This article is written by Nwokorie Sophia Chukwudumebi of University of Benin(Nigeria) during her internship at Ledroit India
Abstract
Contracts no longer need paper, signatures, or middlemen to exist. With the rise of blockchain technology, smart contracts have emerged as a new method of executing commercial agreements through automated code. This paper examines the concept of smart contracts and evaluates their enforceability under Indian commercial law. It analyses whether smart contracts satisfy the essential requirements of a valid contract under the Indian Contract Act, 1872, including offer, acceptance, consideration, and competence of parties. The paper also explores how blockchain technology supports contract execution by ensuring transparency, security, and immutability. Although India currently lacks legislation specifically regulating smart contracts, this study argues that they may still be enforceable within existing legal principles. A brief comparison with developments in other jurisdictions highlights the growing global acceptance of smart contracts and emphasizes the need for India to establish a clearer legal framework for their use in commercial transactions.
Keywords
Smart Contracts, Blockchain, Indian Contract Act 1872, Commercial Transactions, Contract Enforcement, Digital Agreements.
Introduction
Modern contract law is akin to a masterpiece, bearing significant influence from Greek, Roman, and Anglo-Saxon legal traditions. The evolution of contract law in India has been a journey marked by various changes until it was ultimately consolidated under the Indian Contracts Act of 1872 during the colonial era. Since its enactment, this legislation has consistently served as a guiding light, illuminating the landscape of contractual jurisprudence for over fifteen decades.
However, Indian contract law has faced
criticism for its cumbersome processes, third-party interventions, and susceptibility to unauthorized alterations. Nevertheless, contemporary technological innovations offer a revolutionary shift, capable of reshaping our understanding of contracts. This intellectual invention introduces a shared database of transactions, designed to enhance security, transparency, and efficiency, known as blockchain technology. The potential of blockchain extends far beyond mere data storage; it enables decentralized transaction
Management and automates processes, regulations, and organizational principles.
To facilitate these transactions, a concept known as “smart contracts” is employed. Smart contracts enhance blockchain functionality by incorporating self-executing instructions, with the blockchain serving as the ultimate source of truth. These contracts, which does not mandate manual verification, simplifies approval processes and offer transparent calculations.
However, the distinctive features that set smart contracts apart from other contractual innovations raise questions about their legality and existence. This research paper conducts an examination of the facets of smart contracts while tackling issues regarding their legal standing within the framework of Indian law.
CONTRACTS IN INDIA: A LEGAL PERSPECTIVE
Contracts, in essence, represent agreements between parties, yet their validity hinges on specific criteria prescribed by the governing law. A precise definition of a contract varies depending on the legal requisites stipulated by the relevant jurisdiction. In order to grasp the conceptual framework of smart contracts and their legal status in India, it is essential to understand the position of “contract” within India’s legislative framework.
In India, Section 2(h) of the Indian Contract Act, 1872 (ICA) defines a contract as “an agreement enforceable by law.” Section 10of the ICA delineates the essential conditions for an agreement to transform into a contract. These conditions include free consent of competent parties, a lawful consideration, a lawful object, and the absence of an express declaration of voidness. Moreover, Section 11 of the ICA stipulates that a person must be a major, of sound mind, and not prohibited by state laws to be competent to contract. An agreement adhering to these conditions is regarded as a valid contract.
UNDERSTANDING SMART CONTRACTS
Smart contracts represent a pivotal aspect of blockchain technology. The term “smart contract” is rather self-explanatory, though the term “smartness” might seem misleading. The true brilliance of a smart
contract lies in its decentralized, third-party-free execution, where parties engage in agreements governed by programmed code, rendering it “smart.”
In 1994, it was uncovered that since cryptography is decentralized in nature, it could be used to improve the process of execution of a contract virtually. This took the shape of ‘smart contracts’. As a result, a lot of time is saved and it leads to avoidance of any conflict which may arise owing to a third party. They rule out room for human intervention of any sort, thereby eliminating the risk of human error. Further, they cannot be altered once the agreement is fully the terms in their favour. Additionally, they help in doing away with transactional and procedural costs associated with negotiations (paperwork) and verification (commissions); since there is no intermediary.
The key feature of a smart contract is that it is self-performing in nature, i.e. the terms of the agreement between the parties to the contract are directly incorporated into lines of the code. The code is contained in a distributed blockchain network, and it comprises all the agreement terms. Apart from the agreements, it consists of information that enables execution of the transactions and makes sure that these transactions are fully tracked, permanent, irreversible and time stamped. Every transaction carried out by the smart contract is placed as a block on the platform, which helps in establishing a clear audit trail, and erasing or wiping it out. It is an arduous task.
Thus, the important characteristics of a smart contract are as follows:
- Once it has been released, it is not possible for anyone, including the owner or creator, to alter its terms.
- Its performance and completion do not require submission of any physical documents.
- Although users may be anonymous, the details of each transaction are recorded and registered.
- Transactions under smart contracts are irreversible in nature.
There can be two types of smart contracts, the first one being contracts which are entered into in the absence of any enforceable text-based contract governing them. For instance, when two parties agree in oral terms, the business relationship they wish to maintain and proceed to capture that understanding into executable code; it is termed as a “code-only smart contract”. The second type of contract can be used to execute certain clauses of a conventional text-based contract when it consists of provisions for the same. They may be termed as “ancillary smart contracts”.
The main point of difference between a smart contract and a traditional contract is that the former is a self-executing computer programme, which cannot be tampered with by parties and works on complicated blockchain technology. On the other hand, the latter relies on the performance of the legal terms agreed upon by the parties, which can be modified at any given time with the parties mutual consent and leaves room for conflicts. Further, the risk factor associated with conventional contracts is very high, as there are chances of non-performance. Whereas in case of smart contracts, since they are automated, the risk is minimised.
Financial institutions like Barclays, headquartered in London, have embraced smart contract templates, supported by R3, to automate legal documentation in financial transactions. Startups like Chain, that utilize blockchain technology for managing and negotiating smart contracts, catering to the evolving landscape
of technology-driven contracts.
THE ASCENDANCE OF BLOCKCHAIN TECHNOLOGY
The wave of interest in understanding the revolutionary blockchain technology-based smart contracts in India began around 2017 when SBI launched the “bank chain” platform, a consortium of 27 banks
designed to share e-KYC information. This announcement was followed by a deluge of articles in leading newspapers, dissecting the pros and cons of blockchain-based technologies.
However, the term “blockchain” first gained global prominence in 2008 when an enigmatic figure or group known as Satoshi Nakamoto used it as a public transaction ledger for the cryptocurrency Bitcoin. To truly comprehend the significance of smart contracts, it is imperative to delve into the workings of
blockchain technology.
Blockchain represents a novel database technology in which information is shared across a network of users, with each user maintaining a comprehensive and up-to-date copy of records. The core strength of blockchain lies in how information is stored, duplicated, and updated within a distributed ledger, rendering it reliable and transparent. An inherent feature of blockchain is its decentralized nature; it is not controlled
by a single central authority. Instead, it operates through “nodes,” which constitute a network of participating computers.
These nodes function as the custodians of publicly transacted data, ensuring its storage, updates, and security. Every node has a duplicate of the blockchain. database, and these copies remain in synchronization with one another through a set of cryptographically-enforced rules, known as a consensus algorithm. The blockchain’s integrity is upheld by a cryptographic process called a hash function, which swiftly identifies and rejects any attempt to alter the database.
Subsequent to this peer-to-peer broadcasting, the next step involves aggregating transactions into a block.
Each block has a reference to another block, collectively forming the “chain” in the blockchain. This linkage ensures that third parties cannot tamper with the transactions. These transactions are based on mathematical logic and lack a reliance on trust. Any modification to any aspect of a transaction or a block result in a distinct “hash.”
This emerging technology boasts a myriad of features warranting exploration. Its technological attributes encompass transparency, timestamps, immutability, irrevocability, and programmability. Its capacity to facilitate the exchange of entirely Digital assets that can be exchanged without the involvement of a third-party intermediary that needs to be trusted. It has the potential to transform the global financial landscape.
BLOCKCHAIN TECHNOLOGY AND SMART CONTRACT EXECUTION.
Smart contracts operate on blockchain technology, a decentralized and distributed ledger that records transactions across multiple nodes. Once deployed, smart contracts become immutable and transparent, ensuring security and trust among contracting parties. Transactions are validated through cryptographic verification, making unauthorized alteration virtually impossible.
Blockchain technology enables automatic contract execution without intermediaries. Smart contracts facilitate peer-to-peer transactions by executing obligations once pre-defined conditions are satisfied. For example, in a commercial sale, payment may be automatically released to the seller upon confirmation of delivery on the blockchain. This automation enhances efficiency and reduces transaction costs, particularly in sectors such as finance, supply chains, and real estate.
Enforceability of Smart Contracts Under Indian Commercial Law:
Although India lacks legislation specifically regulating smart contracts, their enforceability may be determined under the Indian Contract Act, 1872. Section 10 of the Act provides that a contract is valid where there is competence of parties, free consent, lawful consideration, and a lawful object.
Smart contracts satisfy these requirements by incorporating offer and acceptance within coded instructions that are executed automatically upon fulfillment of specified conditions. Consideration is also present where reciprocal obligations are programmed into the contract, such as the exchange of goods for payment.
Indian contract law does not mandate that contracts be in writing unless expressly required by statute, meaning that agreements executed through blockchain technology may still be legally valid. Accordingly, where a smart contract fulfills the essential elements of a valid contract, it may be enforceable under Indian law.
CHALLENGES AND FUTURE DEVELOPMENTS.
Despite the significant potential of smart contracts, several legal hurdles must be addressed before their widespread adoption, particularly in India. A major challenge is the absence of specific legislation governing smart contracts. While the Indian Contract Act, 1872 provides a general framework for contractual validity, it does not adequately address the unique features of smart contracts, such as blockchain-based execution and cryptographic verification.
Another concern is the lack of built-in dispute resolution mechanisms. Traditional contracts often include arbitration or litigation clauses to resolve disputes, whereas smart contracts execute automatically once conditions are met, leaving little scope for post-execution remedies. This poses risks where contracts are executed incorrectly or unforeseen circumstances arise.
Smart contracts are also limited in their ability to handle complex agreements that require human judgment or subjective standards, such as obligations involving “reasonable efforts” or equitable considerations. While they are effective for simple, objective transactions like fund transfers or delivery verification, they remain unsuitable for contracts requiring legal interpretation or discretion.
Despite these challenges, the future of smart contracts remains promising. As blockchain technology continues to evolve, legal frameworks are likely to adapt. Jurisdictions such as Arizona, Nevada, and Estonia have already taken steps to legally recognize smart contracts, and similar developments may emerge in other legal systems, including India.
INTERNATIONAL PERSPECTIVES ON SMART CONTRACT ENFORCEMENT:
At a global level, many legal jurisdictions are establishing the recognition of the legal validity of smart contracts and then consequently adapting their respective legal frameworks.
In the United States, the Uniform Electronic Transactions Act (UETA) combined with the Electronic Signatures in Global and National Commerce Act (E-SIGN) provides legal effect to electronic contracts and signatures. However, the enforceability of smart contracts is still an emerging area of law. Some states in the United States, such as Arizona and Nevada, are at the forefront, enacting laws that affirmatively ratify smart contracts and blockchains as valid methods of contract enforcement.
Its law in Arizona holds that data on a blockchain, even smart contracts, cannot be rendered without legal effect solely based on its presence on a blockchain. This forward-thinking legal position establishes a significant precedent for the future application of smart contracts within the United States and may encourage other jurisdictions to implement comparable legislation.
Within the EU, the GDPR represents a new dimension of challenges posed to smart contracts, particularly in aspects like the right to forget and blockchain immutability. However, several other countries in the EU are starting pilot applications of smart contracts in domains as varied as financial sectors, property registrations, and supply chains in Estonia and the Netherlands, embracing their role in streamlining and automating complex transactions.
In both Singapore and the United Kingdom, the use of smart contracts continues to increase, with judicial authorities displaying receptiveness to discuss smart contracts in the context of traditional contract law provisions, assuming that these contracts meet the basic requirements of offer, acceptance, and consideration.
CONCLUSION.
In conclusion, the introduction of blockchain technology into the legal domain is a remarkable development. Our exploration of the evolution and legality of blockchain-based smart contracts brings us one step closer to embracing a new era. While certain aspects of smart contracts remain uncertain and
ambiguous, we cannot afford to ignore such innovations. In this ever-evolving landscape, what we need is extensive research, thorough analysis, and informed policymaking.
Smart contracts have the potential to revolutionize digital contracts, offering solutions that range from small financial transactions to more complex applications in areas like insurance, logistics, and healthcare. India’s initial scepticism about blockchain technology is understandable, but it should not hinder the state from crafting new legislation to regulate its use within the country. The vast possibilities of smart contracts await exploration, and the absence of a proper legal framework should no longer impede national
progress
Ultimately, I echo the words of Muhammed Iqbal, which resonate in the current context: “Let this be our beautiful departure from stagnation; let our minds come alive; enter another dimension; go beyond the stars, eagerly struggling to find that… which our naked eyes did not know existed; rise like a falcon born to soar and not be alone but be present amongst others.” It is time for India to embrace the potential of blockchain technology and smart contracts and set sail toward a new era of legal innovation.
