by Sindhuja Kashyap and Tanishq Acharya, King Stubb & Kasiva, India

Introduction

Blockchain technology has gained significant attention and recognition due to the rise of cryptocurrencies, particularly Bitcoin. However, blockchain’s potential extends far beyond the realm of digital currencies. It has found application in various industries, including finance and real estate, revolutionizing the way transactions and contracts are conducted. This article explores the legal implications of blockchain technology and smart contracts in India, analyzing their impact on the Indian legal landscape.

Understanding Blockchain Technology

Simply put blockchain is a decentralised ledger boasting the highest standards of security which prevents the data so stored from being tampered with. The decentralised nature of the storage of the data allows instantaneous distribution and storage of data for perpetuity across the network of computers. Every new data entry is recorded in a new block and is stacked upon the previously created blocks of information thereby creating a chain of information. The intertwining of these blocks and decentralised storage of the information within them renders them impenetrable and the hacking or alteration of said information is improbable.

The Emergence of Smart Contracts

Blockchain has also been employed for the creation of “smart contracts”. Smart contracts are electronically programmed protocols stored on a blockchain that automates the requisite actions for execution of a contract and run only on the completion of pre-determined conditions. These transactions are traceable, trackable and irreversible. The automated nature of these contracts leads to minimal human supervision for the execution of said contracts. Smart contracts essentially are lines of codes that are not readable by the parties to the contract unlike e-contracts which are not formulated by lines of codes but employ certain coding for the execution of the agreement. Smart contracts provide a faster and more efficient way to execute contracts by minimising the amount of human supervision, paperwork and human errors; smart contracts also provide a great degree of security rendering these contracts tamper-proof; and benefit the parties by reducing the costs associated with the execution of contracts.

Challenges and Consideration

One of the significant differences between a smart contract and an e-contract is the lack of human interpretation. While smart contracts are self-executing in nature and operate on the basis of the pre-determined and agreed upon terms put into code, once these terms are met the smart contract self-executes by way of the blockchain technology, e-contract is simply executed by way of a cryptographic/electronic signature. This automated execution may pose challenges in interpreting certain clauses, such as force majeure, which require contextual application rather than mechanical execution.

Another notable difference between a smart contract and traditional contract is the readability of the contract itself. Since smart contracts are essentially terms communicated in the form of lines of code it is not discernible to human parties, therefore rendering the verification and comparison of the final clauses with the pre-agreed clauses is not possible. This may lead to the validity of the agreement being questioned in the event of a dispute on the grounds of want of understanding and verifiability of the final clauses.

Validity of Smart Contracts in India

Smart contracts form a subset under the larger set of e-contracts as recognised by Section 10 of the Indian Contract Act which provides grounds to test the validity of any contract and Section 10-A of the IT Act, 2000 which recognises contracts formed through electronic means. The essential features of a valid contract as provided under the Indian Contract Act are free consent; competent parties of sound mind and age; lawful consideration; and a lawful object which are all present in smart contracts.

The validity of smart contacts has been challenged on the grounds of:

1. non-readability of the agreement; and
2. the self-executing nature of the instrument.

With regards to the non-readability of smart contracts, it is pertinent to note that in most instances the originator of said contracts provides the contents of the smart contract in a comprehendible language to the parties involved for their due diligence and verification.

Individuals opposed to the adoption of smart contracts have often cited the self-executing nature of smart contracts as one of its greatest drawbacks. The self-executing nature of smart contracts is only an issue when it comes to exceptional circumstances such as frustration and force majeure which lead to contacts being held void. The same shall be the case in the event frustration or force majeure event occurs having an impact on a particular smart contract. Thereby rendering both traditional and smart contracts to function similarly under the aforementioned circumstances.

Conclusion

Smart Contracts are a subset of a much larger group of e-contracts which is recognised by the Indian Contract Act as well as the Information Technology Act. The fact that smart contracts employ blockchain renders these agreements tamper-proof and boast an almost impenetrable level of security. These agreements are stored in blocks of perpetuity and are accessible across multiple nodes in the blockchain. The self-executing nature of smart contracts reduces the requirement of human supervision and middlemen, thereby increasing the efficiency with which agreements are executed and reduces the scope of human errors as well.

While smart contracts bring significant advantages, it is important to address their challenges, such as non-readability and the interpretation of specific clauses. With the appropriate safeguards and understanding, smart contracts have the potential to transform the way contracts are executed in India, fostering greater efficiency and security in business transactions.