Enforceabilty of Smart Contracts in India: An Overview

Author:- Advait Panda, Associate, All India Legal Forum

A legal expert and cryptographer named Nick Szabo discovered in 1994 that smart contracts, which are essentially self-executing contracts and ensure the performance of virtual agreements through blockchain technology to provide a hassle-free contract execution, could use the decentralised nature of cryptography. The distinguishing feature of blockchain is its decentralised nature, which eliminates the need for intermediaries and, as a result, cuts down on time and potential conflicts.

In a self-executing contract known as a “smart contract,” the terms of the agreement between a buyer and a seller are directly incorporated into lines of code. The code, which comprises of all the agreement provisions, is stored on a distributed, decentralised blockchain network. The programming also contains data that conducts transactions, makes sure they are recorded, and guarantees their irreversibility in addition to the agreements.

Therefore, it can be claimed that a smart contract is primarily a type of computer protocol to conduct the contract’s facilitation, verification, and enforcement functions digitally. The main components of a smart contract are that no one, not even the developer or owner of the smart contract, may alter its conditions once it has been issued. Physical documentation or submission are not necessary for the contract’s performance or conclusion and despite the fact that a user may remain anonymous, the specifics of the transaction are logged and registered. Smart contract transactions are final and cannot be undone.

Statutory Overview of Contract Law in India

The primary statutory contract regulation is provided by the Indian Contract Act of 1872. All agreements are contracts if they contain the free assent of parties who are prepared to contract, for a legally recognised consideration, and with an object, according to Section 10 of the act.

If an agreement has an offer, an acceptance, and a consideration, it qualifies as a contract and is legally binding. Smart contracts appear to be permitted by the Indian Contract Act of 1872 by definition. A smart contract includes an offer, an acceptance, and payment in the form of cryptocurrency as consideration. This raises the question of whether cryptocurrency is recognised as valid payment under Indian law. Digital signatures are accepted legally under Sections 5 and 10 of the Indian Information Technology Act 2000, which also recognises contracts made electronically as binding and enforceable. Furthermore, contracts that have been digitally signed are acceptable in court, according to Section 65B of the Indian Evidence Act of 1872. As a result, the government is empowered to use the legal system to resolve disputes between the parties.

Smart Contracts in India: Their Legal Operation

In essence, smart contracts offer a framework for contracting between parties who may or may not be acquainted and who may also be held responsible for the risks. Under Indian law, smart contracts may be enforceable, but if caution is not used regarding the entity you are contracting with, you will be responsible for dealing with the fallout on your own because there is no elaborate structure in place to govern smart contracts.

If the consideration for the contract was not reciprocal, then it’s possible that it wouldn’t be enforceable under Indian law. If the contract is unilateral in nature, this can happen. A breach of such a contract would not be considered a breach in Indian courts because, in their opinion, there wouldn’t have been a contract in the first place because mutual consideration, an essential component of a contract, would not have been present. However, smart contracts without mutual consideration can still be enforced through code. As there is no regulatory framework in place to govern smart contracts, the legality of smart contracts in India permits their use but does not grant the parties involved in them legal protection should they become liable or suffer damages. However, if the smart contract falls within the parameters of contract law as defined by statute, the law will assist to the greatest extent possible.

Smart Contracts & Risks

Despite the fact that electronic contracts are permitted under Indian law, the practicality of protecting people’s interests is called into doubt by Ponzi schemes, which are made even easier by blockchain technology.

The issue is that, whether in India or anyplace else in the globe, there are no well-established regulatory structures to control cryptocurrency transactions. A government-designated certifying body is the sole place to get an electronic signature, according to Section 35 of the Information Act. This presents the issue because, while there is no legal body that approves of electronic signatures, the blockchain technology is what creates the hash key that must be used as an identification to authenticate the smart contract before the contract can begin. The court presumes that an electronic record brought in court is authentic, according to Section 88A of the Indian Evidence Act, but it makes no assumptions regarding the sender of the contract. As a result, using a signature obtained via blockchain technology will further complicate the admissibility of a smart contract because the signature was not acquired in accordance with the Information Act. This invalidates the blockchain technology’s encryption method for smart contracts and forbids the submission of smart contracts as evidence before the tribunal.

Application of Smart Contracts In India

A prominent producer of electrical equipment and a member of the Bajaj Group is Bajaj Electrics. It is without a doubt one of the major participants in the Indian economy; the firm’s business operations have an impact on a number of industries and suppliers, both inside and outside the organisation.

Because Bajaj works with many different suppliers and needs to make sure that each transaction between each vendor was completed properly, the payment procedure for vendors was lengthy and onerous. In order to obtain payment, the vendor must demonstrate that Bajaj Electricals has verified delivery, raise a supplier’s physical bill of exchange, and submit an invoice and shipping documentation to Yes Bank as delivery evidence. The management of Bajaj Electricals was compelled by this to look for a quick and secure replacement for their manual invoicing system. They chose blockchain as their chosen option. The business announced in January that it will use a blockchain vendor financing—also known as supplier financing—solution created by Yes Bank.

Chetan Bhanushali, Treasury General Manager of Bajaj Electricals Ltd., claims that the adoption of blockchain eliminated the various processes that were part of the company’s bill discounting procedure and made the entire transaction paperless. The new procedure has brought Bajaj Electricals’ overall system cycle for payments down from five to four business days to nearly instantaneous. Blockchain for supplier finance is being pursued and tested by other institutions besides the Indian bank Yes Bank. For instance, in November 2016, the Mahindra Group and IBM said that they were collaborating to establish a cloud-based blockchain architecture that has the potential to revolutionise supply chain financing in India.  A white paper on blockchain technology was recently released by the Institute for Banking Technology Development and Research, a branch of the Reserve Bank of India, to help Indian banks and financial institutions prepare for their own blockchain journey.

Conclusion

There is no doubt that the adoption and development of smart contracts represents the next stage of innovation and has the potential to immediately save hundreds of billions of dollars’ worth of overhead expenses while increasing the effectiveness of the whole system.

However, there are regulatory concerns, particularly in India where there are no rules defining the specifics of a smart contract. If special restrictions are not implemented, the Indian Evidence Act of 1872 and the IT Act will need to be changed in order for the technology to be widely used. The law is currently operating in a grey area, so even if the corporate sector and laws have made some progress toward embracing the notion of smart contracts, a strong commitment is still needed to create a complex structure that will govern how smart contracts operate in India.

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