With the growing number of contracts being executed between businesses today, the concept of smart contracts comes in at an opportune time. Smart Contracts is one of the latest technological developments built on blockchain technology. These are essentially self-executable contracts where the terms of the contract/agreement between two parties are written as codes on a blockchain network. The manner of execution and related transactions in the contract are based on the underlying code that can be tracked but cannot be reversed. Arguably, the most apparent distinction between smart contracts and regular contracts is that the former need not have a governing authority, enforcement framework, or legal obligations to be carried out. Smart contracts might also not meet all essentials of a contract as laid down in the contract laws. However, the transactions are traceable, consistent and irreversible, making it a trusted manner of execution even between two unknown or anonymous parties.
Laws governing ‘Smart Contract’ in India
In India, the Indian Contract Act, 1872 (‘Act’) is the primary statute regulating contracts. Section 10 of this Act lays down the requisite elements for an agreement to be called a contract which are free consent of the parties, an object and a lawfully acceptable consideration. Thus, an ex-facie understanding of a valid contract comprising offer, acceptance and a lawful consideration may create the impression that smart contracts could come under the ambit of the Act. Considerations in smart contracts are effectuated in the form of ‘cryptocurrency’, which poses ambiguity whether the same can be considered a valid consideration under the Indian contract law.
Another Indian statute relevant while dealing with smart contracts is the Information Technology Act, 2000 (‘IT Act’). Section 5 of the IT Act discusses the legal recognition of ‘digital signatures’ while Section 10 of the IT Act grants the Central Government the power to make rules with regard to digital signatures. The IT Act finds a contract effectuated by digital means to be valid and enforceable. Other sections of the IT Act, such as sections 17, 18 and 19 too, allow regulatory supervision from domestic and international authorities. In fact, even the Indian Evidence Act, 1872 recognises digitally signed contracts, wherein Section 65B of the Evidence Act states that digitally signed contractual agreements will be admissible in the courts. Thus, albeit limitedly, these Indian statutes allow the government to regulate and enforce smart contracts.
Feasibility of using smart contracts for business transactions
Smart contracts can find immense civilian and business applications. While the nitty-gritty of specific usage in a particular sector may garner myriad implications – both good and bad, however, blockchain technology is a rapidly growing branch that may offer more efficiency and efficacy for several business transactions.
A famous example of smart contract usage in the real estate sector is Propy. Propy incorporated the technology of smart contracts to facilitate real estate contractual agreements. Here, the owners can list their properties, and interested buyers may navigate such lists and negotiate online. If a deal is struck, each transactional step is coded on the blockchain. In fact, Propy has recently taken it to a whole new level by auctioning a real property in the form of a non-fungible token (NFT).
Smart Contracts have entered the insurance market as well and are in the direction of revolutionizing the sector. A smart contract based scheme called ‘Fizzy’ was launched by AXA which is essentially a travel insurance in cases of flight cancellations or delays. The most useful aspect of such tech-driven schemes is the element of transparency. The claims made by the insurance beneficiaries and the terms on the website are stored on a blockchain that is traceable and irreversible. In instances of delays or cancellation, the contract execution is triggered on its own, ensuring performance. Such initiatives raise intriguing debates – to what extent can smart contracts affect other kinds of businesses?
Given the rate of technological advancement and the growing utility of blockchain technology, almost all kinds of enterprises – automobile, education, healthcare, insurance, digital identity etc., can benefit from smart contracts. With technological advancements, data leakage is a rather rampant concern, and smart contracts can bring seminal advantages for the growth of any business in a secure manner. It can ensure transparency and, most importantly – consistency and data ‘immutability’. Instances of fraud and faulty record-keeping can be done away with, unarguably leading to growth and customer satisfaction. In the insurance sector, the growth of micro insurances can be better accommodated through smart contracts instead of conventional methods. Moreover, pay per use functions any micro transactions at large can be efficiently managed through smart contracts.
Smart Contracts for the legal domain
Smart Contracts functions may seem simplistic at times, but it is sufficiently equipped to handle complex transactions. The transparent, consistent and accurate mechanism at play in smart contracts may lead to the erroneous assumption that it is an iron-clad way of handling transactions and will not give rise to possible litigation. However, it is still a technological tool that cannot think on its own. A smart contract will only depend on the underlying codes and will consequently suffer from what is termed as “Oracle problem”. It means that a smart contract can only act within the limitations of the code, and it would still need human intervention to ascertain if the contractual obligations have been fulfilled or not. This will lead to an increase in the application of online dispute resolution mechanisms.
The way forward with the implementation of smart contracts in the legal landscape is a road not yet travelled, but it goes without saying that computer codes would not be able to demonstrate the entire understanding reached between the parties to the contract. To tackle this, a hybrid model, assimilating a smart and a traditional contract, can be used, with precedence being given to the traditional contracts in case of conflict between the two. This would provide the efficiency of smart contracts, alongside the understanding of a traditional one.
Besides the direct challenges posed by applying blockchain to specific uses, certain exogenous challenges also arise, as are listed below:
- Non-Atomic v Atomic Transactions: Blockchain implementation is more acquiescent to transactions with a finite life mainly defined (atomic transactions) as compared to transactions with a large or infinite life, such as records of the properties. Supply chain projects, which have a finite life with records of the origination and dissemination of assets, are more likely to implement blockchain solutions. On the other hand, a complete antecedent as a starting point is required in long term transactions, creating more legwork for being amenable to blockchain solutions.
- Cost of Implementation: Private blockchain networks, which would run the smart contracts, have a huge infrastructure cost, including the system, computing and development, ongoing maintenance, etc. This evaluation would be required to be done at the outset.
- Constraints on Human Resources: Smart contracts, or even blockchain for that matter, would need masters at top business levels, during its starting phase of being adopted, alongside technical expertise. There is a lack of both in India.
- Developed Community Being Nascent: The number of JAVA developers globally is currently approximately 1000 times that of the number of blockchain developers. So, to run the system on which the smart contracts will function, a lot of work is required, especially but not limited to increasing the number of developers.
Conclusion
Smart Contracts have the potential to become a vital component of several business models. It also has the potential to trigger initiatives based entirely on the unique features of smart contracts. It is not to say that it does not attract legal complications or regulatory concerns. However, it can offer viable solutions in the legal domain as well. After cryptocurrency, NFT and now smart contracts, it is quite evident that blockchain technology will arguably affect many domains of human life. It is consequentially the need of the hour to deliberate over formulating specific legislation regulating this technology. Only then, the potential of these developments can be utilised without being surrounded by legal conundrums.
Authors:
Vasundhara Shankar: Managing partner, Verum Legal. Vasundhara is a startup lawyer and focuses on data privacy, IP, tech laws, white-collar crime, dispute resolution & legal tech innovations.
Mudit Kaushik: Counsel, ZeusIP Advocates LLP. Mudit is an IP lawyer skilled in pre-filing strategies, prosecution, opposition, brand enforcement and domain name disputes.
Disclaimer: Views expressed in the above article are of authors.
