EXPLAINED: SMART CONTRACTS IN INDIA

This article was written by Shristi Roongta, who explains what are smart contracts and elaborates upon its presence in the Indian laws.

INTRODUCTION

With the growth and advancement of technology, we are moving towards a more digitalised world. The modern era is dependent on the internet to a great extent. Hence the contracts are also getting digitalised. Basically, smart contracts are new age software-based contracts in which the software automates the business processes. It is self-performing in nature. 

KEYWORDS

Smart contract, software-based contract, blockchain, self-performing, contracts.

WHAT ARE SMART CONTRACTS?

As mentioned above, the smart contract is a new age software-based contract having a main feature of self-performing. The smart contracts are stored on blockchain and in this type of contracts the code explains the mechanisms of the transactions and final arbiter of the terms. Therefore, these contracts have become the building blocks of the entire ecosystem of decentralized applications and it represents a point of convergence of development of blockchain. Due to blockchain the requirement of intermediaries or third parties or human interactions are eliminated owing to its decentralized nature. This also ensures the smooth and trouble-free experience of virtual contract execution. Hence, there are no chances of human errors, however, once the agreement is completely codified, it cannot be altered or modified as per the need. 

Features

• It is self-performing
• It is once codified, cannot be modified or altered
• It uses blockchain technology for performance and executions of contract virtually
• For the performance and completion, it do not require submission of physical documents.

Presently, the smart contracts are best suited for two types of commonly used transactions:

• Confirming the payment of funds upon certain triggering events.
• Imposition of financial penalties if certain objectives or conditions are satisfied. 

HOW DO SMART CONTRACT WORKS?

In smart contracts, the code contains the terms. Therefore, the contract interprets and verify then automatically executes the transactions which are in accordance with the terms. For example, in case of rent, a contract of rent is made in smart contracts. The tenant will pay the rent to the house owner in cryptocurrency and once the payment is made and the house owner receives the receipt of successful transaction, he will release the key to the house. The system operates on If-Then principle and the people who are involved in blockchain will observe the transaction and will become the witnesses. The house owner will be surely paid when he releases the key and the tenant will definitely receive the key if he pays the amount. Therefore, one action will not be completed without the other and this states an efficient and effective system. 

USES

The smart contracts can be used in various such cases. Some of them are listed below:

1. Insurance- due to lack of automation process in insurance claims, this can lead to delay to process claims for months and it can be problematic to the customers. Here, adopting smart contracts can be extremely helpful. The smart contract can trigger the insurance claim automatically when certain events occur which ultimately saves time and costs. Furthermore, this makes the entire process smooth and effective.
2. Mortgages-  the smart contract assist in mortgages cases by  automatically joining the parties and by providing a frictionless process. It can also automatically process payments and release the liens from landlords when the loan is paid.
3. Supply chain management- for any company keeping a track of the flow of goods is a difficult task. Here, the smart contract helps and saves time, costs and makes the process more efficient by taking a note of the ownership rights as the products move through supply chain with confirmation who is responsible for the product at a given time.

SMART CONTRACT IN INDIA

The primary statute to regulate the contracts in India is the Indian Contract Act, 1872. Section 10 of the Act states that “all agreements are contracts if they hold the free consent of parties willing to contract, for a lawfully accepted consideration and with an object.” In simpler terms it means that an agreement to be enforceable by law must have an offer, acceptance and consideration. In smart contracts, there is offer, acceptance and consideration in form of cryptocurrency. Hence, the essential requirements of section 10 are fulfilled which means that the smart contracts are enforceable under the Indian law. However, cryptocurrency is not recognized in India as there is no such regulation which can regulate it. Here a question raises, whether cryptocurrency can be considered a valid consideration under the Indian law. In a 2020 judgment of the Supreme Court, the Hon’ble Court lifted the ban imposed by Reserve Bank of India on cryptocurrency which refused the banks and financial institutions from providing services to individuals or businesses who were engaged in cryptocurrency dealings. 

Now, question arises that whether digital signature are enforceable or not and can be admitted as an evidence in the court?

Section 5 and section 10 of the Information Technology Act, 2000 (“IT Act”)defines that a digital signature is legally acceptable and a contract of electronic means to be legitimate and enforceable. Section 65B of the Indian Evidence Act, 1872 (“Evidence Act”) states that the contracts signed digitally shall be admitted as an evidence in the courts. However, according to the Evidence Act, an electronic contract is considered valid only when if it is authenticated by way of a digital signature which should be in accordance with law and these signatures are enforceable and recognized under the IT Act and in accordance with the rules of the Central Government. In case of smart contracts, the contract may be identifiable to the contracting parties, however, these do not employ signatures in digital formats that the Indian law requires. Thus, the smart contracts may not enjoy the benefits of a contract under the Indian law.  

Smart contracts are enforceable in India, however, if caution is not followed with respect to the party that is being contracted then the consequences of a failed transactions shall be carried all by own as the law has no detailed system in place for the regulation of the smart contracts. The smart contracts might not be enforceable under the Indian law if the consideration in the contract is not mutual. As the Indian law recognizes the concept of mutual consideration, absence of the same will make the contract enforceable. This situation can occur in case of unilateral contracts. Although a smart contract without consideration can still be enforceable through code. However, if such contract is breached them it shall not be held as breach in the eyes of courts of India because for the courts there is no contract in the first place as there was no mutual consideration which is a significant requirement of a contract. 

CONCLUSION

It can be concluded after reading the above piece of information on smart contracts that smart contracts have many benefits with evident disadvantages. The smart contracts are enforceable in the Indian law, however, the protection cannot be granted as there is no regulation which can regulate this type of contracts. There are several other issues as well in smart contract such as policy issues including jurisdictions problems and the possibility of fraud and etc. Therefore, the Indian law needs amendments or laws for the regulation of smart contracts in India.

REFERENCES

1. Indian Contract Act, 1872.
2. The enforceability of smart contracts in India, https://www.mondaq.com/india/contracts-and-commercial-law/874892/the-enforceability-of-smart-contracts-in-india
3. Smart contracts: Functioning and legal enforceability in India, https://www.alliance.edu.in/ijls/ijls-2021/assets/documents/Smart-Contracts.pdf
4. Smart contracts in India, https://www.mondaq.com/india/fin-tech/1133130/smart-contracts-in-india