matter.