a case for interpretative reform of the indian contract act, 1872

NUJS Law Review 13 NUJS L. Rev. 4 (2020)

October-December, 2020 1

STATIONING SMART CONTRACT AS A ‘CONTRACT’: A CASE FOR INTERPRETATIVE REFORM OF THE INDIAN

CONTRACT ACT, 1872

Deepti Pandey & Harishankar Raghunath*

Smart contracts have garnered indubitable popularity as a disruptive technology that provides an effective digital alternative to traditional contracts. Summed up pithily as ‘automated digital contracts’, smart contracts gain significant ground in terms of efficiency and transparency over their traditional counterparts, and are increasingly moving into the mainstream in several jurisdictions. The benefits of smart contracts by no means exclude India – various domestic and international forums have acknowledged that employing smart contracts could transform contract enforcement and harness economic growth in the country. In this backdrop, it is imperative to ascertain precisely where the Indian Contract Act, 1872 positions smart contracts. Placing smart contracts into the unchartered waters of autonomous and anonymous digital contracting in India entails testing them for contractual validity as provided under the Indian Contract Act. Several concerns crop up during this exercise, particularly in the context of a rigid procedural framework under the law. In this article, we rebut the argument of ‘self-regulation’ frequently mooted as the best regulatory response to smart contracts. We favour an approach that harmonises smart contracts within the Indian Contract Act through a liberal interpretation of substantive contractual law, in line with the flexibility offered by common law. We illustrate that a smart contract is constituted of the same building blocks as that of a traditional contract under common law, and subsequently refine our analysis in the context of Indian laws and attendant precedent. This interpretation is strengthened through reference to similar approaches adopted in foreign jurisdictions. Notwithstanding the need for reform across a broad spectrum of statutes, we argue that a law catering specifically to the legitimisation and regulation of smart contracts is not necessary. The article concludes by suggesting remedies to the potential challenges that arise from our approach.

TABLE OF CONTENTS I. INTRODUCTION ........................................................................................................................ 2

II. DEMYSTIFYING SMART CONTRACTS ................................................................................... 4 A. AN INTRODUCTION TO BLOCKCHAIN ........................................................................... 4

B. CRYPTOCURRENCY AND SMART CONTRACTS ............................................................. 7 III. AN INTERNATIONAL PERSPECTIVE ON REGULATING SMART CONTRACTS ............... 8

A. USA ....................................................................................................................................... 9 B. UK....................................................................................................................................... 11

IV. RATIONALISING SMART CONTRACT AS A ‘CONTRACT’: IN THEORY AND IN PRACTICE …………………………………………………………………………………………………12

A. SITUATING SMART CONTRACTS WITHIN EXISTING THEORIES ............................. 13

* The authors are fifth-year and fourth-year students at the West Bengal National University of Juridical Sciences,

Kolkata respectively. The authors are deeply grateful to our Editors Mr. Ravi Shankar and Ms. Aastha Malhotra for their patient counselling and constructive comments that greatly helped shape this article. All responsibility for the arguments mooted and conclusions drawn, however, remains entirely ours.



1. ECONOMIC CONTRACT THEORY ............................................................................ 13 2. INCOMPLETE CONTRACT THEORY AND SMART CONTRACTS ........................... 15

B. ANALOGICAL JUSTIFICATIONS ................................................................................... 16 C. APPLICABILITY ............................................................................................................... 18 1. REAL-ESTATE MARKET ............................................................................................. 19 2. BANKING AND FINANCE SECTOR ........................................................................... 21

V. SMART CONTRACTS AND THE INDIAN LEGAL REGIME ................................................. 23 A. POSITIONING SMART CONTRACTS UNDER INDIAN CONTRACT ACT, 1872 ......... 23 1. FOUNDATIONS OF FORMATION ............................................................................. 24

B. IMPACT ASSESSMENT ON PROCEDURAL STATUTES ............................................... 34 1. INFORMATION TECHNOLOGY ACT, 2000 .............................................................. 34 2. INDIAN EVIDENCE ACT, 1872 ................................................................................... 35

VI. CHALLENGES IN REGULATION: AN UNSETTLED CONUNDRUM ................................. 37 A. PINNING DOWN TERRITORIAL JURISDICTION ......................................................... 37

B. SECURITY CONCERNS ................................................................................................... 38 VII. REMEDIAL MEASURES TO CURE THE INFIRMITIES ..................................................... 39

A. REMEDIES TO THE JURISDICTIONAL ISSUES ........................................................... 39 1. PARTY AUTONOMY .................................................................................................... 40 2. DISTRIBUTED JURISDICTION .................................................................................. 41

B. THIRD-PARTY INTERVENTION – TACKLING SECURITY CONCERNS ..................... 42

VIII. CONCLUSION ..................................................................................................................... 43

I. INTRODUCTION

Fast-paced technological growth inevitably has a significant impact on the law. This can be exemplified from the multi-faceted effect that Artificial Intelligence has had in the way law is understood today.1 One such recent transition can be understood by examining the traction that smart contracts have recently gained in the global market. A smart contract can be described as a bilateral or multilateral contract, the terms of which are enforced automatically without human intervention.2 Nick Szabo, an American computer scientist, coined the term in 1994. He defines smart contracts as a set of digital promises entered into between parties, the execution and enforcement of which is facilitated through digital procedure encoded in the contract.3 The nomenclature is derived from their sophisticated and superior functionality in

1 Srivats Shankar, Looking into the Black Box: Holding Intelligence Agents Responsible, Vol.10, NUJS L. REV.,451 (2017). 2 Max Raskin, The Law and Legality of Smart Contracts, Vol.1, GEO. L. TECH. REV., 305 (2017); Riccardo De Caria, The Legal Meaning of Smart Contracts, Vol.6, EUR.REV.PRIV.L. (2019). 3 Nick Szabo, Building Blocks for Digital Markets, 1996, PHONETIC SCIENCES, AMSTERDAM, available at http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html (Last visited on August 31, 2020).



comparison to traditional contracts.4 By delegating the execution of contractual terms to a computer, a smart contract aims to minimise both human discretion and state intervention in the contract.5 Such execution is enabled through converting the ‘human-readable’ written terms of a contract into a ‘machine-readable’ code.6 A practical illustration of a smart contract could be a debt contract for an automobile, which prevents its ignition if the terms of the contract have not been met. In such a contract, the automobile has an in-built program containing code that digitally verifies whether the terms of the contract have been met.7 This code is integrated into a blockchain8 – a decentralised collection of data that can be verified by the members of a peer-to-peer network. The basic form of a smart contract involves the deployment of specified contractual terms in the form of code on a blockchain platform, with its performance being squarely based on automaticity, thus obviating human intervention.9

The edge in terms of speed, efficiency and cost inter alia which a smart contract

has over a traditional contract prompts its commercial explorations. ‘Propy’10 (a real-estate based smart contract) and ‘Fizzy’11 (an insurance-based smart contract) highlight the various avenues of commercial exploitation that this disruptive technology12 provides. However, the self-executing nature of smart contracts has fuelled legal discourse concerning their legitimacy and regulation.13 This is suggestive from the reluctance amongst legal scholars to recognise it as a ‘contract’ in stricto sensu. They argue that smart contracts, unlike traditional contracts, cannot be governed by conventional contractual law.14 Despite some scholars having espoused the self-regulation of smart contracts,15 we argue against this laissez-faire approach and instead propose to harmonise the existing laws of contract with the budding smart contract regime. Apart from lending state legitimacy to smart contracts, this would also enable the law to clamp down on

4 Id. 5 Szabo, supra note 3. 6 Kevin Werbach & Nicolas Cornell, Contracts Ex Machina, Vol.67, DUKE L.J., 347 (2017). 7 Raskin, supra note 2. 8 A technology developed by Satoshi Nakamoto. It is based on Distributed Lesdger Technology. It is a time-stamped series of data recorded and managed by group of computers and not controlled by single body. It replaces central authority with participating parties in the network to verify and validate the resulting transactions. 9 UK JURISDICTION TASKFORCE, Legal Statement on Cryptoassets and Smart Contracts, 17 (November, 2019). 10 Tim Ventura, Propy’s Mission to Transform the Real Estate Industry, MEDIUM, June 24, 2020, available at https://medium.com/@timventura/propys-mission-to-transform-the-real-estate-industry-c03b76d012ba (Last visited on December 12, 2020). 11 AXA, AXA goes blockchain with fizzy, September 13, 2017, available at https://www.axa.com/en/newsroom/news/axa-goes-blockchain-with-fizzy (Last visited on December 12, 2020). 12 A disruptive innovation is a ‘game-changing’ innovation that creates a new market while disrupting, and rendering obsolete, an existing established market. 13 Stuart D. Levi & Alex B. Lipton, An Introduction to Smart Contracts and their Inherent Limitations, HARVARD LAW SCHOOL FORUM ON CORPORATE GOVERNANCE, May 26, 2018, available at https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/ (Last visited on August 31, 2020). 14 Garath Peters & Efstathios Panayi, Understanding Modern Banking Ledgers Through Blockchain Technologies and Smart Contracts on Internet of Money, SSRN (2015); Hassan & Primavera De Filippi, The Expansion of Algorithmic Governance: From Code is Law to Law is Code, Special Issue 17, ARTIFICIAL INTELLIGENCE AND ROBOTICS IN THE CITY, 89 (2017). 15 Alexander Savelyev, Smart Contracts as the Beginning of the End of Classic Contract Law, WP. BRP 71/LAW/2016, NATIONAL RESEARCH UNIVERSITY HIGHER SCHOOL OF ECONOMICS, 2016, available at https://wp.hse.ru/data/2016/12/14/1111743800/71LAW2016.pdf (Last visited on December 24, 2020); Hassan & De Filippi, supra note 14.



smart contracts that have unconscionable terms or promote illegal objectives such as money laundering and theft of private encryption keys.16

The underlying reason behind potential governance issues is the stark difference

between a traditional contract and an automated smart contract. While they both seek to enforce rights and obligations of contracting parties, their methods of execution and conceptualisation vastly vary. A smart contract is written in machine-readable code in the template of a ‘if this – then that’ flowchart which self-executes automatically per its terms – serving as a ‘proxy performer’ of the parties’ contractual obligations. Additionally, a smart contract is wedded to the blockchain architecture, and is thus limited to crypto-assets – such as cryptocurrencies – as valid contractual ‘consideration’. Employing a smart contract would thus necessitate the use of crypto-assets, such as Bitcoin, to constitute valid consideration. This automaticity, coupled with the fact that smart contract transactions are effectuated through crypto-assets, can potentially give rise to certain legal ramifications – primarily pertaining to the perpetration of crimes. Such crimes include the untraceable sale of private documents and the theft of private encryption keys. Smart contracts also enable seamless, untraceable transactions between two non-trusting parties and can thus act as a convenient channel for illegal contracts, such as hit contracts.17

In this article, we examine the need to govern smart contracts, and argue that

bringing smart contracts into practice under the ambit of the Indian Contract Act, 1872 (‘Indian Contract Act’ or ‘Contract Act’) shall substantially help in improving processes underlying commercial transactions. We succinctly explain the theoretical underpinnings of smart contracts in Part II, along with a brief complementary analysis on the legality of cryptocurrency. Part III delves into an analysis of smart contract jurisprudence in the USA and the UK, and Part IV justifies the regulation of smart contracts through analysis grounded in economical and analogical scholarship. Part V breaks new ground in Indian contract law scholarship by arguing that the Indian Contract Act can accommodate smart contracts without any substantial amendments. Part VI underscores certain practical obstacles in regulating smart contracts, and Part VII attempts to moot broad solutions for remedying such obstacles. Part VIII concludes the article by proposing to construe the existing contract law in favour of legitimising smart contracts, and recommends optimal solutions to the consequential challenges that accompany our approach.

II. DEMYSTIFYING SMART CONTRACTS

A. AN INTRODUCTION TO BLOCKCHAIN

It would be remiss to discuss smart contracts without exploring the concept of blockchain, the technology that powers their operation. Blockchain is a type of data structure, and at the heart of it, is a ‘chain’ of ‘blocks’. These blocks contain data, and are connected to each other through a digital chain, forming a ledger. Each block contains data and a unique

16 Ari Juels et al., The Ring of Gyges: Investigating the Future of Criminal Smart Contracts, PROCEEDINGS OF THE 2016 ACM SIGSAC CONFERENCE ON COMPUTER AND COMMUNICATIONS SECURITY, October 2016, available at https://eprint.iacr.org/2016/358.pdf (Last visited on August 20, 2020). 17 Id.



cryptographic hash code that allows it to locate the next block in the chain.18 A copy of the blockchain is stored with every user of the network, and every change to a block has to be validated by all the users of that network. To illustrate: when a transaction of a blockchain-based cryptocurrency is effectuated,19 the transaction details are recorded in a block, and its authenticity is validated by every user of the network. By virtue of this ‘distributed’ nature, blockchain provides transparency and certainty to transactions.20

In this backdrop, we define a smart contract as an agreement entered into between

parties through machine-readable code. This code is integrated into a decentralised blockchain, which automatically executes the smart contract based on pre-determined ‘trigger-events’.21 The terms of the smart contract are thus coded in an ‘if-then’ format – if the trigger event occurs, then the smart contract shall automatically execute a certain action. A smart contract’s dependence on blockchain necessitates the deployment of digital assets that are premised on the blockchain network; namely, cryptocurrency.22 To contextualise the earlier illustration of a debt contract in the backdrop of this explanation – a smart contract would be coded to allow ignition of the automobile only if the contract has registered the receipt of cryptocurrency equal to the value of the requirements of the debt contract.

Despite having been pioneered in the early 1990s, smart contracts gained

commercial traction only after the development of modern decentralised platforms such as Ethereum – a blockchain-based software platform that is predominantly used for running smart contracts.23 Ethereum allows users to code the terms of a smart contract in the programming language ‘Solidity’, with cryptocurrency being the medium of exchange. An illustration of an Ethereum smart contract is insurance firm AXA’s flight delay insurance, which operated ‘Fizzy’24 - a platform which allowed users to enter into automated insurance contracts which would automatically dole out the insurance amount in cryptocurrency if one’s flight was delayed

18 WORLD BANK GROUP, Distributed Ledger Technology and Blockchain, October 2017, available at https://olc.worldbank.org/system/files/122140-WP-PUBLIC-Distributed-Ledger-Technology-and-Blockchain-Fintech-Notes.pdf (Last visited on August 31, 2020). 19 ‘Blockchain-based cryptocurrency’ is a linguistic redundancy that has been employed only for the sake of clarity – all cryptocurrencies are powered by blockchain. 20 Raskin, supra note 2; NITI AAYOG, Blockchain: The India Strategy, February 2020, 11, available at https://niti.gov.in/sites/default/files/2020-01/Blockchain_The_India_Strategy_Part_I.pdf (Last visited on January 2, 2021). 21 Raskin, supra note 2; Tanash Utamchandani Tulsidas, Smart Contracts from a Legal Perspective, UNIVERSIDAD DE ALICANTE, 2018, available at https://rua.ua.es/dspace/bitstream/10045/78007/1/Smart_Contracts_from_a_Legal_Perspective_Utamchandani_Tulsidas_Tanash.pdf (Last visited on August 31, 2020). 22 Tulsidas, supra note 21. 23 Ethereum is a decentralised, blockchain-based public platform that runs smart contracts. It was created by Vitalik Buterin. He describes it as a decentralised platform that runs smart contracts. Transactions are operated on Ethereum based on a computer code which is mostly in Solidity – a contract-oriented, high-level programming language for implementing smart contracts. See Demetrios Zamobglu, Ethereum explained, MEDIUM, December 14, 2018, available at https://medium.com/datadriveninvestor/ethereum-explained-788c5cf6080b (Last visited on August 31, 2020). 24 AXA, Axa goes Blockchain with Fizzy, September 13, 2017, available at https://www.axa.com/en/newsroom/news/axa-goes-blockchain-with-fizzy (Last visited on August 31, 2020).



past two hours.25 Decentralised platforms offering smart contracts services have mushroomed as of late, with several new entrants cropping up in the market – Steller, NEO, EOS and Hyperledger, to name a few. Each of them offer a discrete set of features and functions within the smart contract matrix, and reflect multiple ways in which smart contracts can be tailored to the contracting parties’ requirements.

Since smart contracts operate on a blockchain, they inherit some of its intrinsic

properties. Smart contracts are thus immutable – they cannot be modified once created.26 Smart contracts are also distributed – all actions effected by the smart contract have to be validated by all the users on the blockchain network, thus significantly reducing the chances of fraud.27 Consider the hypothetical of a ‘kickstarter’ smart contract, created for the purpose of raising funds for a particular project. Patrons of the project deposit cryptocurrency into the smart contract, which automatically disburses the money to the project-creator upon the target amount being met. In case the target is not met within a specified amount of time, the money is deposited back into the patrons’ accounts. Both the project-creator and the patrons do not need to trust an intermediary third party; owing to its distributed nature, any transaction must be verified by the users of the blockchain network. Smart contracts thus facilitate transactions between non-trusting parties, and contracting users may, and often do, adopt a pseudonym while contracting through smart contracts.

Smart contracts are intrinsically digital entities, and are in the form of machine-

readable code instead of human-readable language. This is particularly problematic from the judicial standpoint since most judges are not equipped to read and interpret code28 - especially in the Indian context given the courts’ lack of technical expertise.29 To address this concern, we rely on a hybrid model – similar to Ricardian contracts,30 wherein the code is supplemented by a contract in human-readable language.31 The hybrid mechanism would thus entail machine-

25 The platform constantly monitored the status of users’ flights, and relayed the information back to the smart contract. 26 Gauci-Maistre Xynou, Immutability in a Smart Contract, LEXOLOGY, February 26, 2019, available at https://www.lexology.com/library/detail.aspx?g=9b0e1787-f6cc-428a-8d55-93e5994bf416 (Last visited on August 31, 2020). 27 Id. 28 Jared Arcari, Decoding Smart Contracts: Technology, Legitimacy, & Legislative Uniformity, Vol.24(2), FORDHAM J. CORP. & FIN. L., 363, 376 (2019); See Sai Agnikhotram & Antonios Kouroutakis, Doctrinal Challenges for the Legality of Smart Contracts: Lex Cryptographia or A New, ‘Smart’ Way to Contract?, Vol.19(2), J. HIGH TECH. L., 300, 315 (2019); Levi & Lipton, supra note 13. 29 The BCI itself has admitted that over 90% of lawyers and judges are unaware of the applications of technology, such as video-conferencing tools. See LEGAL DESIRE, Technological Revolution in Indian Judiciary in Post-COVID-19 Era, May 8, 2020, available at https://legaldesire.com/technological-revolution-in-indian-judiciary-in-post-covid-19-era/ (Last visited on August 31, 2020). 30 Emanuel Regnath & Sebastin Steinhorst, SmaCoNat: Smart Contracts in Natural Language, IEEE (2018); Jan Joos, From Clause to Code: Transforming Contracts into Smart Contracts, A Master’s Dissertation, GHENT UNIVERSITY, GHENT, May 15, 2019, 48, available at https://lib.ugent.be/fulltxt/RUG01/002/782/568/RUG01-002782568_2019_0001_AC.pdf (Last visited on December 06, 2020) . 31 Levi & Lipton, supra note 13; In this regard, law firms are also advising the clients to create a ‘wrapper’ in ‘human-readable’ language as a pre-agreement indicating parties’ intent to be bound by the code. See Smart Contracts (Code v. Contract) An Overview of Blockchain Technology and Legal Implications of Smart Contracts from a Turkish Law Perspective, CLIFFORD CHANCE, December 18, 2017, available at



readable and executable code, accompanied by a document stating the terms and conditions of the smart contract, akin to a conventional contract. Throughout the course of this article, we will employ this hybrid model as a factual-matrix to analyse smart contracts, and conclusively establish smart contracts as the superior alternative to their conventional counterparts.

B. CRYPTOCURRENCY AND SMART CONTRACTS

Since smart contracts are built on the backbone of blockchain, they can only process digital assets that are similarly premised on the blockchain. The most popular digital asset employed is cryptocurrency – Bitcoin, ether etc. A jurisdiction that has proscribed the use of cryptocurrency cannot be expected to practically assimilate smart contracts into its legal framework. An analysis into the viability of smart contracts would thus be premature without first examining the legal status of cryptocurrency itself.

Global judicial interpretations and legislative action signal a definite shift towards accommodating cryptocurrency into mainstream commercial channels. The Singapore International Commercial Court in B2C2 Ltd. v. Quoine Pte Ltd32 has held that cryptocurrency possesses the fundamental characteristics of intangible property as an identifiable thing of value.33 The Supreme Court of British Columbia has similarly legitimised cryptocurrency.34 Additionally, the UK Government has also clarified its stance on crypto-assets as valid property under English common law.35

India, in stark comparison, has adopted a fairly hostile approach to the advent of cryptocurrency. The Reserve Bank of India (‘RBI’), the country’s apex regulatory bank, has always struck a cautionary note with regard to cryptocurrency - even as it has acknowledged the benefits of financial inclusiveness and efficiency that stem from the blockchain framework (which in turn is powered by cryptocurrency).36 Starting 2013, government authorities – the RBI, the Central Board of Direct Taxes (‘CBDT’) and the Finance Ministry - have strongly discouraged citizens from trading in cryptocurrency on the grounds of consumer-protection and security concerns.37 To this effect, the RBI issued a circular in April 2018 directing all financial institutions to cease their dealings in any form with virtual currency.38 The Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India (‘Cryptocurrency’ case) struck down this directive as disproportionate39 though it affirmed the RBI’s contention that

https://www.cliffordchance.com/content/dam/cliffordchance/PDFDocuments/december2017-client-briefing-smart-contracts-(code-vs.-contract).pdf (Last visited on August 31, 2020). 32 B2C2 Ltd v. Quoine Pte Ltd, [2019] SGHC(I) 3 (Singapore International Commercial Court). 33 Id.; Although the Court of Appeal subsequently refrained from concluding the proprietary status of crypto-assets, it did acknowledge (based on the Taskforce’s Report and common law cases) that they are capable of being integrated into the general concepts of property. See Quoine Pte Ltd v. B2C2 Ltd [2020] SGCA(I) 02, ¶144 (Singapore Court of Appeal). 34 Copytrack Pte Ltd. v. Wall, [2018] BCSC 1709 (CanLII) (Supreme Court of British Columbia). 35 UK JURISDICTION TASKFORCE, supra note 9, ¶85. 36 RESERVE BANK OF INDIA, Transcript of Bi-Monthly Policy Press Conference, April 5, 2018, available at https://m.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3465 (Lat visited on August 31, 2020). 37 Id. 38 Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), RBI/2017-18/154 (Notified on April 6, 2018). 39 Internet and Mobile Association of India v. Reserve Bank of India, W.P. (Civ.) 373/2018 (SC) (Unreported).



cryptocurrency could be regulated by the central bank. Upon the heels of the Supreme Court judgment, the Ministry of Finance has drafted the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.40 Notwithstanding the future uncertainties in light of pendency of the Bill, a perusal of the aforementioned judgment along with the RBI’s response to an RTI query vide May 22, 2020, sufficiently clarifies the absence of any existing prohibition on the financial institutions to deal in cryptocurrency.41 While the judgment is a welcome move in furthering the exchange of cryptocurrency, there is a clear reluctance on the part of state agencies to legitimise it. Our arguments regarding the validity of smart contracts in contemporary Indian jurisprudence are thus premised on the existing legality of cryptocurrency in India.

III. AN INTERNATIONAL PERSPECTIVE ON REGULATING SMART CONTRACTS

Smart contracts have lately been recognised by various jurisdictions. A concerted global awareness towards the utility of smart contracts can be gauged from the UNICEF’s effort to build a prototype smart contract to improve transparency and accountability of partnerships and related transfer of resources.42 On similar lines, the UN Economic and Social Council’s draft, pertaining to the applicability of blockchain technology, has focused on smart contracts as a means of trade facilitation – providing support to supply chain automation.43 The United Nations Commission on International Trade Law has also endorsed recognising smart contracts through establishing rules to allow electronic documents to be legally recognised.44 However, in India, the only legislation that addresses smart contracts is the Telecom Commercial Communications Customer Preference Regulations, 2018, released by the Telecom Regulatory Authority of India.45 It defines ‘smart contracts’ as the functionality of a programmable code which can be operated on a pre-determined command and eliminate human intervention, and which can create a digital agreement as per the Distributed Ledger Technology (‘DLT’).46 As per

40 Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. 41 THE ECONOMIC TIMES (Anandi Chandrashekhar & Ashwin Manikandan), RBI says no curbs in providing bank accounts to crypto traders, May 26, 2020, available at https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/rbi-says-no-curbs-in-providing-bank-accounts-to-crypto-traders/articleshow/75990202.cms?from=mdr (Last visited on November 30, 2020); THE COIN CRUNCH, RBI Clarifies: No Prohibition on Banks to Open Accounts for Crypto Firms, May 25, 2020, available at https://coincrunch.in/2020/05/25/rbi-clarifies-no-prohibition-on-banks-to-open-accounts-for-crypto-firms/ (Last visited on November 30, 2020). 42 UNICEF Request for Proposal, RFP/KAZA/2018/003, September 20, 2018, available at https://www.ungm.org/UNUser/Documents/DownloadPublicDocument?docId=735519. 43 United Nations Economic and Social Council [ECOSOC], Economic Commission for Europe, White Paper on technical application of Blockchain to United Nations Centre for Trade Facilitation and Electronic Business, U.N. Doc. ECE/TRADE/C/CEFACT/2018/9. (April 16, 2018). 44 United Nations General Assembly, Legal Aspects of Smart Contracts and Artificial Intelligence: Submission by the Czechia, G.A., U.N. Doc. A/CN.9/960 (May 30, 2018). 45 Recently, they have also found mention in an RBI bulletin. See Reserve Bank of India, Bulletin (Issued on February 11, 2020) available at https://m.rbi.org.in/Scripts/BS_ViewBulletin.aspx?yr=2020&mon=2 (Last visited on January 2, 2021). 46 The Telecom Commercial Communications Customer Preference Regulations, 2018, Reg. 2(bk). It states:

“’Smart contract’ means a functionality of intelligent and programmable code which can execute pre-determined commands or business rules set to pre-check regulatory compliance without further human intervention and suitable for DLT system to create a digital agreement, with cryptographic certainty that the agreement has been honored in the ledgers, databases or accounts of all parties to the agreement.”



the given Regulation, smart contracts are an effective means of recording transactions,47 handling complaints48 and effectively controlling the flow of Commercial Communication.49

In order to comprehend the future of smart contracts governance in India, it is

pertinent to refer to the developments in its regulation in other parts of the world. Therefore, the focus of this part is on the legal developments in regulating smart contracts across the jurisdictions of the United States and the United Kingdom. These jurisdictions have been chosen for three reasons. Firstly, both the countries have nascently forayed into the crypto-space by clarifying their positions on the legality of smart contracts and crypto-assets. Secondly, these countries’ outsized footprint on global financial markets ensures that their position on a disruptive technology such as smart contracts can be safely emulated by other jurisdictions as well. Thirdly, with particular reference to the UK, the legal arguments mooted by this jurisdiction can be adopted mutatis mutandis by India as well, considering the shared common law framework between the two jurisdictions. Since the US has witnessed lawmakers actively attempt to integrate smart contracts into their legal framework, it serves as a strong backing for their governance. The UK, while not having the same pedigree as the US with regard to legislative attempts to legitimise smart contracts, has recently made bold strides towards their adoption into the common law framework, and is the clearest path forward for India to integrate this disruptive technology into its legal framework.

A. USA

Smart contracts have been welcomed by US lawmakers, with the states of Nevada, Arizona, Wyoming and Tennessee having passed legislations to accommodate such contracts into their respective legal frameworks.50 The stated purpose of these bills is to ensure that the presence of smart contracts in a commercial transaction has no negative bearing on the validity of such a transaction. Such legislations usually specify that the submission of a legal document, such as a record, may be conducted through a blockchain. In light of academic debates as to how wide the definition of a smart contract should be, the Tennessee law attempts to dispel confusion by clarifying the legally applicable ambit of what qualifies as a smart contract. Its definition, which is deliberately framed broadly so as to not arbitrarily exclude different variants of blockchain-based contracts, sums up a smart contract as an “event-driven computer program that executes on an electronic, distributed, decentralised, shared, and replicated ledger that is used to automate transactions”.51 It is to be noted that this definition is consistent with our understanding of smart contracts elaborated upon in Part II of this article.

A point of contention, however, is the necessity of drafting tailor-made legislations towards inducting smart contracts into the commercial sphere. The Chamber of

47 The Telecom Commercial Communications Customer Preference Regulations, 2018, Reg.7.2. 48 The Telecom Commercial Communications Customer Preference Regulations, 2018, Reg. 5.3.2. 49 The Telecom Commercial Communications Customer Preference Regulations, 2018, Reg. 13. 50 IKIGAI LAW, How have Different States in the United States of America enabled Blockchain Technology and Smart Contracts, July 22, 2020, available at https://www.ikigailaw.com/how-have-different-states-in-the-united-states-of-america-enabled-blockchain-technology-and-smart-contracts/#acceptLicense (Last visited on December 2, 2020). 51 Tennessee House Bill 1507, 2017 (U.S.A.).



Digital Commerce, an advocacy group for blockchain technology,52 has opined that the existing laws of the US are sufficient for tackling smart contracts.53 The Electronic Signatures in Global and National Commerce Act, a federal law that applies to all states in the country, recognises the validity of electronic signatures, records and contracts within the blockchain architecture.54 This thus serves to substantially legitimise smart contracts in US law.55 This argument is also borne out by the fact that smart contract legislation in certain states of the US legitimises smart contracts primarily by a cursory clarification that no contract may be denied legal recognition because of the presence of an electronic signature or record – clearly indicating a belief that any substantial legislation to this effect would be redundant.56 The consensus, however, is that the smart contracts are here to stay – in November 2018, the Commodity Futures Trading Commission (‘CFTC’), a US state agency tasked with regulating the derivatives market, released a primer on smart contracts, outlining the benefits and risks involved with the technology.57 While acknowledging the possibility of fraud and cyber-security risks exacerbated by the anonymous nature of smart contracts, it recognises that automation of traditional contracts could result in enhanced market efficiency and secure transactions.58

However, it is to be noted that the US has taken a far more liberal stance with regard to cryptocurrency as opposed to India, with the US CFTC having categorised bitcoin as a ‘commodity’ on par with gold and silver.59 This legitimises cryptocurrency through granting it legal standing and regulates it through the Commodity Exchange Act. While no comprehensive federal law has been drafted, regulatory bodies such as the Securities and Exchange Commission

52 INTERNATIONAL BUSINESS TIMES (Anthony Cuthbertson), Bitcoin Breakthrough as Chamber of Digital Commerce Opens in US, July 22, 2014, available at https://www.ibtimes.co.uk/bitcoin-breakthrough-chamber-digital-commerce-opens-us-1457289 (Last visited on August 31, 2020). 53 CHAMBER OF DIGITAL COMMERCE, “Smart Contracts” Legal Primer, January 10, 2018, available at https://digitalchamber.org/wp-content/uploads/2018/02/Smart-Contracts-Legal-Primer-02.01.2018.pdf (Last visited on August 31, 2020); Certain scholars and luminaries in the field also share this opinion. See Alan Cohn et al., Smart after All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids, 1 GEO. L. TECH. REV. 273 (2017); Robert A. Schwinger, Property and Contract in the Digital World, NORTON ROSE FULBRIGHT, March 17, 2020, available at https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/knowledge-pdfs/blockchain-law-property-and-contract-in-the-digital-world.pdf?la=en-jp (Last visited December 6, 2020). 54 In this regard, it is crucial to note that a Bill titled H.R.8524 - Blockchain Records and Transactions Act of 2020 has been recently introduced for the purpose of amending the Electronic Signatures in Global and National Commerce Act by adding sub-clause (3) to §101(a), stating that “an electronic record, electronic signature, or smart contract may not be denied legal effect, validity, or enforceability solely because it is created, stored, or secured on or through a blockchain”. 55 The Electronic Signatures in Global and National Commerce Act, 2000, §101(c)(1) (U.S.A.). 56 Hunton Andrews Kurth, The State of Smart Contracts Legislation, BLOCKCHAIN LEGAL RESOURCE, September 5, 2018, available at https://www.blockchainlegalresource.com/2018/09/state-smart-contract-legislation/#more-570 (Last visited on August 31, 2020). 57 COMMODITY FUTURES TRADING COMMISSION, A Primer on Smart Contracts, November 27, 2018, 7, available at https://www.cftc.gov/sites/default/files/2018-11/LabCFTC_PrimerSmartContracts112718_0.pdf (Last visited on January 2, 2021). 58 Id. 59 In the matter of Coinflip, Inc.,d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-19, 2015 WL 5535736 (September 17, 2015), the CFTC held that bitcoins and other virtual currencies fall within the ambit of ‘commodity’.



have designated digital currencies as securities.60 This, in turn, has spurred a flurry of legislation from individual states that aim to bring cryptocurrency within the fold of regulated assets, with states such as California amending its civil code to permit ‘any smart contract carried out through cryptocurrency’.61 As discussed in Part II of this article, India’s stance towards cryptocurrency has been markedly hostile, with crypto-assets accorded a ‘begrudging legality’ in the country’s contemporary legal landscape. As the law stands in India, it would thus be presumptuous to claim that the smart contracts landscape in the US can be replicated in India, without first fostering a federal inclusiveness to the idea of digital currency as an economic asset.

B. UK

The UK is arguably one of the most progressive jurisdictions with regard to cryptocurrency and its ancillary technological facets. The country’s stance on smart contracts and blockchain transactions is abundantly clear, as established by the UK Jurisdiction Taskforce (‘Taskforce’) - a government-established panel tasked with incorporating digital advancements into the country’s legal framework.62 In a statement delivered by the Chancellor of the High Court of Justice63 and endorsed by the UK government, the legitimacy of smart contracts has been underscored by deeming them capable of “satisfying the basic requirements of an English common law contract”.64 While the statement is not an authoritative legislative pronouncement, the Taskforce, having been established by the UK Government and Judiciary,65 enjoys significant clout among the industry. Formulated with the intention of consolidating a definite position on the legal status of crypto-assets and smart contracts in the English law, the Taskforce’s Report stresses on the importance of working ‘forward’, i.e. establishing a legal position based on existing common law and local laws, and then venturing towards a regulatory framework.66 After conducting an extensive analysis into common law, English laws and existing precedent on the question of crypto-assets, the Taskforce’s Report concludes that assets stored on a decentralised ledger have the necessary legal attributes of property, which in turn lend legal credence to smart contracts.67 The Taskforce’s Report has been lent judicial credence through the English High Court decision of AA v. Persons Unknown & others Re Bitcoin (‘the

60 Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings, UNITED STATES SECURITIES AND EXCHANGE COMMISSION, December 17, 2017, available at https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 (Last visited on December 25, 2020). 61 BOBS GUIDE (Alex Hamilton), Cryptocurrency Rules and Regulations across the US, February 8, 2019, available at https://www.bobsguide.com/guide/news/2019/Feb/8/digital-states-cryptocurrency-rules-and-regulations-across-the-us/ (Last visited on August 31, 2020). 62 LINKLATERS, Linklaters assists UK Jurisdiction Taskforce in clarifying legal status of cryptoassets and smart contracts, November 18, 2019, available at https://www.linklaters.com/en/about-us/news-and-deals/news/2019/november/linklaters-assists-uk-jurisdiction-taskforce-in-providing-certainty-on-legal-status-of-cryptoassets (Last visited on August 31, 2020). 63 The High Court of Justice is part of the Senior Courts of England and Wales, and has original jurisdiction over all civil and criminal issues. 64 SIR GEOFFREY VOS, CHANCELLOR OF THE HIGH COURT, The Launch of the Legal Statement on the Status of Cryptoassets and Smart Contract, November 18, 2020, available at https://www.judiciary.uk/wp-content/uploads/2019/11/LegalStatementLaunch.GV_.2.pdf (Last visited on December 20, 2020). 65 THE LAW SOCIETY, Campaigns, 2020, available at https://www.lawsociety.org.uk/campaigns/ (Last visited on August 31, 2020). 66 SIR GEOFFREY VOS, supra note 64. 67 UK JURISDICTION TASKFORCE, supra note 9.



Bitcoin case’). The given case relies on the Taskforce to recognise bitcoin as a valid property.68 Notably, in the opinion of Justice Bryan, even though the said document is non-binding, it is a “compelling analysis” into the legal implications of cryptocurrency.69 It is thus evident that the Taskforce’s Report upholds and reaffirms the adaptability and sophistication of the common law regime by advocating that the English law suitably makes room for recognising and enforcing smart contracts, similar to a conventional contract.70 Besides, a perusal of the UK Law Commission’s endeavours strongly indicates the quest for reforms in the English law in order to trap the huge potential of smart contracts in revolutionising businesses and economy. Its ongoing projects are in line with the Taskforce’s Report; aimed at fine-tuning the English law and assimilating crypto-assets and smart contracts within the given legal framework.71 In this regard, the Law Commissioner, Professor Sarah Green, opines that there is a “compelling case” to review and reform the existing law so as to effectively capitalise on smart contracts and crypto-assets.72

We are of the opinion that the conclusions of the Taskforce’s Report should lend impetus to resolving the present confusion in the Indian legal framework with regard to smart contracts. While these conclusions cannot be imported wholesale into the Indian jurisdiction, a perusal of the statement makes it amply clear that the arguments are based on common law and judicial precedent,73 which must be taken into consideration for deciding India’s legal position on these issues. For example, the conclusion that a smart contract is capable of fulfilling the common law requirements of a valid contract is based purely on a superficial analysis of the characteristics of a smart contract with regard to common law, and can thus be imported mutatis mutandis into Indian law.74 The English law viewpoint on smart contracts is thus a very liberal one, which fosters digital innovation in law and stresses on the flexibility of the common law in adapting to digital challenges through purposive judicial interpretation. The common law underpinnings of both jurisdictions, India and the UK, means that the former should necessarily take the latter’s stance into consideration for formulating a framework for smart contracts.

IV. RATIONALISING SMART CONTRACT AS A ‘CONTRACT’: IN THEORY AND IN PRACTICE

Smart contracts are self-executing in nature; the encapsulated code sticks to a pre-programmed function. This automaticity is often cited to argue that such contracts cannot be reconciled with the traditional dispute-resolution process. It is the notional belief of some scholars that smart contracts should fall under a certain ‘self-help’75 mechanism, referring to the intrinsic self-enforcing nature of a smart contract. The performance of a smart contract is thus assured, and edges out the need for judicial intervention.76 Notwithstanding such a mechanism,

68 AA v. Persons Unknown & others Re Bitcoin, [2019] EWHC 3556 (Comm). 69 Id., ¶57. 70 UK JURISDICTION TASKFORCE, supra note 9. 71 LAW COMMISSION, Adapting English law for the digital revolution, September 21, 2020, available at http://www.lawcom.gov.uk/adapting-english-law-for-the-digital-revolution/ (Last visited on December 6, 2020). 72 Id. 73 UK JURISDICTION TASKFORCE, supra note 9, 17. 74 UK JURISDICTION TASKFORCE, supra note 9, 19. 75 Raskin, supra note 2; Douglas I. Brandon et al., Self-Help: Extrajudicial Rights, Privileges and Remedies in Contemporary American Society, Vol.37, VANDERBILT. L. REV., 845, 850 (1984). 76 Raskin, supra note 2.



we argue that this self-enforcement is not mutually exclusive to state-regulation, and does not supplant the therapeutic mechanism provided in the form of remedies such as injunction, damages for breach of contract etc. This part of the article endeavours to vindicate state-regulation both in terms of the pragmatic applicability of smart contracts in the legal scenario and the theoretical understanding such contracts are premised on.

A. SITUATING SMART CONTRACTS WITHIN EXISTING THEORIES

Smart contracts, as opposed to traditional contracts, are time and cost-efficient due to their technological sophistication.77 This sophistication, coupled with their self-enforcing nature, has led scholars to argue that smart contracts create an efficient substitute to the conventional governance framework, and thus run parallel to the law.78 We, however, contend that allowing for such unbridled self-execution would increase overall costs, and thus decrease economic efficiency.79 To substantiate this argument, we rely on the normative framework provided by the theories of law and economics, with particular reference to the Economic Contract Theory and Incomplete Contract Theory, to explain how transaction cost economics favour the state-enforcement of smart contracts and in turn promote contractual efficiency. On the touchstone of these two theories, we contrast the efficiency factor of smart contracts in two paradigms – self-enforcement, and state-enforcement.

1. ECONOMIC CONTRACT THEORY

Smart contracts, akin to traditional contracts, possess the abstract, rudimentary features of contracting viz. offer, acceptance, consideration, mutual assent and legal intention.80 One such feature is the efficiency of a contract. Economic contract theory is premised on this idea of efficiency, whereby it equates the degree of enforceability of a contract to its net efficiency.81 In a contractual framework, this efficiency is attainable through trust and cooperation between contracting parties, which in turn provides a mechanism to nurture ‘Pareto Efficiency’.82 In a commercial setting, an enforceable contract can ensure Pareto Efficiency for both parties by either securing contractual performance, or remedying any breach through recourse to a court of law. Since contracts are premised on mutually agreed-upon terms, the benefits arising thereof should be secured such that no party is unduly enriched at the expense of

77 J Jeremy Sklaroff, Smart Contracts and the Cost of Inflexibility, Vol.166, UNIVERSITY OF PENNSYLVANIA LAW REVIEW (2017); See also Werbach & Cornell, supra note 6. 78 Werbach & Cornell, supra note 6; See also Savelyev, supra note 15; Hassan & De Fillipi, supra note 14; Kevin J. Fandl, Can Smart Contracts Enhance Firm Efficiency in Emerging Markets?, Vol.40(3), NW. J. INT'L L. & BUS., 333 (2020). 79 Sklaroff, supra note 77; See Helen Dimitrieva & Maria José, Creating Markets in No-Trust Environments: The Law and Economics of Smart Contracts, Vol.35, THE INTERNATIONAL JOURNAL OF TECHNOLOGY LAW AND PRACTICE (2019); DAVID DRIESEN, THE ECONOMIC DYNAMICS OF LAW, 104-106 (Cambridge University Press, 2018). 80 Maren Woebbeking, The Impact of Smart Contracts on Traditional Concepts of Contract Law, Vol.10, JIPITEC, 106 (2019). 81 Jody Kraus, Philosophy of Contract Law in THE OXFORD HANDBOOK OF JURISPRUDENCE AND PHILOSOPHY OF LAW, 38 (Oxford University Press, 2004). 82 Pareto Efficiency in a contract is the optimal benefit that accrues in a transaction to both parties which is in excess of both their costs, thus making the contract pareto efficient. This metric is commonly employed by neo-classical economists to define efficiency in a contract. See DRIESEN, supra note 79.



the other, or adversely affected by an act of the other.83 In the backdrop of the Economic Contract Theory, it is often argued that legal enforceability enables contracting parties to arrive at a Pareto-Efficient solution, or correct the underlying Pareto-inefficiencies in the contract.84

The contemporary understanding of smart contracts as self-executing agreements outside the ambit of judicial enforcement thus contributes to lowering its overall economic efficiency. The arguments advanced in favour of self-regulation tend to extol the former as an efficient alternative to court-intervention.85 This argument, however, overlooks the critical transaction cost economics86 which lies in court enforcement87 - these transaction costs imply that external interference is desirable for determining contractual rights, issuing appropriate remedies, and accounting for contingencies that may prevent the execution of the agreement.88 These facets remain unaddressed in the absence of legal enforceability, and sole reliance on the automatic execution of the contract may cause additional transaction costs.

This is easily illustrated through the example of a contract that runs into an unexpected event – for example, a pandemic, or a cyclone.89 As previously discussed, since smart contracts strictly operate within the confines of its code, such an event may either make the performance contingent, or lead to frustration of contract. This hikes the transaction costs for either, or both, party(ies). A cyclone might lead to an upsurge in the costs of certain raw materials, transportation etc. Since smart contracts are immutable,90 such eventualities can be countered only at the expense of terminating the contract. Accounting for the remotest of contingencies at the time of drafting the smart contract is an absurd impossibility, leaving no viable scope for factoring in unexpected circumstances except through court-enforcement. Although certain other costs may spur up in litigation, it remains the sole feasible method to resolve even the most unexpected of barriers in contracts.91

83 See Hawkins v. McGee, 146 A. 641,643 (N.H. 1929). 84 Dimitrieva & José, supra note 79; DRIESEN, supra note 79. 85 Massimiliano Vatiero, Smart Contracts, Transaction Costs and Adaptation, SSRN, 4 (2018). 86 The economy of transaction is attained in external adaptation via court intervention because it is prepared to address the contingencies that lead to breach of contract by mandating parties to perform their obligations and providing remedies in case of deviation. Even anticipatory breaches can be remedied under an external enforcement mechanism. As against this, self execution focuses on pre-emptive security against breaches and thus lacks adaptive mechanisms to deal with contingences which form essential part of efficiency of contract. 87 Massimiliano Vatiero, Smart Contracts and Transaction Costs, Discussion Paper n. 238, 2018, available at https://www.ec.unipi.it/documents/Ricerca/papers/2018-238.pdf (Last visited on August 31, 2020). 88 Id. 89 The causes of frustration could be anything from insufficient crypto-account balance, to non-delivery of goods, to internet break-down, strikes, bad weather etc. While some of them could easily be made part of the smart contract – for example, the simple computational task of checking whether there is sufficient account balance – others could be accommodated via an ‘oracle’, which is a data feed from an external system that supplies a smart contract with information, such as whether a package has been delivered or not. However, it would be very difficult to encode a precise force majeure clause within a smart contract to account for all exigencies, thus necessitating court intervention. See Eric Tjong Tjin Tai, Force Majeure and Excuses in Smart Contracts, Vol.26(6), Eur. Rev. Priv. L., 787-804 (2018).See Part II of this article. 90 See Part II of this article. 91 Vatiero, supra note 85.



2. INCOMPLETE CONTRACT THEORY AND SMART CONTRACTS

The Incomplete Contract Theory propounded by Oliver D. Hart and Holmström serves as an additional justification for the regulation of smart contracts.92 This theory as pioneered by Hart posits that real-world contracts are often poorly-worded, and contain missing provisions that are left to the parties to negotiate as and when unforeseen events occur.93 This incompleteness is largely inevitable, and a corresponding pitfall is that it encourages opportunistic behaviour on the part of the contracting parties looking to interpret this vagueness to their advantage.94 This leads to conflicting versions of interpretations, with each party advancing its own interests. This problem is usually remedied through re-negotiation or litigation.95

The justification for incomplete contracts is thus grounded in the higher transaction costs that result from terminating contracts as opposed to re-negotiating them, and the concomitant reduction in the efficiency.96 As stated above, an incomplete contract can be resolved in two ways – either by way of renegotiation between the parties, or judicial intervention.97 However, the fallout of renegotiation is the ‘hold-up problem’ – a phenomenon where one party holds up the other due to its higher negotiation power, thus forcing inequity in the contract.98 Therefore, it is often suggested that the parties in an incomplete contract place reliance on the courts to fill in the gaps at the stage of enforcement.99

Szabo in Formalizing and Securing Relationships on Public Networks has integrated the Incomplete Contract Theory into smart contracts.100 Szabo argues that factoring in every single unforeseen eventuality in an agreement entails prohibitive mental, computational and writing costs.101 This can be mitigated by leaving smart contracts incomplete by omitting these eventualities.102 In order to bridge the resultant interpretational gap, he advocates for ex-ante processes of re-negotiation between parties as and when such eventualities occur.103 However, we argue that in order to ensure the efficiency of incomplete contracts, it is incumbent

92 Oliver Hart & Bengt Holmstrom, The Theory of Contracts in ADVANCES IN ECONOMIC THEORY, FIFTH WORLD CONGRESS (Cambridge University Press, 1987). 93 Oliver Hart, Incomplete Contracts and Control, Vol.107, THE AMERICAN ECONOMIC REVIEW (2017). 94 Oliver E. Williamson, The Vertical Integration of Production: Market Failure Considerations, Vol.61(2), THE AMERICAN ECONOMIC REVIEW, 112, 115 (1971); See Hanna Halaburda et al., Understanding Smart Contracts as a New Option in Transaction Cost Economics, ICIS 2019 PROCEEDINGS, AISEL., 3 (2019). 95 Williamson, Id. 96 Robert E. Scott & George G. Triantis, Incomplete Contracts and the Theory of Contract Design, Vol.56, CASE W. RES. L. REV., 187 (2005). 97 Hart, supra note 93. 98 For instance, a factory set up near the site of raw materials may fear lower negotiation power if any unprecedented event raises the price of those raw materials, and may thus hold up in the bargain process. See Oliver Hart, Incomplete Contracts and Control, Vol.107, THE AMERICAN ECONOMIC REVIEW (2017). 99 Scott & Triantis, supra note 96; Vatiero, supra note 85. 100 Nick Szabo, Formalising and Securing Relationships on Public Networks, FIRST MONDAY, available on https://firstmonday.org/ojs/index.php/fm/article/download/548/469 (Last visited on August 31, 2020). 101 Olivier Meier & Aurélie Sannajust, The Smart Contract Revolution: A solution for the Hold-up problem?, Vol.18, SMALL BUS ECON., 25 (2020). 102 Szabo, supra note 100. 103 Id.; See Hart, supra note 93.



on the contracting parties to repose trust in courts to fill in the gaps of the contract.104 The courts by way of filling the gaps in the contract, providing appropriate interpretation in case of ambiguities and awarding adequate remedies, restore contractual efficiency.105 Such a solution ensures that the efficiency of a contract is upheld by guaranteeing the performance of the contract as per the intent of the parties, and suitably awarding damages for non-performance of the contract. Any argument favouring the self-regulation of smart contracts divests them of this efficiency – self-regulation vouches for ex-ante compliance with contractual terms, and lacks the adaptive mechanisms under litigation to deal with contingencies.106 We thus opine that the state-regulation of incomplete smart contracts ensures economic efficiency through filling in the gaps via judicial interpretation.

B. ANALOGICAL JUSTIFICATIONS

A comparison with analogous technological evolutions that have been assimilated into the law serves to highlight the need for the state-regulation of smart contracts. An oft-cited example in this regard is the vending machine. Automatic vending machine operates on the principle of a simple mechanical contract, where the acceptance of coin and the delivery of product create a legally binding contract.107 It is worth noting that a contract entered through a vending machine is a legally enforceable contract. In Thomson v. Shoe Lane Parking,108 Lord Denning stated that a legally binding contract exists where an offer is made by the proprietor of a vending machine and is accepted by the customer through the insertion of a coin. This illustration stems from the reliance placed by Szabo on the vending machine to expound his idea of smart contracts. He conceptualises smart contracts as the successor of vending machines with regard to its operability and functionality.109 While smart contracts share basic properties with the vending machine, the features that they inherit by virtue of their association with blockchain serve to make them far more versatile and commercially useful.110

Another contract analogous to the smart contract is an algorithmic contract.111

104 Vatiero, supra note 85; Scott & Triantis, supra note 96. 105 Vatiero limits the analysis to semantic contracts on the hypothesis that smart contracts obviate judicial intervention. However, we argue that smart contracts are substantively similar to traditional contracts, and are thus capable of being enforced by the court, which completes the incomplete smart contract. 106 Jerry I-H Hsiao, “Smart” Contract on the Blockchain-Paradigm Shift for Contract Law?, Vol.14, US-CHINA LAW REVIEW, 685 (2017); See Vatiero, supra note 85. 107 Kristian Lauslahti & Juri Matiila, Expanding the Platform: Smart Contracts as Boundary Resources in TRANSLATIONAL SYSTEM SCIENCE, 12 (Springer, 2018); Kuruvila M. Jacob & Utsav Mitra, Emerging Contemporary Legal Issues in Blockchain Technology Smart Contracts: The Opportunities & Challenges in DECODING CORPORATE AND COMMERCIAL LAWS IN THE 21ST CENTURY, NLIU - TRILEGAL SUMMIT ON CORPORATE AND COMMERCIAL LAWS 2018, August 24-25, available at https://cbcl.nliu.ac.in/wp-content/uploads/2020/06/Decoding-Corporate-Commercial-Laws.pdf (Last visited on December 07, 2020). 108 Thomson v. Shoe Lane Parking, [1970] EWCA Civ 2. 109 Nick Szabo, The Idea of Smart Contracts, PHONETIC SCIENCES, AMSTERDAM, available at https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/idea.html (Last visited on December 23, 2020). 110 Simon J.D. Schillebeeckx et al., Blockchain and Smart Contracts, Industry Roundtable Discussion Paper, SINGAPORE MANAGEMENT UNIVERSITY, SINGAPORE CFO INSTITUTE, 2016, 6, available at https://business.smu.edu.sg/sites/business.smu.edu.sg/files/business/Strategy_Organisation/BlockChainReport_2016_02_highres.pdf (Last visited on August 31, 2020); Szabo, supra note 109. 111 Lauren Henry Scholz, Algorithmic Contracts, Vol.20, STAN. TECH. L. REV., 128 (2017).



Algorithmic contracts are those contracts that are determined by computer algorithms,112 and are legally enforceable in a court of law. An example of such a contract is the pricing policy of Amazon, wherein sellers using computer algorithms set prices.113 Despite the inherent limitations of algorithmic contracts, they have been statutorily regulated as an electronic transaction. Algorithmic trading is governed by the Securities and Exchange Board of India.114 Additionally, the Electronic Trading Platforms (Reserve Bank) Directions, 2018, issued by the Reserve Bank of India, govern algorithmic trading undertaken by the Electronic Trading Platforms.115 The USA Information Technology law also recognises algorithmic contracts by considering electronic records and signatures as equivalent to manual records.116 Given the level of automation existent in smart contracts, they are recognised as an advanced form of algorithmic contract.117

Further, it should be noted that the technological evolution of contracting is not entirely novel. The Electronic Data Interchange (‘EDI’),118 a form of electronic contract, has been deployed to form contracts based on interchange agreements;119 such agreements are placed at par with traditional contracts as per Indian law.120 The presence of the fundamental perquisites of a ‘contract’ such as communication, mutual assent, quid pro quo etc. proves that these electronic agreements are valid contracts under the law.121 Moreover, common law courts have widely recognised electronic contracts122 - Australia,123 New Zealand124 and UK125 have statutes validating electronic contracts126 so as to not undermine the United Nations Commission on

112 Id. 113 Le Chen et al., An Empirical Analysis of Algorithmic Pricing on Amazon Marketplace, 25TH INTERNATIONAL CONFERENCE ON THE WORLD WIDE WEB, ACM PRESS, April 26-29, 2016, 1339-1349, available at https://dl.acm.org/doi/10.1145/2872427.2883089 (Last visited on December 24, 2020). 114 Securities and Exchange Board of India, General Circular No. 2016/97. (Issued on September 27, 2016).; Securities and Exchange Board of India, General Circular No. 2020/107 (Issued on June 24, 2020). 115 Reserve Bank of India, General Circular No. 2018-2019/55 (Issued on October 5, 2018). 116 Scholz, supra note 111. 117 Id. 118 Electronic Data Interchange (‘EDI’) is the exchange of business information electronically from computer to computer, using a standard electronic format. This creates a mechanism for the direct exchange of information in a computer processable format. According to the United Nations Trading Interchange Directory (UNTDID), Electronic Data Interchange means business communication which replaces paper with high electronic messages. EDIs are credited as being ‘crude smart contracts’ by Nick Szabo. See Nick Szabo, Smart Contracts, 1994, available at http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart.contracts.html. (Last visited on August 31, 2020). 119 Amelia H. Boss, Electronic Data Interchange Agreements: Private Contracting Toward a Global Environment, Vol.13, NW. J. INT'L L. & BUS., 31 (1992-1993). 120 Information Technology Act, 2000, Preamble, §10-A; See Uniform Computer Information Transactions Act, 1999, §112, §206. (U.S.A.). 121 Information Technology Act, 2000, §10-A; JOHN BAGBY, E-COMMERCE LAW: ISSUES FOR BUSINESS, 330-331 (Thomson/South-Western West, 2003). 122 ALAN DAVIDSON, THE LAW OF ELECTRONIC COMMERCE, 35 (Cambridge University Press, 2009); See Brinkibon Ltd. v. Stahag Stahal und Stahalwarenhandelsgesellschaft mbH, [1983] 2 AC 34; Reese Bros Plastics Ltd. v. Hamon-Sobelco Aust. Pty Ltd., [1988] 5 BPR 11, 106. 123 Electronic Transactions Act, 1999. (Australia). 124 The New Zealand Electronic Transactions Act, 2002 (New Zealand); The Contract and Commercial Law Act, 2017 (New Zealand). 125 The Electronic Communications Act, 2000 facilitates contracts entered via electronic mode. See IAN LLOYD, CYBER LAW IN THE UNITED KINGDOM, 149-150 (Kluwer Law International, 2010). 126 DAVIDSON, supra note 122, 30-45.



International Trade Law (‘UNCITRAL’) Model Law on Electronic Commerce.127 UNCITRAL has, by and large, facilitated the legal enforceability of smart contracts.128 In India, electronic contracts are accorded validity by the Information Technology Act, 2000 (‘IT Act’).129 §10-A of the IT Act confers validity to contracts formed through electronic means.130 In addition, §81 of the IT Act negates any inconsistency under any statute in effect, including the Indian Contract Act that might invalidate an online contract.131

The computerisation of contracts is not a new phenomenon. Vending machines, EDIs and algorithmic contracts illustrate that parties which accede to a contract are subject to the legal enforcement mechanism irrespective of the contract’s computerised nature. Based on this, we opine that the technologically adaptive legal framework should make room for smart contracts to be equally governed as a ‘contract’ under Indian law. However, it should be noted that the aforementioned analogy is only intended to extend to application of legal principles of contracting. The distinct functional features of smart contracts result in certain implementation challenges pertaining to jurisdiction, novation, court interpretation etc.132 It is suggested that the flexibility and adaptability of the law is not compromised while assimilating technical evolutions in various forms of contracting – one such form being smart contracts.

C. APPLICABILITY

Smart contracts have only recently moved into the mainstream, and the avenues for their commercial exploitation are still being explored. There are promising signs that the economy would benefit from their integration into everyday commercial transactions. The Society of Construction Law, Australia, recently proposed the use of smart contracts to create construction trusts that could help resolve insolvency and payment related issues, resulting in an overall structural enhancement in the functioning of the society.133 Potential applications of this technology are also concentrated in the financial sector.134 For the purposes of this part, we have confined ourselves to two major components of the Indian financial sector. Firstly, the real-estate sector, which is projected to constitute over 13% of the country’s GDP in the next decade with a valuation of a trillion dollars,135 and secondly, the banking sector, which is worth well over 15%

127 Id. 128 The UNCITRAL Model Law on Electronic Commerce, 1996, Art. 11; United Nations Convention on the Use of Electronic Communications in International Contracts, 2005, Art. 12; See UNCITRAL Model Law on Electronic Transferable Records, 2017, Art. 6. 129 Information Technology Act, 2008, §10-A (amended by the Information Technology (Amendment) Act, 2008). 130 Information Technology Act, 2008, §10-A; See APARNA VISWANATHAN, CYBER LAW: INDIAN & INTERNATIONAL PERSPECTIVES, 277-279 (Lexis Nexis, 2012). 131 Information Technology Act, 2008, §81; See APARNA VISWANATHAN, CYBER LAW: INDIAN & INTERNATIONAL PERSPECTIVES, 277-279 (Lexis Nexis, 2012). 132 See Part V of this article. 133 Salar Ahmadisheykhsarmast & Rifat Somnez, Smart Contracts in the Construction Industry, 5th International Project and Construction Management Conference, RESEARCHGATE, available at https://www.researchgate.net/publication/329363162_Smart_Contracts_in_Construction_Industry/references (December 2018). 134 JULIAN SCHÜTTE ET AL., BLOCKCHAIN AND SMART CONTRACTS (Fraunhofer, 2018). 135 INDIAN BRAND EQUITY FOUNDATION, Indian Real Estate Industry Report, September, 2020, available at https://www.ibef.org/industry/real-estate-india.aspx (Last visited on August 31, 2020).



of the national GDP and plays an integral role in powering the national economy.136 These sectors enjoy a notable slice of the GDP pie, and we believe that their growth can be expedited through an integration with smart contracts. This is primarily due to the uniquely intricate nature of these institutions, which are mired in convoluted procedure and red tape, throwing up an opportunity for streamlining their processes through smart contracts.

1. REAL-ESTATE MARKET

The real estate market is uniquely positioned to benefit from its integration with smart contracts. The current market in developing nations is encumbered with complications such as sluggish transactions and corruption, mainly centred around the manipulation of real estate values recorded by government organisations.137 India is no different – the state-maintained (centralised) Record of Rights (‘RoR’), a physical ledger that serves to keep tabs on the ownership of land assets in the country, is often an inaccurate reflection of the actual property title, despite being the only document that records these values.138 The RoR is in the exclusive possession of a government official who is not de facto supervised over the amending of these prices.139 This enables officials to manipulate hand-written ledgers into misrepresenting land transactions,140 thus increasing the chances of the payment of bribes to modify figures and correspondingly decreasing transparency. As a consequence, over 80% of all the cases dealt with by the country’s district courts are land and property related, often involving a claim that the RoR has been tampered with.141 Moreover, the whole process of registering is crippled with the lack of procedural uniformity across states, thus leading to inordinate delays.142

Smart contracts can provide an expedient alternative by incorporating the details of the property value across a distributed, decentralised ledger such as a blockchain, which would foster trust and prevent fraud in addition to streamlining the process of transferring property. This would involve the creation of a decentralised digital land registry, which would facilitate the verification of the land title by all participant members,143 and prevent undocumented changes. These verification records can be made accessible to nodal governmental agencies, which can use unique private keys to verify the transfer of title.144 This would also revolutionise the process of transacting in land – such a transition would involve the smart contract holding a ‘digital certificate’ that represents the title of the property, which can be

136 Id.; See Charan Singh, An Essay on Banking and Macroeconomics, Working Paper No. 530, IIM BANGALORE, December 2016, 4-9, available at https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf (Last visited on December 24, 2020). 137 Muhammad Mansab Uzair et al., The Impact of Technology on the Real Estate Sector using Smart Contracts, MPRA Paper 88934, UNIVERSITY LIBRARY OF MUNICH, GERMANY, 2018, 5-10 available at https://ideas.repec.org/p/pra/mprapa/88934.html (Last visited on December 24, 2020). 138 Punit Shukla, How India’s Government can build better contracts with Blockchain, WORLD ECONOMIC FORUM, October 4, 2019, available at https://www.weforum.org/agenda/2019/10/how-indias-governments-can-build-better-contracts-with-blockchain/ (Last visited on August 31, 2020). 139 OBSERVER RESEARCH FOUNDATION (‘ORF’), Report on Securing Property Rights in India through Distributed Ledger Technology, January 23, 2017, 18; See INDIA INSTITUTE, BLOCKCHAIN FOR PROPERTY: A ROLL OUT ROAD MAP FOR INDIA, 40 (Vishnu Chandra, India Institute, 2017). 140 Uzair et al., supra note 137. 141 Id. 142 ORF, supra note 139; See INDIA INSTITUTE, supra note 139. 143 In this case, all land owners would be participant nodes of the blockchain. See ORF, supra note 139, 18. 144 ORF, supra note 139, 18.



transferred to the buyer upon receipt of a certain amount of cryptocurrency. A blockchain-based land registry would allow for a trusted property transaction by tracing the transaction history, verifying the data and maintaining secure ownership records.145 The nature of a smart contract effected through cryptocurrency146 means that money can be transferred from one person to another free of traditional barriers, lowering both transaction fees and the time required for the transaction to conclude.147

It is worth noting that the NITI Aayog, the nodal think-tank of the Government of India, has authored a discussion paper acknowledging the various deficiencies of India’s land record system, decrying it as inefficient and plagued with discrepancies. It strongly favoured the deployment of blockchain technology and smart contracts to land transfers in India to enhance their transparency and assure the certainty of available records.148 To facilitate this adoption, it has inter alia recommended amending the cumbersome and taxing provisions under the existing real-estate regime.149 This reflects an encouragingly positive outlook of the state to integrate a blockchain-based land registry into the legal regime.

The real estate market is no stranger to transactions effectuated through smart contracts, with a Ukrainian apartment being sold for sixty thousand dollars through the Ethereum blockchain in October 2017.150 Sweden, for example, is developing an application-based model wherein the property details will be put in the blockchain and the transaction will take place through the application by the use of smart contracts. Government agencies would be able to verify the transaction through a unique hash key and thereafter register the title – thus integrating the model within the regulatory regime.151 Besides, India can take a cue from Ghana, where models for a decentralised land registry are in the pipeline.152 Ghana is a nation that shares many of India’s problems with respect to the real estate market – in particular, the paucity of reliable records on land ownership which in turn enables bureaucratic corruption. A decentralised land record hosted on the blockchain architecture has been frequently mooted as a solution to increase transparency and reliability in the process, and has been recently adopted by the government.153 Georgia, on the other hand, is a country with substantially better ground realities; reliable land records exist and corruption is low in a country that sees a substantial number of land

145 NITI AAYOG, supra note 20, 34. 146 Even though it is not legal tender, the position as it stands today does not in any way proscribe a cryptocurrency transaction. See Internet and Mobile Association of India v. Reserve Bank of India, W.P. (Civ.) 373/2018 (SC) (Unreported). 147 Avi Spielman, Blockchain: Digitally Rebuilding the Real Estate Industry, Thesis, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, August 10, 2016, available at https://dspace.mit.edu/bitstream/handle/1721.1/106753/969450770-MIT.pdf?sequence=1 (Last visited on August 31, 2020). 148 NITI AAYOG, supra note 20 (“This platform will capture transactions, verify data and work with financial institutions to update current registries, enable smart transactions and distribute private keys for clients, thus allowing an automated and trusted property transactions between all parties”). . 149 NITI AAYOG, supra note 20, 34. 150 NEWSWEEK (Anthony Cuthbertson), Blockchain used to sell Real Estate for the First Time, December 10, 2017, available at https://www.newsweek.com/blockchain-sell-real-estate-first-time-ethereum-682982 (Last visited on August 31, 2020). 151 ORF, supra note 139, 18. 152 Id. 153 George Eder, Digital Transformation: Blockchain and Land Titles, OECD INTEGRITY FORUM, August 2019, available at https://www.oecd.org/corruption/integrity-forum/academic-papers/Georg%20Eder-%20Blockchain%20-%20Ghana_verified.pdf (Last visited on December 24, 2020).



registrations every year.154 This success has been credited in part to its widely adopted blockchain-based land registration system developed in partnership with the government, which has increased transparency and fostered efficient registration mechanisms in tandem with monitoring mechanisms.155 Thus, it is possible to capitalise on the potential of a blockchain-based land registry in India without compromising on the existing state-monitoring mechanisms.

2. BANKING AND FINANCE SECTOR

The problems faced by the real estate sector in the status quo are by no means unique; financial transactions are cluttered with paperwork and ancillary fees. In this part, we argue that the considerations under the real estate sector, such as efficiency and data integrity, are also crucial to the banking sector, and conceptualising financial transactions through smart contracts would help in achieving these goals.

The protection of patrons’ financial data from unauthorised disclosure, malicious or otherwise, is of prime importance in banking set up. A permissioned blockchain which restricts the pool of users who have access to the smart contract framework maintains the decentralised nature of the blockchain and adds a layer of privacy.156 In the presence of a strong encryption standard for the security keys of the approved users, data can be accessed only after prior authorisation through the decentralised blockchain. This, in turn, leaves a digital footprint that minimises the risk of anonymous data leakage.157

Data confidentiality and data integrity are closely linked, with the latter referring to the protection against unauthorised changes in data. Compromised data cannot assist in making informed business transactions, and additionally deceives the bank and the customers. Changes in data contained in a smart contract may only be amended after verification from the approved pool of users; unilateral alteration of a mode will necessitate the generation of all further nodes to pass the verifiability test – a computational impossibility.158 Such a verifiability test is often inbuilt in the cryptocurrency framework used in a smart contract – for example, the Bitcoin or the Ethereum blockchain.

The operation of smart contracts on the backbone of these cryptocurrency networks also has the potential to expedite financial transactions routed through the said smart contracts. The banking sector currently relies extensively on manual confirmation of contractual pre-conditions. Further, on account of extensive paperwork and numerous intermediaries, the process is rendered cumbersome.159 The disruption that the proposed integration with blockchain shall bring to the real estate sector can also be attributed to the banking sector; the digitisation and automation of contracts that will execute upon the fulfilment of certain pre-conditions (such

154 Id. 155 Id.; BITFURY EXONUM, Improving the Security of a Government Land Registry, available at https://exonum.com/story-georgia (Last visited on December 1, 2020). 156 Gareth Peters, Understanding Modern Banking Ledgers through Blockchain Technologies in TASCA et al., (eds), BANKING BEYOND BANKS AND MONEY, 239, 278 (Springer, 2016). 157 Id. 158 Id. at 251. 159 Ye Guo & Chen Liang, Blockchain Application and Outlook in the Banking Industry, Vol.2, FINANC INNOV (2016).



as disbursing payments upon a certain time or result)160 as well as the trusted consolidation of accounts-related data apart from reducing paper work curbs delays and data-manipulation.161 The integration of smart contracts with the finance sector also opens the doors to efficient and secure counterparts of traditional banking processes. A notable example is the Security Token Offering (‘STO’), which can replace the traditional Initial Public Offering. An STO consists of digital crypto tokens that represent securities, which can be transferred freely using smart contracts.162 Another example is that of ‘smart derivative contracts’, that replace the traditional derivative contract through offering a faster and cheaper alternative.163

The banking sector, in having made tentative steps to invest and research into blockchain technology, has recognised and affirmed its faith in the benefits outlined above. JP Morgan Chase has invested in the development of ‘Quorum’, a distributed ledger and smart contract platform for expediting financial transactions.164 Bank of America has also taken steps to patent permissioned blockchain for data integrity.165 Indian banks have also taken steps to leverage smart contracts for implementing Know-Your-Customer (‘KYC’) norms, which would help save a substantial sum of money currently diverted towards ensuring KYC compliance.166 This is through ensuring that an organisation that needs to verify KYC details does not have to undertake an independent verification process, but can simply access them through a typical secure blockchain. The RBI, while maintaining its scepticism on cryptocurrency, has stressed on the need to exploit distributed ledger technology such as blockchain to innovate in the financial sector. In particular, it has cited the example of a smart contract that automatically divides up a sum of money proportionately amongst several entities upon the triggering of a certain event. It has additionally mooted the possibility of smart contracts being tested within a ‘regulatory sandbox’ to iron out any teething issues.167 Several major Indian banks have already formed a consortium to develop a common computational infrastructure for implementing blockchain within the Indian framework.168 Bank smart contracts through reducing overhead fees and

160 Id. 161 SCHÜTTE et al., supra note 134. 162 DELOITTE, Report on Security Token Offerings: The Next Phase of Financial Market Revolution, August 2020, available at https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/audit/deloitte-cn-audit-security-token-offering-en-201009.pdf (Last visited on December 24, 2020). 163 Arnav Maru, Smart Derivative Contract: The Dark Horse of the Securities Market, TECH LAW FORUM, September 18, 2019, available at https://techlawforum.nalsar.ac.in/smart-derivative-contract-the-dark-horse-of-the-securities-market/ (Last visited on September 1, 2020). 164 J.P. MORGAN, Blockchain: Centre of Excellence, available at https://www.jpmorgan.com/global/technology/blockchain (Last visited on August 31, 2020). 165 COIN TELEGRAPH (Helen Partz), Bank of America applies for Blockchain-based Encrypted Crypto Storage System Patent, August 25, 2018, available at https://cointelegraph.com/news/bank-of-america-applies-for-blockchain-based-encrypted-crypto-storage-system-patent (Last visited on August 31, 2020). 166 THE BANKING & FINANCE POST, How can blockchain transform India’s banking system, August 16, 2018, available at https://bfsi.eletsonline.com/how-can-blockchain-transform-indias-banking-system/ (Last visited on August 31, 2020). 167 RESERVE BANK OF INDIA, Distributed Ledger Technology, Blockchain and Central Banks, February 11, 2020, available at https://m.rbi.org.in/Scripts/BSViewBulletin.aspx?Id=18766 (Last visited on December 1, 2020). 168 THE ECONOMIC TIMES (Anjali Venugopalan), High Street Indian Banks are riding the blockchain wave for efficiency, August 8, 2018, available at https://economictimes.indiatimes.com/industry/banking/finance/banking/high-street-indian-banks-are-riding-the-blockchain-wave-for-efficiency/articleshow/65316055.cms (Last visited on August 31, 2020).



complexity could lower barriers for entry, enable greater competition,169 and ultimately ensure that the benefits of banking reach a wide audience.

Thus, it is clear that the rising prospects of the increased practical application of smart contracts in the real world will require a regulatory mechanism to ensure a safe transaction and consumer protection. The emerging prospects of application of smart contracts as a Fin-Tech require a need to probe into its regulatory framework, which can assist in fostering trust, and increase the utilisation of smart contracts.

V. SMART CONTRACTS AND THE INDIAN LEGAL REGIME

This part represents a significant divergence from existing Indian scholarship on smart contracts. Here, we argue that smart contracts are substantially not inconsistent with the country’s legal regime, and attempt, through two parts, to demonstrate its nexus with Indian law. The first part examines smart contracts with reference to the Contract Act, and illustrates that the basic requirements of a contract are met by a smart contract. We, however, stop short of claiming that smart contracts can seamlessly mesh in with Indian law – in the second part, we outline certain procedural complexities that arise from harmonising smart contracts and the Contract Act.

A. POSITIONING SMART CONTRACTS UNDER INDIAN CONTRACT ACT, 1872

The fundamentals of contract law such as offer, acceptance, consideration, mutual assent and legal intention have been pliant towards technological shifts in society. This is reflected in the courts’ receptiveness towards interpreting the law in light of technological innovations. As a result, various types of electronic contracts have been brought within the ambit of contract law by drawing on a ‘substantive similarity’ with their traditional counterparts.170 However, certain features of smart contracts – immutability, coded language and anonymity/pseudo-anonymity – do not find much common ground with traditional contracts in terms of their application and enforcement.

At this juncture, it is important to note that Indian courts have not engaged with any form of blockchain-based contracting. There is thus a lack of binding legal precedent on the subject. In light of this deficiency, our analysis of smart contracts, whenever required, is buttressed by English case law. The common law underpinnings of both India and the United Kingdom, coupled with the substantial similarity which the Contract Act shares with English contracting law,171 make English contract jurisprudence very influential on Indian shores. For example, a conclusion that is arrived at primarily through an analysis of common law holds ground both in India and the United Kingdom.172 In a similar vein, we rely on the Taskforce’s

169 Joichi Ito et al., The Blockchain Will Do to the Financial System What the Internet Did to Media, HARVARD BUSINESS REVIEW, March 7, 2019, available at https://hbr.org/2017/03/the-blockchain-will-do-to-banks-and-law-firms-what-the-internet-did-to-media (Last visited on August 31, 2020). 170 Thomson v. Shoe Lane Parking, [1970] EWCA Civ. 2; Trimex International FZE Limited, Dubai v. Vedanta Aluminium Limited, India, (2010) 3 SCC 1. 171 Jonathan Riley, Contracting under Indian or English law, MONDAQ, September 1, 2008, available at https://www.mondaq.com/india/contracts-and-commercial-law/65442/contracting-under-indian-or-english-law-part-1-the-indian-legal-framework (Last visited on August 31, 2020). 172 Id.



Report to argue that smart contracts must have contractual force within the rigours of the common law, as established contracting principles apply to them.173 On the strength of this argument, we analyse the application of these principles to smart contracts. We first provide the rationale and objective of this analysis in sub-sub-part 1, along with a brief overview on the basic operation of smart contracts. In the subsequent sub-sub-parts, we analyse the core constituents of a valid contract vis. offer, acceptance, consideration, legal intention and mutual assent and their nexus to smart contracts. Based on this analysis, we infer that smart contracts fulfil the requisites of a valid contract under the Contract Act.

1. FOUNDATIONS OF FORMATION

It is often argued that the choice to operate agreements through smart contracts should deter parties from approaching the courts to enforce one’s contractual obligations.174 Although India has not impelled any progressive legislation aimed at smart contracts, a perusal of steps taken by other common law jurisdictions reinforces the notion that by applying the fundamental principles of contracting, smart contracts are capable of being regulated under existing contract law.175 The Taskforce’s Report176 clearly underscores that smart contracts enjoy legality at par with an ordinary contract, as both are equally capable of satisfying the requirements of a contract under common law.177 It further opines that the technical complexities that the operation of smart contracts entails do not restraint the flexible nature of common law, which is equipped to factor in technological advancements.178

Despite an absence of court rulings that specifically address the legal enforceability of smart contracts, the Indian judiciary has held that the electronic nature of a contract does not prejudice it as opposed to a mechanical one, since the former does not ipso facto rule out the applicability of general principles of contract law.179 While smart contracts do share common ground with electronic contracts,180 trying to strictly equate them would be an exercise in futility. An electronic contract is merely a conventional contract executed digitally –

173 UK JURISDICTION TASKFORCE, supra note 9. 174 Raskin, supra note 2. 175 UK JURISDICTION TASKFORCE, supra note 9. 176 The statement is not in form of treatise or law but largely explains the stance taken by UK in reforms as per the growth in technology in terms of smart contracts and blockchain. 177 UK JURISDICTION TASKFORCE, supra note 9. 178 Id. 179 Software Solutions Partners Ltd v. HM Customs & Excise [2007] EWHC 971; See Trimex International Fze. Limited, Dubai v. Vedanta Aluminium Limited, India, (2010) 3 SCC 1; Tamil Nadu Organic Private Ltd. and Ors. v. State Bank of India, AIR 2014 Mad 103; B2C2 Ltd v. Quoine Pte Ltd., [2019] SGHC(l) 3; Chwee Kin Keong and Others v Digilandmail.com Pte Ltd., [2005] 2 LRC 28I. 180 An electronic contract (‘e-contract’) is a contract designed, monitored and controlled using electronic means such as email, websites, EDI etc. See Roos Niza Mohd Shariff, The Role of UNCITRAL in Regulating E-contract in the Emerging E-Commerce, INTERNATIONAL CONFERENCE ON E-COMMERCE (ICOEC), September 19-20, 2006, available at http://repo.uum.edu.my/14325/1/010_ICoEC_2006.pdf (Last visited on December 3, 2020); See Werbach & Cornell, supra note 6; Victor Manuel Gracia, The Regulation Applicable to the Smart Contract and its Subtypes: Smart Code Contracts and Smart Legal Contract, MEDIUM, January 4, 2019, available at https://medium.com/@abogadovicgarcia/regulation-applicable-to-the-smart-contract-and-its-subtypes-smart-code-contracts-and-smart-legal-73e387be09ad (Last visited on December 21, 2020).



an example of which is a click-wrap agreement.181 The UNCITRAL positions e-contracts on the same footing as traditional contracts, and they are legally valid and enforceable under Indian law as per §10-A of the IT Act.182 While a smart contract is frequently touted as an evolved form of an electronic contract,183 the former’s reliance on the blockchain, – which necessitates the deployment of cryptocurrency as consideration – coupled with its automaticity and immutability renders it significantly different from electronic contracts.184 However, electronic contracts, particularly click-wrap agreements, present a procedural shift with reference to conventional contracting as envisaged under the Contract Act. Nevertheless, their validity has been firmly encrusted in Indian law, primarily due their conformation with the “fundamental principles of contracting” vis. offer, acceptance, consideration, mutual assent and legal intention.185 Similarly, notwithstanding the procedural concerns that smart contracts raise, we argue that one cannot preclude the contractual validity of such contracts if they substantially conform with these fundamental principles of contracting. Based on the given stance of the courts on electronic contracts, we opine that it is likely that the judiciary shall view smart contracts favourably provided that the ‘fundamental principles of contracting’ apply to them.186

While smart contracts represent a technological leap over electronic contracts, they cannot be regarded as an aberration in the existing legal framework.187 The self- executing machine-readable code is to be considered as subject to legal enforcement, rather than as a substitute to it.188 The case B2C2 Ltd v. Quoine Pte Ltd189 is a landmark decision in recognising self-executing automated contracts as legally valid. In this case, B2C2 entered into an agreement with Quoine, wherein the former was allowed to trade on the latter’s cryptocurrency trading platform. During one such transaction, certain trades were carried out by the platform for the exchange of cryptocurrencies at a rate almost 250 times the prevailing market rate.190 It was found to be on account of a computer error and was subsequently unilaterally reversed by Quoine. This action was challenged by the appellant as amounting to a breach of trust. It was ruled by the Court of First Instance and later affirmed by the Court of Appeal that Quione is

181 A click-wrap agreement involves transacting by way of displaying the product (along with its specifications, quantity, price and other terms and conditions) over the seller’s website accessible to the customer who can place the order by filling in the details and clicking on ‘submit’ or ‘I agree’ etc. This is essentially an electronic simulation of a traditional transaction in a physical market; See KURT BAUKNECHT, E-COMMERCE AND WEB TECHNOLOGIES (Springer, 2005); FAYE FANGFEI WANG, LAW OF ELECTRONIC COMMERCIAL TRANSACTIONS (Routledge, 2014). 182 The UNCITRAL Model Law on Electronic Commerce, Art. 11; The Information and Technology Act, 2000, §10-A. 183 Gracia, supra note 180. 184 Werbach & Cornell, supra note 6, 359, 368. 185 UK JURISDICTION TASKFORCE, supra note 9; Trimex International Fze. Limited, Dubai v. Vedanta Aluminium Limited, India, (2010) 3 SCC 1. 186 Ambalal Sarabhai Enterprise Limited v. KS Infraspace LLP Limited, (2020) SCC OnLine 1; Trimex International Fze. Limited, Dubai v. Vedanta Aluminium Limited, India, (2010) 3 SCC 1. 187 Jacob & Mitra, supra note 107; Nikhar Maloo, An Introduction to Smart Contracts, available at http://vinodkothari.com/wp-content/uploads/2019/06/An-Introduction-to-Smart-Contracts.pdf (Last visited on December 6, 2020); See Pooja Dhamor, Smart Contracts in Leasing: Is India Ready?, Vol.9(1), NLIU LAW REVIEW (2020). 188 UK JURISDICTION TASKFORCE, supra note 9. 189 B2C2 Ltd. v. Quoine Pte Ltd., [2019] SGHC(I) 3 (Singapore International Commercial Court). The decision was rendered by the court of first instance, i.e. Singapore International Commercial Court in favour of B2C2 which was later partly affirmed by the Court of appeal in Quoine Pte Ltd.v. B2C2 Ltd., [2020] SGCA(I) 02. 190 Quoine Pte Ltd. v. B2C2 Ltd., [2020] SGCA(I) 02.



liable for breach of contract for unilaterally cancelling the trades. While the question as to whether the agreement amounts to contract as per law was not addressed in the case, two important observations were made by the Court of Appeal which are very pertinent in the context of smart contracts – firstly, the court impliedly accepted that the agreement made via an automated trading platform was a valid contract.191 Secondly, regarding the applicability of common law principles to an automated technology, the majority ruled in favour of ‘meaningful adaptation’ of the existing law to deal with the changing technology as opposed to fundamental alteration of the law.192 The given judgment has a potential impact on regulating smart contracts as it provides considerable guidance on the contractual validity of automated contracts and their assimilation into the traditional contract law as such.193 Although similar disputes have not yet arisen in India, the applicability of basic legal principles of contract law to automated platforms is relevant for the purposes of this discussion.

A major challenge in a smart contract transaction is ensuring holistic regulatory compliance. Transacting through smart contracts involves the interplay of various legislations, which opens a Pandora’s box of techno-legal challenges. For instance, in the case of purchase of land via smart contract, a multitude of legislation swings into effect contract law, property law, registration law and taxation law. To illustrate further in the context of registration; the ability to effortlessly transfer title via smart contract gives rise to issues regarding the centralised registration of asset transfer. This is suggestive of the potential challenges in regulating smart contracts under the Contract Act; a bird’s eye view of the issues is required to fully materialise a statutorily regulated smart contract transaction.

Certain cardinal elements of a valid contract under the Contract Act, such as mutual assent and intention to create legal relations, are established based on an objective test.194 We argue that under this objective test,195 signing on to a smart contract manifested through machine-readable code reflects a commitment to be bound by the contract the code represents.196 Traditionally, the existence of a contract is determined based on the satisfaction of certain prerequisites. The generally accepted principles necessary for contract formation under the Contract Act are offer, acceptance, communication, consideration, mutual assent, and legal intention.197 A legally enforceable contract is an agglomerate of all these factors taken together. In order for smart contracts to be recognised as a contract under the Act, it must thus necessarily have these requisite elements of contract-formation.

191 Id. 192 Id., ¶78-79. 193 Id.; See Singapore Court of Appeal Delivers Landmark Judgment on Doctrine of Mistake in Cryptocurrency-Related Contract Claim, RAJAH & TANN ASIA LLP, February, 2020, available at https://eoasis.rajahtann.com/eoasis/lu/pdf/2020_02_Cryptocurrency_Related_Contract_Claim.pdf (Last visited on December 24, 2020). 194 UK JURISDICTION TASKFORCE, supra note 9. 195 The broad tenets of this objective test have been elucidated upon in the sub-sub parts. 196 Mykyta Sokolov, Can a smart legal contract be considered a contract, LAWLESS.TECH, July 15, 2018, available at https://lawless.tech/can-a-smart-legal-contract-be-considered-a-contract-according-to-the-u-s-contract-law/ (Last visited on August 31, 2020). 197 The Indian Contract Act, 1872, §2(h), §10.



a. Offer and Acceptance

Under §2(a) of the Contract Act, an offer or proposal is understood as the definite manifestation of the intention to enter into a legally binding contract in order to obtain assent of the opposite party.198 In order for an offer to be valid, it must satisfy the following requirements –(a) its terms must be definite and clear (b) it must be communicated to the offeree199 (c) it must create a legal relationship200 (d) it must be made for the purpose of obtaining the assent of the offeree.201

Likewise, under §2(b) of the Contract Act, ‘acceptance’ indicates an absolute and unqualified assent to the proposal.202 It is subject to the objective test of intention,203 where parties are left to their free will to determine what constitutes an acceptance.204 Acceptance of offer by way of performance by the offeree may per se constitute a valid acceptance leading to a unilateral contract.205 Apart from knowledge of the offer under the Act, communication of acceptance is equally important.206 It is also relevant to note that the English law has accorded validity to automated offer and acceptance in a contract.207 The acceptance of offer becomes a promise, which further becomes an agreement if backed by consideration.

It is worth noting that the law does not prohibit offer and acceptance through data messages.208 In order to protect electronic contracts, the IT Act comes into play to confer legality to offers made in the form of data messages. §10-A of the IT Act states that the mere use of data messages for the purpose of entering into a contract shall not be treated as a ground for invalidating the contract. Reference can also be made to the UNCITRAL Model Law on Electronic Commerce (‘MLEC’)209 and the United Nations Convention on the Use of Electronic Communication in International Contracts, 2005 (‘UECIC’). Article 11 of the MLEC states that the legality, validity or enforceability to information shall not be denied solely on the ground that it is in form of data messages.210 The UECIC focuses on the use of electronic communications in connection with the formation or performance of a contract between parties whose places of

198 The Indian Contract Act, 1872, §2(a); POLLOCK & MULLA, THE INDIAN CONTRACT ACT AND THE SPECIFIC RELIEF ACT, Vol.2, 38,39 (14th ed., LexisNexis, 2012). 199 Lalman Shukla v. Gauri Datt, (1913) All LJ 489. 200 Balfour v. Balfour, [1919] 2 KB 571; Jones v. Padavatton, [1969] 1 W.L.R. 328; Parker v. Clark, [1960] 1 NLR 286. 201 Indian Contract Act, 1872, §2(a). 202 Indian Contract Act, 1872, §2(b). See Indian Contract Act, 1872, §7. 203 POLLOCK & MULLA, supra note 198. 204 Holwell Securities Ltd. v. Hughes, [1974] 1 WLR 155. 205 Alka Bose v. Parmatma Devi and Ors., MANU/SC/8475/2008, ¶6, ¶7; See K.S.N. Murty, Some Problems in the Formation of Contract, INDIAN LAW INSTITUTE, May, 1968, available at http://14.139.60.114:8080/jspui/bitstream/123456789/853/1/005_Some%20Problems%20in%20Formation%20of%20Contract.pdf (Last visited on 31 August, 2020). 206 POLLOCK & MULLA, supra note 198. 207 R (Software Solutions Partners Ltd) v. HM Customs & Excise, [2007] EWHC 971, ¶67. 208 Emir Bayramoglu, Online Dispute Resolution and Direct Enforcement in the Age of Smart Contracts, Master’s Thesis, TILBURG UNIVERSITY, 2018, available at https://arno.uvt.nl/show.cgi?fid=146835. (Last visited on 31 August, 2020). 209 The MLEC aims at facilitating e-commerce by providing a set of internationally acceptable rules. 210 The UNCITRAL Model Law on Electronic Commerce, 1996, Art. 11.



business are in different countries.211 Article 12 of the said convention states that interaction over an automated message system shall not be denied validity due to the lack of human intervention.212

Based on the above legal principle, we attempt to ascertain whether the parameters of a valid offer and acceptance are satisfied by a smart contract. It is clearly discernible that there exists an offer in the form of machine-readable code encapsulating the terms of the contract.213 The code depicts the manifestation of intention to enter into a contract. The deployment of smart contract by the act of posting it on a blockchain platform amounts to communicating a valid offer.214 Users who access the code, and assent to the rights and obligations it encapsulates can be inferred to have an intention to create a legal obligation. By virtue of this, the existence of a valid offer is abundantly present through a smart contract provided (a) it is unambiguous; (b) it is posted on a platform and (c) it reflects the commitment to enter into legal relationship.

As regards ‘acceptance’, the conduct of the offeree who is ready and willing to accept the offer as uploaded on the blockchain is relevant.215 In this regard, it is imperative to note that the determination of stipulations constituting a valid acceptance is left to the free will of the parties, and any mode prescribed under this can constitute valid acceptance be it through submitting specified details & documents, performing an action such as inserting coin in a vending machine or simply clicking on the “I Agree” button.216 Acceptance in smart contracts can be denoted either by uploading digital assets (such as cryptocurrency) on the blockchain or by signing through private cryptographic keys217 to the offer deployed through a distributed ledger.218 The fact that the parties use a private cryptographic key for the purpose of signing the contract is a valid ground to recognise the existence of valid acceptance.219 In case of a hybrid smart contract, acceptance is sufficiently denoted, since the offeree is able to read and understand

211 United Nations General Assembly [UNGA], United Nations Commission on International Trade Law [UNCITRAL], United Nations Convention on the Use of Electronic Communications in International Contract. United Nations Publications Sales No. E.07.V.2 (November 23, 2005). 212 United Nations Convention on the Use of Electronic Communications in International Contracts, 2007, Art. 12. 213 CHAMBER OF DIGITAL COMMERCE & SMART CONTRACTS ALLIANCE, Smart Contracts: Is the Law Ready, DIGITAL CHAMBER, September, 2018, available at https://digitalchamber.s3.amazonaws.com/Smart-Contracts-Whitepaper-WEB.pdf (Last visited on December 24, 2020) 214 Id, 16-18; See Mateja Durovic & Andre Janssen, Formation of Smart Contracts under Contract Law in THE CAMBRIDGE HANDBOOK OF SMART CONTRACTS, BLOCKCHAIN TECHNOLOGY AND DIGITAL PLATFORMS, 71,74 (Cambridge University Press, 2019); Adarsh Vijayakumaran, Legally Blocked: The Evolution and Legality of Smart Contracts in ADVANCEMENT IN LEGAL RESEARCH, TRANSDISCIPLINARY INNOVATIVE DIMENSIONS (K.V. Publishers, 2019). 215 Durovic & Janssen, Id. 216 Jelena Madir, Smart Contracts: (How) Do they Fit Under Existing Legal Frameworks, SSRN (2018); See Mateja Durovic & Andre Janssen, The Formation of Blockchain-based Smart Contracts in the Light of Contract Law, Vol.26(6), EUR. REV. PRIV. L. (2019). 217 Durovic & Janssen, supra note 215; See Shubham Nahata, Square Peg in a Round Hole – Evaluating Smart Contracts on the Principles of Contract Law, Vol.7, DELHI LAW REVIEW (2019). 218 CHAMBER OF DIGITAL COMMERCE & SMART CONTRACTS ALLIANCE, supra note 213;Durovic & Janssen, supra note 214. 219 UK JURISDICTION TASKFORCE, supra note 9;See Madir, supra note 216.



the sum and substance of the offer.220 Furthermore, in a commercial transaction, there is a strong presumption that the parties intend to create legal relations, notwithstanding the form in which offer and acceptance are communicated.221 It is a reasonable inference that the employment of one’s private cryptographic key to authenticate a transaction and/or transfer assets reflects a commitment to be bound by the terms of the offer. The communication of this intent to be bound thus constitutes a valid acceptance of the offer.222 Besides, unless a time-frame is provided under the smart contract, it is presumed to be indeterminate and therefore, indefinite.223 The autonomous interaction of parties with the smart contract thus indicates the existence of offer and acceptance. Regardless of the format of contracting, the means and principles of offer and acceptance are thus akin to an ordinary contract.224

b. Consideration

In order for a promise to become an agreement, it must be backed by consideration.225 Under §2(d) of the Contract Act, ‘consideration’ is the act, abstinence or past act or past abstinence at the instance of offeror.226 It is an essential element of a valid contract.227 It is understood as a benefit or profit or interest in favour of the promisee, or loss or harm or detriment suffered by the promisor.228 Consideration needs to have value in the eyes of law.229 It is upon the parties’ free will to determine the consideration for them – the fact that the thing seems insignificant to others does not cease to be of value in the eyes of law.230 However, it must reflect the desire of the offeror.231 The concept of consideration is different for the law of contracts and sale of goods – the latter limits its ambit to only monetary value, and thus excludes barter transactions.232 This position is similar in both the United Kingdom233 and India.234

220 CLIFFORD CHANCE TALKING TECH, Are smart contracts contracts?, August 1, 2017, available at https://talkingtech.cliffordchance.com/en/emerging-technologies/smart-contracts/are-smart-contracts-contracts.html (Last visited on December 24, 2020); Levi & Lipton, supra note 13. 221 See Banwari Lal v. Sukhdarshan Dayal, AIR 1973 SC 814; Edwards v. Skyways Ltd, [1964] 1 WLR 349, 355; Esso Petroleum v. Commissioners of Customs & Excise, [1976] 1 WLR 1; Lucent Technologies Inc. v. ICICI Bank Limited & Ors., MANU/DE/2717/2009. 222 Werbach & Cornell, supra note 6, 359,368; Nahata, supra note 217; Madir, supra note 216; Rachel Lidgate & Charlie Morgan, Hashing out the Implications of Smart Contracting under English Law, HERBERT SMITH FREEHILLS, October 2, 2018, available at https://www.herbertsmithfreehills.com/latest-thinking/hashing-out-the-implications-of-smart-contracting-under-english-law (Last visited on August 31, 2020). 223 CHAMBER OF DIGITAL COMMERCE & SMART CONTRACTS ALLIANCE, supra note 213. 224 UK JURISDICTION TASKFORCE, supra note 9. 225 POLLOCK & MULLA, supra note 198, 54. 226 The Indian Contract Act, 1872, §2(d). 227 POLLOCK & MULLA, supra note 198, 54. 228 Chappell & Co. Ltd. v. Nestle Co. Ltd., [1960] AC 87; Regional Provident Fund Commissioner v. Shiv Kumar Joshi, MANU/SC/0774/1999, ¶10; Dunlop Pneumatic Tyre Co Ltd v. Selfridge & Co Ltd, [1915] UKHL 1. 229 Regional Provident Fund Commissioner v. Shiv Kumar Joshi, MANU/SC/0774/1999, ¶10; A. Lakshmanaswami Mudaliar & Ors. v. Life Insurance Corporation of India & Ors., MANU/SC/0062/1962, ¶16. 230 Chappell & Co. Ltd. v. Nestle Co. Ltd., [1960] AC 87. 231 Durga Prasad v. Baldeo & Ors., (1881)ILR3ALL221; POLLOCK & MULLA, supra note 198, 54. 232 Pratap Chand Purshottam Das v. State Of Uttar Pradesh & Anr., AIR 1964 All 284. The Sale of Goods Act, 1930, §2(10). 233 The Sale of Goods Act, 1979, §2(1) (U.K.). Sub-section (1) of Section 1 of the said Act states "A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.” 234 The Sale of Goods Act, 1930, §2(10).



However, no such qualification exists under the law of contracts. Even a plain detriment to the promisor can amount to valid consideration, even in the absence of a corresponding benefit to the promisee.235 It is the substance, and not the form of consideration that has value in law. The focus is primarily towards the reciprocity and mutuality of exchange.236

It is significant to note that the principle of quid pro quo is based on the exchange of value in the eyes of the law, regardless of the adequacy of consideration. For example, ascertaining the validity of consideration is a question of fact.237 The Taskforce’s Report is pertinent in examining the question of consideration in the case of smart contracts.238 As per the Taskforce, consideration in a smart contract can be identified through an examination of its code or its behaviour.239 In cases where the promise under a smart contract is backed by terms that indicate an exchange of value, it amounts to valid consideration. For instance, an agreement stating that the shipping of certain goods would automatically lead to the debiting of a specified amount from the account of the buyer reflects valid consideration. AXA’s flight delay insurance compensation discussed in the beginning of this article could be another practical illustration of valid consideration under smart contracts.240 Hence, an automatic transfer contingent on the payment of a regular premium creates a valid consideration. Smart contracts that outline such terms are capable of being made legally enforceable under the Contract Act.

Based on the above analysis, it is evident that unlike the position of the Sale of Goods Act,241 the Contract Act does not place limits on the form and manner of consideration. As discussed in Part II, the law also does not proscribe the usage of cryptocurrency as consideration. Therefore, consideration in the form of cryptocurrency is a valid form of consideration under the Contract Act.

c. Legal Intention

The presence of legal intention is the core constituent of a legally binding contract. We argue that it is possible for smart contracts to manifest the intention of parties to legally bind them to the contract. The determination of animus contrahendi, the intention to contract, is done in an objective manner.242 It is imperative to note that the commercial nature of a transaction raises a presumption of the existence of legal intention.243 This principle has been exemplified in the case of Edwards v. Skyways, where the court relied on prior business negotiations to infer intent to enter into legal relations, even in the absence of a domestic/social contractual set up.244 Furthermore, the courts have also inferred intent based on the conduct of

235 Perumal Mudaliar v. Sndanatha Mudaliar, AIR 1918 Mad, 311-312. 236 Eliza Mik, Smart Contracts: Terminology, Technical Limitations and Real World Complexity, Vol.9(2), LAW, INNOVATION AND TECHNOLOGY (2017). 237 Id. 238 UK JURISDICTION TASKFORCE, supra note 9. 239 Id. 240 Levi & Lipton, supra note 13. 241 Sale of Goods Act, 1930, §2(10). 242 Werbach & Cornell, supra note 6, 339, 368. 243 Banwari Lal v. Sukhdarshan Dayal AIR 1973 SC 814; Edwards v. Skyways Ltd [1964] 1 WLR 349, 355; Esso Petroleum v. Commissioners of Customs & Excise [1976] 1 WLR 1; Lucent Technologies Inc. v. ICICI Bank Limited & Ors. MANU/DE/2717/2009. 244 Edwards v. Skyways Ltd, [1964] 1 WLR 349.



the parties245 – a similar approach has been endorsed in India for inferring the intention of the parties.246 Needless to say, the facts and circumstances of each individual case play a pivotal role in ascertaining such intention, and one of the factors is the opportunity to have notice of the legal terms of the contract.247 The will of the parties is prima facie the determinant of legal intent to enter into a contract, which is deducible from the facts and circumstances of a particular case. For instance, courts across various jurisdictions while upholding the validity of click-wrap agreements have placed emphasis on the underlying free will element, which is held to be satisfactorily deducible from the opportunity to ascertain the terms before clicking on “I Agree”.248 Similar principles can be applied to smart contracts. In spite of their self-executing nature, the will of the parties remains the basis of contracting.

It is evident from the above analysis that to form a binding contract, parties must be able to establish legal intention while transacting through smart contracts. We argue that signing a smart contract with a private key is indicative of the intention to commit to the contract.249 The act of posting the coded terms of the contract by the offeror on a decentralised platform so as to obtain assent, and the use by the offeree of her private cryptographic key to transfer assets or sign the contract, reflect a lawful commitment to abide by the contract.250 A smart contract that has been fully read and understood by the parties entering into it can legally bind them on account of their manifestation of legal intention to be bound by it.251 Additionally, various scholars are of the view that the acceptance of a commercial offer conveyed by a smart contract shall manifest in legal intention to contract through conduct.252 Their reasoning is compelling – the presumption of existence of a valid contract in a commercial setting253 is extended to its logical conclusion to argue that a reasonable person would objectively consider an acceptance under a commercial smart contract as legally binding and enforceable.254 Ideally, for enforcing such a contract, the terms of the contract should be adequately, categorically and

245 See Martin v. Campanaro, 156 F. 2d 127 (2d Cir. 1946); RTS Flexible Systems Ltd v. Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14. 246 Siddharth Ratho et al., Implying Terms in a Contract, MONDAQ, November 13, 2017, available at https://www.mondaq.com/india/contracts-and-commercial-law/645868/implying-terms-into-a-contract-supreme-court-sets-contours (Last visited on August 31, 2020); See Nabha Power Limited v. Punjab State Power Corporation Limited & Anr., Civ. App. No.179 of 2017 (SC) (Unreported). 247 Jeffrey D. Neuberger et al., Smart Contracts: Best Practices, THOMSON REUTERS, 2019, available at https://s3.amazonaws.com/assets.production.proskauer/uploads/dc2c188a1be58c8c9bb8c8babc91bbac.pdf (Last visited on December 24, 2020; ASHURST, Smart Contracts: Can code ever be Law?, March 1, 2018, available at https://www.ashurst.com/en/news-and-insights/legal-updates/smart-contracts---can-code-ever-be-law/ (Last visited on August 31, 2020). 248 Rudder v. Microsoft Corp., 1999 OJ No. 3778 (Canada); Feldman v. Google, Inc., 513 F. Supp. 2d 229 (E.D. Pa. 2007) (U.S.A.); Century 21 Canada Limited Partnership v. Rogers Communications Inc., 2011 BCSC 1196. (Canada); See Trimex International FZE Limited, Dubai v. Vedanta Aluminium Limited, India, (2010) 3 SCC 1 (The Supreme Court observed that “in the absence of signed agreement between the parties, it would be possible to infer from various documents duly approved and signed by the parties in the form of exchange of e-mails, letter, telex, telegrams and other means of tele-communication[…]”). 249 UK JURISDICTION TASKFORCE, supra note 9; See Werbach & Cornell, supra note 6; Barnes v. Yahoo!, Inc., 570 F.3d 1096, 1108 (9th Cir. 2009); Delhi Cloth and General Mills Co. Ltd. v. K.L. Kapur, AIR 1958 P&H 93. 250 Sokolov, supra note 196. 251 ASHURST, supra note 247. 252 Durovic & Janssen, supra note 214; See Paul Catchlove, Smart Contracts: A New Era of Contract Use, Vol.1, SSRN (2017). 253 Esso Petroleum Limited v. Commissioners of Customs and Excise [1975] UKHL 4. 254 Durovic & Janssen, supra note 214.



correctly stated in the code. A smart contract employed for commercial purposes is thus legally valid when entered into between two parties, since it de jure manifests the intention to be bound by the code.

d. Mutual Assent

Consensus ad idem is one of the essential elements of a contract under the Contract Act.255 The meeting of minds is reflected in the mutuality among parties to bind themselves to an agreement.256 The law of contracts requires real and actual assent between the parties;257 it should not be vitiated by mistake, coercion, fraud, undue influence or misrepresentation. The test to determine such assent is objective in nature.258 Mutual assent can be inferred from the consciousness of the parties in understanding the terms available to them at the time of entering into the contract. For example, the clear and unequivocal conditions posted on the website in case of an electronic contract will bind the parties notwithstanding the possibility that the agreement is entered into without actually reading the terms.259 Actual knowledge of the terms is thus not required, as long as the court is satisfied with the reasonableness in the conduct of the offeror in ensuring that the terms of the contract are abundantly noticeable by the offeree.260 When the terms of offer are inconspicuous, or there is no reasonable intimation of the same to the offeree, they will not be binding.261 On the other hand, if there is reasonable notice, the mere fact that there is a language barrier would not affect the contract if constructive notice can be imputed on the offeree.262 This implies that in order to read mutual assent into a contract, the offer has to be clearly stated, and the offeree should have sufficient notice to assent to it.

There are certain complexities that crop up in the case of electronic contracts that are concluded on websites. These electronic contracts, that are sometimes categorised as adhesion contracts, assume that users of the website have due notice of the terms, even though they have not read the same.263 These ‘terms of use’ are obscurely browse-wrapped on a remote corner of the website, and may make the users susceptible to deemed assent by equating the use

255 Dhanrajamal Gobindram v. Shamji Kalidas and Co. AIR 1961 SC 1285; U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. & Ors., 1996 IIAD SC 318. 256 POLLOCK & MULLA, THE INDIAN CONTRACT ACT AND THE SPECIFIC RELIEF ACT, Vol.1 307 (16th ed., Lexis Nexis, 2019). 257 Id., 310. 258 Id. 259 Dewayne Hubbert v. Dell Corp., 359 Ill. App. 3d 976. 260 Contract principles state that when a benefit is offered subject to certain conditions and the offeree takes the benefit with knowledge of those conditions, the taking constitutes acceptance of those terms and the terms become binding on the offeree. See Cairo Inc. v. Crossmedia Services, Inc., 2005 WL 756610 (N.D. Cal. 2005); See Pollstar v. Gigmania Ltd. - 170 F. Supp. 2d 974 (E.D. Cal. 2000); The court held, “as with paper contracts or shrink wrap agreements, to be bound, an internet user need not actually read the terms and conditions or click on a hyperlink that makes them available as long as she has notice of their existence”. See Dean Nicosia v.Amazon.com, Inc., No. 14-cv-4513, U.S. Dist. Ct. (E.D.N.Y. 2015). 261 Henderson v. Stevenson, (1875) 2 HL SC App. 470. 262 See Mackillican v. Compagnie Des Messageries Maritimes de France, (1881) ILR 6 Cal 227. 263 Dean Nicosia v. Amazon.com, Inc., No. 14-cv-4513, U.S. Dist. Ct. (E.D.N.Y. 2015).



of the website as acceptance of the terms.264 The courts have remedied this unscrupulous practice by holding that even if the terms are provided in close proximity to the relevant buttons that the offeree might click on in the course of concluding a contract, they will not bind her unless the offeror can prove that sufficient notice of such terms was provided.265

The coded nature of smart contracts renders it difficult to ascertain whether the offeror did indeed provide sufficient notice of the terms of the contract to the offeree. In this regard, the prior transactions and (or) correspondence that aided in arriving at the agreement can determine whether the element of mutual assent is present in the contract. Such correspondence could be either oral, written or through any electronic means.266

We recommend that the terms of offer, as a matter of practice, be made available beforehand in human-readable language through email or a ‘wrapper’ contract.267 A hybrid contract could thus greatly help in deducing consensus ad idem (or the lack thereof) – such contracts encapsulate the text of the contract in human-readable language, and a reference to the same can be determinative of mutual assent.268 Additionally, the use of private cryptographic keys to enter into the transaction, and the prominent presence of the terms of the contract across the platform can prove the existence of mutual assent, as it indicates commitment to the contract. This is in consonance with the laws governing electronic commerce, which have recognised an electronic signature as a means of providing assent.269 As long as the code is understandable and unambiguous, the offeree is given the notice and opportunity to read the terms of contracts, and the contract is entered into in the backdrop of the offeree having conspicuous notice of those terms, it can be inferred that there is a mutuality in agreement, and that the party has understood the terms and agreed upon the same.270

Fulfilment of the above fundamental requisites evinces the formation of a contract under the Contract Act. The existence of offer, acceptance, consideration, consensus ad idem and legal intention validates the creation of a legally enforceable contract. Smart contracts, therefore, cannot be denied legal enforceability where the requirements of traditional contracts as under the Act have been met. This conclusion reinforces the legal principle that it is the substance of the contract that triumphs over its form. While a smart contract is usually conceptualised as an agreement disparate from conventionally enforceable agreements, it comprises of the same substantial features as the latter.

264 Specht v. Netscape Communications Corp., 306 F. 3d 17 (Court of Appeals, 2nd Cir. 2002); Century 21 Canada Limited Partnership v. Rogers Communications Inc., 2011 BCSC 1196; Hines v. Overstock.com, Inc., 668 F. Supp. 2d 362, 367. 265 Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir.) (2014). 266 Levi & Lipton, supra note 13. 267 Durovic & Janssen, supra note 214, 61, 69. 268 Levi & Lipton, supra note 13. 269 Rishi A, The Legality of Smart Contracts in India, INDIACORPLAW, December 10, 2017, available at https://indiacorplaw.in/2017/12/legality-smart-contracts-india.html (Last visited on August 31, 2020). 270 Yakima Cty. (W.Valley) Fire Protection District No. 12 v. City of Yakima, 122 Wash. 2d 371, 389 (1993); See Spam Arrest, LLC v. Replacements, Ltd., 2013 WL 4675919.



B. IMPACT ASSESSMENT ON PROCEDURAL STATUTES

In the preceding part, our analysis established smart contracts as legally valid and enforceable under the Contract Act. In this part, we caveat this analysis through appraising it in light of certain procedural requirements, such as authentication requirements, admissibility of records inter alia. Any pragmatic attempt to comprehensively integrate smart contracts in the Indian legal regime must factor in these procedural dimensions that mould the scope within which a legally enforceable smart contract can operate. The IT Act and the Indian Evidence Act, 1872 (‘IEA’) are particularly noteworthy in this regard, since these legislations lay out mechanisms to govern electronic contracts. The impact of these statutes on smart contracts is discussed hereunder.

1. INFORMATION TECHNOLOGY ACT, 2000

The IT Act primarily asserts regulatory control over the verification of electronic contracts. The Act accords validity to electronic contracts under §10-A, which provides that merely involving electronic records as a means of expression of contract formation or communication of proposals and acceptances shall not deem the contract unenforceable.271 In this regard, it is pertinent to note that data/information entered on a block is in electronic form and therefore is capable of being considered an electronic record.272 The given provision is by no means unique to India – legislations on similar lines has been enacted in China,273 the USA274 and the UK.275

Various operational issues crop up while trying to harmonise smart contracts with the IT Act. One such concern is the requirement of authentication of the cryptographic signature in a smart contract, in accordance with §35 of the Act.276 The provision mandates that a government-designated Certifying Authority (‘CA’) must authenticate an electronic signature. In this context, it is pertinent to note that cryptographic digital signatures are legally recognised under the IT Act as equivalent to handwritten signatures.277 According to §3 of the Act read with Guidelines for Usage of Digital Signatures in e-Governance (‘Guidelines’), a digital signature entails an asymmetric pair of one private key and one public key, unique to a given

271 Information Technology Act, 2000, §10-A. 272 Information Technology Act, 2000, §2(t); See THE DAILY GUARDIAN (Sai Sushanth), Blockchain and Law, June 24, 2020, available at https://thedailyguardian.com/blockchain-and-law/ (Last visited on August 31, 2020). 273 Electronic Signature Law, 2004 (P.R.C.). 274 Uniform Electronic Transactions Act, 1999, §9 (U.S.A.); See The Electronic Signatures in Global and National Commerce Act, 2000 (U.S.A.). 275 Electronic Communications Act, 2000 (U.K.). 276 Information Technology Act, 2000, §35. 277 Information Technology Act, 2000, §5; Guidelines for Usage of Digital Signatures in e-Governance (December, 2010), Cl. 4.5.



transaction.278 The electronic record is signed by the sender using her private key and verified by the recipient using the sender’s public key.279

Smart contracts use a certain ‘hash’ key for validating their digital signature.280 However, the IT Act necessitates every digital signature to be duly certified by a CA in order for the signature to assume digital validity.281 Despite the inherent capacity of smart contracts to automatically verify their cryptographic digital signature,282 the authentication requirement under the IT Act adds an additional hurdle to the smooth implementation of smart contracts. The distributed nature of blockchain, which forms the backbone of every smart contract, renders state verification redundant.283

The UK Jurisdiction Taskforce’s Report considers it feasible to fulfil the

authentication requirements prescribed by the statutory regime by adopting a purposive interpretation to the law.284 The Report prescribes broadly interpreting ‘electronic signature’ to include a gamut of new techniques to authenticate an electronic record, including a smart contract’s hash key signature.285 By opining that smart contracts fulfil the substantial requirements of a valid signature, the Taskforce’s Report illustrates a highly persuasive approach in the governance of smart contracts which can be emulated in the Indian law. In order to adapt to smart contracts, the IT Act requires to be re-evaluated in the backdrop of enforcement-based downsides.

2. INDIAN EVIDENCE ACT, 1872

The law of evidence in India has been fairly flexible in accommodating technological shifts. Notably, §65B of the IEA allows for the admissibility of electronic records before the courts upon the fulfilment of certain conditions.286 This has resulted in electronic

278 Information Technology Act, 2000, §2(zc), §2(zd), §3; Private keys are used to create a digital signature and are confidential to an individual. Public keys are used to verify the digital signature and can be shared with people. They perform the function of encryption and decryption using hash function. Information encrypted with a certain private key can only be decrypted using the corresponding public key. See Guidelines for Usage of Digital Signatures in e-Governance (December, 2010), Cl. 4.4. 279 Information Technology Act, 2000, §3; The primary legislation in UK, the Electronic Communications Act 2000 is based on the EU Commission Directive on Electronic Signatures. See Guidelines for Usage of Digital Signatures in e-Governance (December, 2010), Cl. 5.1. 280 Oleksii Konashevych & Marta Poblet, Is Blockchain hashing an Effective Method for Electronic Governance, International Conference on Legal Knowledge and Information Systems, ARXIV.ORG, October 20, 2018, ¶18, available at https://arxiv.org/pdf/1810.08783.pdf (Last visited on December 24, 2020). 281 Information Technology Act, 2000, §35.; See ADOBE/TRILEGAL, Electronic Signatures in India. Legal considerations and recommended best practices, and Adobe/Trilegal white paper, June 20, 2020, available at https://acrobat.adobe.com/content/dam/doc-cloud/en/pdfs/electronic-signatures-in-india-uk.pdf (Last visited on August 31, 2020). 282 Information Technology Act, 2000, §2(p), §3; See Jared Acari, Decoding Smart Contracts: Technology, Legitimacy & Legislative Uniformity, Vol.24, FORDHAM J. CORP & FIN. L. 363 (2019). 283Ana Reyna, On Blockchain and its Integration with IoT: Challenges and Opportunities, Vol.88, FUTURE GENERATION COMPUTER SYSTEMS (November, 2018). 284 UK JURISDICTION TASKFORCE, supra note 9. It states that a digital signature produced using public-key cryptography is just a particular type of electronic signature. 285 THE LAWTECH DELIVERY PANEL, supra note 9, ¶2.2.4. 286 The Indian Evidence Act, 1872, §65B(1), §65B(4); One such condition is the production of certificate in order to identify the record. See Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal, Civ. App. 20825-20826/2017



documents being recognised as valid evidence, electronic records being capable of creating legally enforceable contracts,287 and electronic signatures not being deemed illegal or inadmissible merely because of their digital nature.288

However, given the disruptive technological leap that smart contracts represent, certain concerns have arisen regarding their admissibility as valid evidence. A key challenge is harmonising blockchain authentication, and the authentication mandate under the IEA, which requires under §85B to authenticate every digital signature before admitting an electronic record.289 Such authentication has to be done in accordance with §35 of the IT Act, which confers validity only to authentication through a CA.290 Given this procedural limitation, we rely on the Taskforce’s Report to recommend a relook into the aforesaid provisions to accommodate blockchain-based authentication, so that a mere technicality does not end up frustrating the enforcement of an otherwise valid smart contract.

The coded nature of smart contacts presents another concern in the conventional Indian system of appreciating evidence. As previously discussed in this article, the non-readability of machine code is a major roadblock for any person of ordinary prudence, including judges, to decipher the actual smart contract.291 Interpreting coded terms and deriving legal intention thereof can be possibly done through prior correspondences and ancillary evidence, if any.292 Besides, parties can enter into a pre-agreement in natural language which can form the basis for interpreting the smart contract. However, as far as admitting the primary evidence – the code of the smart contract itself is concerned, it would necessitate some technical assistance to the courts to be able to read and interpret it.293 In this regard, courts and quasi-judicial authorities may call upon additional documentary proof in order to bridge the gap between the anonymity/pseudonymity of parties in a smart contract and the rigidity in evidence law.294 Further, the courts may consider appointing standing experts to interpret the terms of the contract.295 This isn’t a novel phenomenon; Indian courts have, on countless occasions, been assisted by the amicus curiae in various technical matters.296 However, care has to be exercised

(SC) (Unreported). The Apex Court, in this case, has clarified that the production of this certificate is a mandatory requirement. 287 Trimex International FZE Limited, Dubai v. Vedanta Aluminium Limited, India, (2010) 3 SCC 1. 288 CLYDE & CO. & THE INTERNATIONAL CHAMBER OF COMMERCE, The Legal Status of Electronic Bills of Lading, A Report for the ICC Banking Commission, 2018, 15, available at https://www.vantraa.nl/media/1988/the-legal-status-of-e-bills-of-lading-oct-2018.pdf (Last visited on December 23, 2020). 289The Indian Evidence Act, 1872, §85B. 290The Indian Evidence Act, 1872, §85B; Information Technology Act, 2000, §35; Jacob & Mitra, supra note 107; Sanmit Seth, What’s blocking the chain?, INDIA BUSINESS LAW JOURNAL, July 20, 2020, available at https://law.asia/smart-contracts-blockchain-technology/ (Last visited on December 07, 2020); See also Vijayakumaran, supra note 215. 291 Jacob & Mitra, supra note 107, 158; Levi & Lipton, supra note 13. 292 Levi & Lipton, Id. 293 Jacob & Mitra, supra note 107. 294 Benjamin Wright, The Case for Supporting Automated Contracts with Traditional Legal and Audit Documentation, INFOSEC & FORENSICS LAW, 2015, available at http://hack-igations.blogspot.com/2015/02/automated.html (Last visited on December 24, 2020). 295 Lidgate & Morgan, supra note 222. 296 THE PRINT (Yogini Oke), Why Judiciary steps in to solve India’s air pollution crisis, November 5, 2019, available at https://theprint.in/opinion/judiciary-steps-in-to-solve-india-air-pollution-crisis-its-not-enough/315807/ (Last visited on August 31, 2020).



to ensure that the standing experts are qualified to read, interpret and convey the precise meaning of the code to the court. Moreover, their powers and role need to be clearly carved out to ensure they only assist the courts, and not unjustly influence their decisions.297

Various jurisdictions across the globe are moving towards recognising evidence based on blockchain.298 The United States, in particular, has been quite progressive on this front – six US states, Vermont, Ohio, Tennessee, Wyoming, Arizona and Nevada, have passed legislations that accord blockchain records the evidentiary legitimacy of a written document.299 These steps are particularly significant to smart contracts as their operability lies in the blockchain. By explicitly recognising the evidentiary value of Blockchain technology, they create valuable precedent that paves the way to affirm the evidentiary value of smart contracts.

Thus, it is evident that legally enforcing smart contract as a ‘contract’ will not come to fruition until procedural safeguards are in place to allow the enforcement of contracting parties’ rights, while containing potential abuse. While this could be achieved by passing a separate law regulating smart contracts similar to the US, we advocate for amending certain provisions of the existing law wherever feasible to accommodate smart contracts. For instance, amendments to the provisions of the IT Act and the Evidence Act would be required to admit cryptographically authenticated smart contracts as a valid electronic record. However, with reference to the Contract Act, we believe that the regulatory mechanism is baked into the law, and can enforce smart contracts similar to any traditional contract.

VI. CHALLENGES IN REGULATION: AN UNSETTLED CONUNDRUM

From the aforementioned part, it is evident that the applicability of traditional contract law to determine the status of smart contracts is largely a settled proposition, given that the basic features in smart contracts are amenable to governance under the Contract Act. However, given the technological peculiarities of the smart contract, certain hurdles present themselves with regard to state-regulation, two of which have been discussed in detail below.

A. PINNING DOWN TERRITORIAL JURISDICTION

From the lens of procedural law, it is difficult for traditional legal stipulations determining jurisdiction to accommodate smart contracts. In India, the Code of Civil Procedure, 1908 (‘Code’) is the law to determine jurisdiction in a civil dispute. It embodies the territorial and subject-matter facets of such a dispute, and accordingly prescribes the appropriate authority that the petitioner(s) may approach. Such jurisdictional aspects are prescribed under §15-§20 of the Code,300 and a prima facie reading of the same reveals a difficulty in reconciling the concept of ‘cause of action’ with the nature of smart contracts.

297 Lidgate & Morgan, supra note 222. 298 The Interaction between Blockchain Evidence and Courts, BCA, April 23, 2020, available at https://bca.com.mt/blockchain_court_evidence/ (Last visited on August 31, 2020). 299 BITCOINIST (Melanie Kramer), Smart Contracts are seeping into U.S. Law, April 2, 2018, available at https://bitcoinist.com/smart-contracts-are-seeping-into-u-s-law-tennessee-passes-bill/ (Last visited on August 31, 2020); IKIGAI LAW, supra note 50. 300 The Code of Civil Procedure, 1908, §15-20.



Cause of action is inherently a physical concept, which relies on territorial delineations – for instance, a breach of a contractual promise in the city of Kolkata would accordingly give rise to a cause of action in Kolkata under §20(c) of the Code.301 However, smart contracts are effectuated through blockchain technology, which does not per se exist in a physical sense – the distributed nodes in a public distributed blockchain may be situated across the globe, giving rise to multiple causes of action in different jurisdictions.302 For instance, a lease agreement executed through a smart contract in the jurisdiction of the city of Jamshedpur may been concluded via a blockchain that could have nodes across the country, resulting in one having to contend with multiple causes of action and tenancy laws. A blockchain may also have nodes in international jurisdictions, resulting in a severe logistical impediment. Additionally, an added veil of anonymity afforded through smart contracts renders personal jurisdiction aspects such as physical presence and domicile impossible to verify.303 This inability to conclusively determine jurisdiction gives rise to several legal issues that would make a smart contract – regardless of whether it has been concluded within India or not – difficult to enforce in a court of law. Firstly, the applicable law might differ from state to state in India – real estate laws, for example, vary widely according to the respective state jurisdiction. Secondly, the jurisdiction would decide which physical court to file the case in – in case jurisdiction is not clearly manifested, it would be next to impossible to institute a case for the enforcement of a legal right vested by a smart contract. Thirdly, court fees vary from jurisdiction to jurisdiction, making the precise valuation of suit for the purpose of determining the pecuniary jurisdiction impossible. The determination of jurisdiction is particularly necessary, due to the multiplicity of laws a single transaction or event over blockchain may be subject to, and the widespread placement of nodes in blockchain in the world, leading to the furtherance of cross-jurisdictional issues.304

B. SECURITY CONCERNS

Apart from the preliminary requirements needed to be met for the formation of a contract, there are other factors that a court may need to probe further. These include factors such as capacity or competence, mistake, lawfulness of agreement etc. An analysis in this regard entails an inquiry into the identity of parties and the terms of the agreement. However, such an inquiry becomes problematic under smart contracts as they are primarily premised on a certain degree of anonymity.

The smart contracts that operate on a public blockchain make the identity of parties indeterminable due to their pseudonymous nature which paves the way for illegal transactions. The anonymity perpetrated by cryptocurrency and blockchain facilitates ‘criminal smart contracts’– smart contracts which exploit their intrinsic anonymity and lack of party-accountability to perpetuate crime.305 The non-regulation of cryptocurrency leaves no scope for the state to ascertain the identity of the parties involved and the transaction over public blockchain. Theft of documents or digital security keys, ransom ware, or physical offences such

301 The Code of Civil Procedure, 1908, §20(c). 302 Jacob & Mitra, supra note 107. 303 Wulf A. Kaal & Craig Calcaterra, Blockchain Technology’s Distributed Jurisdiction, MEDIUM, June 20, 2017, available at https://medium.com/semadaresearch/blockchain-technologys-distributed-jurisdiction-a2177c244538 (Last visited on August 31, 2020). 304 Raskin, supra note 2. 305 Juels et al., supra note 16.



as contract killings can be commissioned through smart contracts, with the contracting parties’ identities shrouded by a public blockchain.306 For example, a smart contract could be encoded to pay a bounty for the delivery of an issuing authority’s digital certificate key in order to mass-manufacture fake certificates. Such an agreement in the form of a smart contract could be deployed by an individual, which would self-execute with minimal interactions required on part of the criminal, thereby making it significantly harder for law enforcement agencies to track and monitor criminal transactions.307 The parties are not only accomplices in committing offences, but may also be victims. This flows from the fact that user identity cannot be traced in a smart contract over a public blockchain. This lack of identity verification may allow an otherwise proscribed party to enter into malicious contracts for fake cloud services.308 Further, taking a party to court without any identifying characteristics is yet another issue that presents itself. Since neither the party nor the court is in a position to obtain information any more than the Blockchain Address of the user/party, it can be difficult to enforce sanctions against a faceless entity.

VII. REMEDIAL MEASURES TO CURE THE INFIRMITIES

A. REMEDIES TO THE JURISDICTIONAL ISSUES

As mentioned in the previous part, the procedural aspects of contract formation are difficult to reconcile with the technological realities of smart contracts. Chief among these issues is the aspect of territorial jurisdiction – §20 of the Code which prescribes three possible fora in which a suit may be instituted vis. the voluntary residence of the defendant, the place of business of the defendant, or the place where the cause of action wholly or partly arises.309 The anonymity traditionally guaranteed by a public blockchain renders the physical locations of the contacting parties difficult to ascertain. A blockchain, even a domestic one confined within the limits of the country, has nodes present in numerous locations across the country, all of which qualify as a site of the cause of action as per §20(c) of the Code. Any dispute that arises out of a smart contract can thus be argued in almost any court in the land, obviating the restrictive intention the legislature intended to confer upon the Code vis-a-vis the exclusivity of territorial jurisdiction.310 This article suggests two solutions to this conundrum. The first one moots the concept of party autonomy in the context of the International Commercial Arbitration to fit smart contracts within the context of existing contract law, and the second solution suggests a radical amendment to existing procedural law to accommodate a holistic dispute resolution process tailored exclusively towards smart contracts. It is worth noting that the two solutions mentioned hereunder are a radical departure from existing procedural law in India, and merely serve to define the broad contours of popular solutions to the jurisdictional issues posed by smart

306 Id.; Xiaoqi Li et al., A Survey on the Security of Blockchain Systems, FUTURE GENERATION COMPUTER SYSTEMS, November 5, 2020, available at https://arxiv.org/pdf/1802.06993.pdf (Last visited on December 24, 2020). 307 Ari Juels et al., supra note 16. 308 Scott McKinney et al., Smart contracts, blockchain, and the next frontier of transactional law, Vol.3, WASHINGTON J. LAW TECHNOL. ARTS 13 (2018); See Mukesh Thakur, Authentication, Authorization and Accounting with Ethereum Blockchain, Master’s Thesis, UNIVERSITY OF HELSINKI, September 13, 2017, available at https://helda.helsinki.fi/bitstream/handle/10138/228842/aaa-ethereum-blockchain.pdf (Last visited on August 31, 2020). 309 The Code of Civil Procedure, 1908, §20. 310 Saloni Khanderia, Indian Private International Law vis-à-vis party autonomy in the choice of law, Vol.18(1), OXFORD UNIVERSITY COMMONWEALTH LAW JOURNAL (2018).



contracts. Any holistic remedy can only be conceptualised once smart contracts gain traction in India and throw up country-specific issues.

1. PARTY AUTONOMY

Party autonomy expresses the principle that parties to a contract should be allowed to agree in advance on the forum and governing law to be used to resolve any conflicts that might arise.311 In essence, this means that any mutual assent between the parties pertaining to the jurisdiction of any conflict takes precedence over the traditional means of ascertaining such jurisdiction as prescribed by the code.312

Party autonomy has long been recognised as one of the fundamental principles of private international law313 – The European Union, for example, subjects all international contracts to the Rome I Regulation. Article 1 of this Regulation details one’s contractual obligations in civil and commercial matters.314 Smart contracts, that arise out of private international law, would thus fall under its ambit, and parties would be empowered by Article 3 of the Regulation to submit their contract to a forum dictated within the contract’s terms itself irrespective of its territorial nexus to the subject matter of the contract at hand.315 Multiple court decisions have affirmed this notion, and held in the case of international commercial transactions, the question of jurisdiction shall be determined through the choice of the parties, and any alternate mechanism be resorted to only in case the choice is not clearly affirmed.316

Indian law, with respect to domestic transactions, is constrained to the Contract Act which does not per se accommodate parties’ choice of law.317 However, §28 of the Contract Act, as interpreted by the judiciary, already allows for parties to oust courts’ jurisdiction in favour of one or more fora, as long as they have been conferred with such a right under the Code.318 To illustrate, if a suit over a contract dispute can be instituted in Patna, Thiruvananthapuram or Lucknow as per §20 of the Code, the contract itself could have a clause that mandates the filing of all related suits in the Patna courts only. We suggest that the forum of choice of the parties be contained in a clause incorporated in the main smart contract, the absence of which would mean that the dispute could be adjudicated in any of the territories the blockchain nodes fall in.319

In its capacity as a solution that is deeply rooted within the blockchain network, it assures the preservation of the core tenet of the system – anonymity. It is within this spirit that we exclude §20(a) and (b) of the Code from consideration, as they necessitate the revealing of one’s identity, detracting from one of the main benefits of smart contracts. As the blockchain

311 DEAN SYMEON C. SYMEONIDES, CODIFYING CHOICE OF LAW AROUND THE WORLD: AN INTERNATIONAL COMPARATIVE ANALYSIS, 110-115 (Oxford University Press, 2015). 312 Khanderia, supra note 310. 313 Russell Jay Weintraub, Functional Developments in Choice of Law for Contracts, Vol.187, COLLECTED COURSES OF THE HAGUE ACADEMY OF INTERNATIONAL LAW (1984). 314 Rome I Regulation, 2008, Art. 1. (E.U.). 315 Rome I Regulation, 2008, Art. 3. (E.U.). 316 Khanderia, supra note 310. 317 Id. 318 New Moga Transport Co. v. United India Insurance Co. Ltd., AIR 2004 SC 2154. 319 See Jacob & Mitra, supra note 107.



address of each node is available, it can be used to determine location without compromising on anonymity.

Anonymity per se does not impede seeking court-enforcement, as smart contracts are usually pseudo-anonymous. Further, the claimant can prove the identity through the cryptographic key they used to sign the contract. With the growth of technology the platform such as Ethereum would be able to provide a mechanism to trace the identity of the parties.320 Thus, while the application of the CPC is undisputed, it is capable of giving rise to multiple jurisdictional claims on a single dispute due to the decentralised nature of blockchain-based smart contract. Party autonomy needs to step in to restore the efficacy in resolving smart contracts related disputes.

2. DISTRIBUTED JURISDICTION

Distributed jurisdiction, as mentioned before, is a system that is a radical departure from the existing law of dispute resolution in the country, necessitating sweeping substantive and procedural reforms to implement the same. It cannot be accommodated within the traditional adversarial dispute resolution processes of India, and should not be mistaken for a solution that can be implemented in the near future. It merely reflects a nascent policy approach that we believe should merit serious consideration once smart contracts enter into the mainstream as a practical alternative to traditional contracting. Subsequent policy approaches would have the benefit of being moulded by the empirical reality of smart contracts and its interactions with Indian legal mechanisms; in the absence of such empirical factors at this juncture, we moot this model to initiate a discussion around possible solutions to the challenges smart contracts pose.

Distributed jurisdiction, as pioneered by the blockchain service-provider ‘Aragon

Network’,321 relies on a network of anonymous judges who are themselves part of the blockchain, to adjudicate upon disputes. Strikingly similar to the jury system present in American jurisprudence, a case’s verdict is decided by a body of peers that sit in judgment and author a verdict. Another apposite analogy would be the modern Parliamentary Debate format, where the judging happens on the bedrock of mutual trust – the judges decide the losing and the winning team, both of which grade the judges based on the quality of their feedback.322

Whenever a party wishes to dispute a contract that has its genesis in the Aragon

blockchain network, she posts a bond that is valued at a certain amount of cryptocurrency, and written arguments arguing her case. The defendant accordingly posts her bond and written arguments, and these arguments are presented to an anonymous panel of judges, who have themselves posted bonds. This panel is chosen randomly from across users of the blockchain network, and have no contact with one another throughout the duration of the case – thus maintaining their anonymity. Both the arbiters and the parties thus have a monetary stake in the

320 Durovic Mateja & Lech Franciszek, The Enforceability of Smart Contracts, Vol.1, INTERNATIONAL JOURNAL OF LAW AND INFORMATION TECHNOLOGY (2019). 321 The Aragon Network encompasses a set of ‘digital courts’, which are utilised to speedily resolve disputes based on community-based dispute resolution. See GITHUB, Aragon Network, available at https://github.com/aragon/whitepaper (Last visited on 3 January, 2021). 322 NATIONAL PARLIAMENTARY DEBATE ASSOCIATION, NPDA Rules, March 2018, available at https://www.parlidebate.org/npda-rules (Last visited on August 31, 2020).



resolution process. The value of these bonds are utilised for covering the operating costs of the blockchain, and it can be likened to the ‘court fees’ that a litigant has to pay for submitting his/her case to any court of law.323 Upon individual consideration of both parties’ written arguments, each judge renders his judgment, along with a decision as to which party the case is being awarded to. As is with a conventional court, the majority judgment decides the case, with the judges being monetarily rewarded based on whether they sided with the majority or not. Theoretically, this incentivises judges to apply their minds to the dispute at hand and provide cogent, logical decisions. Collusion among the panel is ruled out, since the judges are anonymous throughout the duration of the case. This system also encourages judges to build their ‘reputation’ through siding with the majority as many times as possible. Such ‘reputed’ judges would form the panel for a possible appeal, which would merit a correspondingly larger bond on the part of the appealing party, and larger pay-outs for the judges.324This system thus theoretically provides for a forum to adjudicate disputes by impartial judges, with ‘higher courts’ being stacked with judges that have proven themselves to be sound adjudicators – not unlike the theoretical underpinnings of the Indian court setup. The current model on the lines of the Aragon Network works on the principle of laissez-faire regulation, with smart contract disputes being resolved without state intervention. However, since smart contracts should be regulated by the state, it is desirable that the state itself institute a dispute resolution network along these lines.

B. THIRD-PARTY INTERVENTION – TACKLING SECURITY CONCERNS

The concept of third-party intervention has gained popularity ever since the technology giant Alibaba sought a patent over its application. In essence, third-party intervention detects illegal smart contract transactions over blockchain.325 The idea is to counter criminal application of smart contracts by allowing third-party intervention in circumstances where illegality is suspected.326 It should be noted that while public blockchain deters real identification of users, the de-centralisation and the consequent access to the transaction over the blockchain due to the conspicuity and accessibility of the open-source code operating on it can hamper criminal smart contracts. In addition, apart from the two extremes, vis. Permissioned Blockchain and Public Blockchain, there is a third alternative called Consortium Blockchain – it combines the benefits of the decentralised regulation of a public blockchain with the efficiency and confidentiality of a permissioned blockchain.327 In a Consortium, a central authority validates the transaction through a consensus mechanism and more significantly, opens the door for the incorporation of central administrators or third-parties as intermediaries.328 Given the deplorable state of cyber-security in India, any decision would require drastic steps on part of the lawmakers. In the meantime, certain policy measures can be taken by the platform operators, such as regularly monitoring transactions, spreading awareness amongst the stakeholders,

323 The Court Fees Act, 1870, §3. 324 Kaal & Calcaterra, supra note 303. 325 WORLD INTELLECTUAL PROPERTY REVIEW, Alibaba files Blockchain Patent, October 10, 2018, available at https://www.worldipreview.com/news/alibaba-files-blockchain-patent-to-target-illegal-activities-16787 (Last visited on August 31, 2020). 326 Id. 327 Omar Dib, Consortium Blockchains: Overview, Applications and Challenges, Vol.11, INTL. JOURNAL ON ADVANCES IN TELECOMMUNICATIONS (2018). 328 Id.



implementing internal policy on data security etc.329 In addition, one of the initial papers addressing the abstract idea of criminal smart contracts, ‘The Ring of Gyges’, has recommended intervention through trustee-based tracing, which involves empowering trustees to trace transactions based on a user-requirement to register. It recommends ‘trustee-neutralisable’ smart contracts that authorise certain groups of authorities to expunge a contract based on certain considerations without requiring user registration.330

A recently proposed solution to the criminal application of smart contracts is a bill

titled the Financial Technology Protection Act,331 tabled in the United States Congress, that provides for mechanisms to probe into illicit and terrorist related activities executed via “new financial technologies”, which includes digital currency.332 On this basis, it is deducible that the increased criminalisation of smart contracts supported by anonymity of the parties can be mitigated if third-parties are allowed to intervene in the form of trustees. Further, we believe that such an intervention by a third-party authority would assist in linking the virtual transaction with the physical world. For instance, the verification of lawful ownership of land or holding a public key will require an authorised certification. Smart contracts that perpetrate illicit transactions can thus be edged out by allowing third-party intervention, or promoting a consortium blockchain.

VIII. CONCLUSION

The labelling of the ‘smart’ alternative to traditional contracting as a ‘square peg in a round hole’ is a misnomer. An analysis of the validity of smart contracts as a ‘contract’ under the Contract Act is complex and requires careful examination. Smart contracts cannot be left to the vices of laissez-faire regulation at the detriment of contracting parties. Throughout the course of this article, we’ve identified these vices as avenues for money-laundering, digital theft and illegal contracts for ‘physical crimes’ such as hit contracts. These vices have a detrimental effect on society, thus necessitating some form of state-regulation. This opinion is particularly pronounced in the backdrop of our analysis, which bears out that the substantive law of contracts can be applied mutatis mutandis to smart contracts. The potential and utility that smart contracts serve far outweigh the techno-legal hurdles which can be adequately addressed. Smart contracts, although a more evolved and advanced form of transacting, possess all the necessary rudimentary features of traditional agreements, covenants and records (such as a vending machine or an EDI transaction). In an abstract legal sense, smart contracts fit within the requirements of a valid contract which can be regulated akin to a traditional contract.

The bigger challenge is to probe into the extent of its enforceability and the implications that may arise as a consequence thereof. In our opinion, this is based on a comprehensive analysis on smart contracts, which on an implementational level seeks to unravel

329 Rachit Bahl & Rohan Bagai, Comparative Guide to Blockchain, MONDAQ, May 15, 2020, available at https://www.mondaq.com/india/technology/935294/blockchain-comparative-guide (Last visited on August 31, 2020). 330 Ari Juels et al., supra note 16. 331 The Bill has been passed by the House, and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. See Financial Technology Protection Act, 2018 (U.S.A.). 332 Hunton Andrews Kurth, New Congress Considers Crypto Legislation, BLOCKCHAIN LEGAL RESOURCE, March 5, 2019, available at https://www.blockchainlegalresource.com/2019/03/new-congress-considers-crypto-legislation/#more-762 (Last visited on August 31, 2020).



their impact on laws such as IT Act, Evidence Act, and the Code of Civil Procedure. On the strength of our analysis, we opine that certain procedural aspects of the law need reform, particularly in terms of decentralisation of licensing of digital records, accommodating for the distributed nature of smart contracts in formulating dispute resolution methods, appointment of standing expert by the courts to interpret and explain coded contracts inter alia.

We conclude that in principle, the Contract Act makes room for smart contracts as a valid contract, thus nullifying the need to affirm this through a dedicated legislation. The technical robustness of smart contracts in eliminating human intervention is highlighted through this article which limits litigation through internally correcting the deviations via self-execution. We underscore the remarkable potential of smart contracts for the Indian economy and consequentially also emphasise upon the need to take cues from jurisdictions which have endeavoured within their legislative and judicial realm to validate smart contracts as fully-functional contracts, capable of being enforced in the court of law.

a case for interpretative reform of the indian contract act, 1872

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