In the current era of technological advancement, the legal landscape is undergoing significant transformations. One such innovation is smart contracts, it is believed to have the potential to revolutionize the entire transaction cycle. Today, we see that all businesses and individuals embrace digital solutions, smart contracts are essentially to compliment such digital solutions oriented approach.
Although digital era has been taking over the entire globe, it is important to understand if smart contracts actually helps when compared to traditional contracts in the context of Indian law.
Smart contracts are self-executing agreements where the terms are encoded into a software here, the person sending the contracts becomes the smart contract owner. These digital contracts operate on decentralized platforms like blockchain, automatically fulfilling the contract when predefined conditions are met without the intervention of a third party. By design, smart contracts eliminate the need for intermediaries such as lawyers, banks, or notaries, ensuring that transactions are faster, more efficient, and secure.
The concept of smart contracts was introduced in the 1990s by Nick Szabo, a computer scientist and legal scholar. Later on, in 2008, the term ‘Blockchain’ gained global recognition when Satoshi Nakamoto introduced it as the public transaction ledger for ‘Bitcoin’. However, in India, the adoption of blockchain-based smart contracts began in 2017 with the launch of the ‘Bank Chain’ platform by State Bank of India, a consortium of 27 banks created to share e-KYC information.
Further, in 2020, the Supreme Court of India lifted the Reserve Bank of India’s (‘RBI’) banking ban on cryptocurrency exchanges in the case of Internet and Mobile Association of India (IMAI) vs. RBI, marking a significant development in the regulatory landscape for cryptocurrencies in India. By way of this ruling cryptocurrencies became more accessible in the Indian market by way of blockchain technology on which smart contracts are built, this gave a major spotlight to ‘smart contracts’ in India.
It is noteworthy that today smart contracts can be developed and deployed in different blockchain platforms (For example: Bitcoin which is a public blockchain platform or NXT which is an open-source blockchain platform) who offer distinctive features like contract programming languages, contract code execution, and security levels.
Further, technology always demands formal testing in order to make sure that the software behaves, performs and delivers as expected. Currently, these verification tools are also in their early life stages however, they are one such promising approach to detect bugs and other errors in smart contracts to guarantee their functional correctness.
Today, the Information Technology Act, 2000 (“IT Act”) recognises technical advancements like- electronic contracts and digital signatures. Section 10A of the IT Act validates electronic contracts and recognize digital signatures when created using a valid digital signature certificate issued by a certifying authority recognized by the Controller of Certifying Authorities.
While electronic contracts and smart contracts might seem part and parcel of a similar technical concept the fundamental base line varies. Electronic contracts are agreements that are created, signed, and executed electronically, such as through email or e-signatures which often requires manual human intervention or third-party enforcement, while smart contracts are self-executing agreements written in code, typically based on blockchain technology.
Currently, smart contracts are just not intended towards replacing traditional paper contracts with a digital version but they are poised to fundamentally reshape industries by enabling new and more efficient contracting approach using traditional contract principles. However, full potential of smart contracts will be realized only when the legal and regulatory framework evolves to recognize them, as their execution and terms are coded in a way that may not always align with traditional contract law principles.
Although, smart contracts provide a faster and an immutable record keeping platform to today’s businesses, traditional contracts allowed much greater flexibility with option of renegotiation or amendment by mutual agreement between parties which remains absent here. Therefore, it seems that adoption of smart contracts in India still remain in its preliminary stages as the Indian judicial system has not yet addressed all the legal complexities surrounding its enforceability.
Though smart contracts offer advantages in terms of efficiency, transparency, and security, traditional contracts continue to dominate due to its established framework and familiarity.
As technology matures, the Indian legal system shall slowly adapt the digital shifts, and smart contracts are likely to become more integrated into business practices although they might require a careful consideration of all legal implications related to them.
Also while smart contracts provide- automation, transparency, and security, lawyers shall still remain an integral part of the contracting process for ensuring that these contracts are legally sound, enforceable, and compliant with relevant regulations as legal expertise will always be vital in bridging the gap between technologies, human and/or business needs, and the law
Disclaimer: Please note that the views in this article are solely of the author and not of the company.
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