As the world is developing and modernizing, we are heading in the direction of a world that is driven by technology. One such technology, which is gaining public attention, is blockchain technology, which is a subset of artificial intelligence. This technology is very revolutionary and this technology will change the way the commercial world operates. Due to this technology, the nature of contracts has been changed, and this gave rise to the idea of smart contracts. Simply said, smart contracts are contracts that are created digitally. The idea of Smart contracts is not new as its idea dates back to a 1996 paper titled “Smart Contracts: Building Blocks for Digital Markets” by American computer scientist Nick Szabo.
What are Smart Contracts?
A smart contract is a contract that works on a blockchain network and it works according to the conditions that have been laid out. Smart contracts can be understood as contracts, the performance of which is self-operated by a system such as a blockchain. Smart contracts contain code that lays down prearranged conditions, which when fulfilled, activate outcomes. These contracts are known as “if” and “then” programs in the computer language. “If” something which is predetermined happens, “then” that should be performed or executed. Smart contracts also called E-contracts,
One simple example of a smart contract is that of a vending machine, in which when money is inserted, the product is provided. In a smart contract, the various terms of an agreement are written in the form of codes. These codes contain the information that executes the contract, and that same information is tracked and irreversible. These codes are contained in the distributed and decentralized blockchain network.
Smart contracts are different from traditional contracts. Traditional contracts are in written form or require a third party to enforce them, while smart contracts are programmed and executed as they are set up and do not require any third party or intermediary. The smart contract helps or allows people to transact with greater security and speed.
Characteristics of Smart Contracts
the first key thing about smart contracts is that they are autonomous. It simply means that these are independent. Once a smart contract is written, it cannot be changed. You can scrape off the entire smart contract and create a new contract, but you cannot make modifications to an existing smart contract, so that is the reason why it is autonomous. It is not as if that someone can influence it and change the set of conditions that have been written on the smart contract
The second key thing about the smart contract is that smart contracts are decentralized. It means that there is no central authority. Centralization means for example if you want to transfer money to your friend in the US or Europe, in order to transfer that money, you have to go through a bank. Similarly, if you have a feud with the builder who is not giving you your house despite giving him money, then you have to go to court. So, both banks and courts are the centralized authority in the above two examples. So, in smart contracts, there is no central authority at play because the technology has been disguised in such a manner that you do not need any kind of oversight.
The third key thing about smart contracts is that they are transparent in nature. Smart contracts are contained in a blockchain and they operate a pear-to-pear network, which means anyone can read them on the blockchain network.
The legality of Smart Contracts in India
Now the question arises of whether smart contracts are enforceable? The validity of the smart contracts can be derived from section 10(a) of the Information and Technology Act, 2000. It states that:
“Wherein a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.”
In simple word, it states that the contract formed through electronic means will not be considered invalid just because they were formed through electronic means. Smart contracts will be treated the same way as paper contracts as long as they are fulfilling the conditions that are required to be fulfilled for the formation of valid contracts under section 10 of the Indian Contract Act, 1872. According to section 10 of ICA, 1872:
“All agreements are contract if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”
So as per this section, for a contract to be valid, it must fulfill the following requirements:
- There should be free consent of the parties that are entering into a contract.
- The parties forming contract must be competent to Contract.
- The consideration and object of the contract must be lawful.
- The agreement must not be expressly declared to be void.
After reading this provision, we can say that there is nowhere mentioned that the contract should only be written on paper or it should only be in physical form. So, a contract formed through electronic means can derive its validity and enforceability from this section of the Indian Contract Act, 1872. Thus, we can say that smart contracts are enforceable till they are fulfilling the abovementioned requirements.
But the issue that arises with the smart contract is with respect to the consideration. According to section 23 of the Indian Contract Act, 1872, for a consideration to be valid, it must be lawful, should not be of such a nature if allowed would defeat the provisions of any law, and should not involve injury to the property of another and should not be immoral or against public policy. In Smart Contracts, the consideration given is crypto-currency. Crypto-currency presently fulfills are the conditions required for lawful consideration. But the stance of the Government of India is not in the favour of crypto-currency. The issue with smart contracts would arise when crypto-currency would be banned. If it is declared unlawful, then the consideration in the smart contract would become unlawful. Thus, declaring the smart contract to be invalid. But presently, there is no law that bans crypto-currency. So, till crypto-currency is banned, smart contracts would have the same status as traditional contracts.
Smart Contracts are gaining the attention of the world. Smart Contracts are the future of the business as it is very efficient. Smart Contracts are majorly dependent on crypto-currency and we can see in the present day, the growth of the cryptocurrency market. However, there is concern arises regarding crypto-currency as the same is not regulated. So, in order to get the benefit of this, there is a need to properly regulate cryptocurrency and smart contracts.
Legal Intern, LawDiktat