Author: Bhavna, XIM University, Xavier Law School, Bhubaneswar.
Introduction
Contracts are the cornerstone of business operations which manages the relationships between parties who are involved in various commercial transactions. It is a legally binding agreement that specifies the duties, rights and obligations of the parties involved. These agreements deal with various business transactions in the corporate world, such as joint ventures, mergers and acquisitions, non- disclosure agreements, supply agreements, employment contracts, etc. These contracts are made to ensure that each party can understand their roles and responsibility and to prevent confusion in future. Contract between parties helps to minimize the risk and also provide legal remedy in case of breach. Contracts protect the interests of all parties that are involved.
Emergence of Digital and Smart Contracts
Technology is evolving so are contracts. Unlike traditional contracts we now have digital contracts and smart contracts. Digital contracts are agreements that are made, signed and completed using electronic tools like email or any other digital platforms. It makes the whole process quicker and easier; a person can sign a document just by sitting at home instead of coming to the office.
Smart contracts, on the other hand, is a self-executing agreement where the terms and conditions of the contract are written directly into computer code. These contracts run on a blockchain, which is a secure and decentralized digital ledger. For example, when you buy a smartphone from a seller, you make the payment, and once the smart contract detects that the payment has been processed. It automatically sends a notification to the seller to ship the smartphone to the buyer. The smart contract is set up with conditions. If an individual doesn’t agree with the conditions in the contract or does not make the payment accordingly, then the contract won’t release the goods. A smart contract does not involve an electronic signature unlike traditional contracts because it is a self-executing system. It operates on pre-coded conditions.
The Legal and technical frameworks in India are progressing quickly as the nation promotes digitalization. The legal basis for digital contracts can be found in the Information Technology Act of 2000 which recognizes electronic signatures and provides a framework for the legal endorsement of electronic agreements; However, the usage of smart contracts is still in the very early stages. The most significant problem is the lack of explicitly legislation which will regulate smart contracts and blockchain technology. The Indian Contract Act of 1872 serves as the basic legal foundation for contracts; however, it does not address smart contracts. This raises queries regarding how current laws are applicable to these new kinds of contracts.
Legal Framework for Digital Contracts in India
1. Information Technology Act, 2000 (IT Act):
The Information Technology Act of 2000 addresses digital contracts. The legislation acknowledges the legal legitimacy and enforceability of digital signatures, electronic contracts, and electronic records. Earlier Indian law did not explicitly recognize electronic transactions.
Section 10A The IT Act expressly covers electronic contracts. The provisions of section 10A provide that "where any contract is formed through electronic means, it shall not be considered invalid solely because it is in an electronic form."
2. E-Signatures and the Role of Certifying Authorities:
A digital signature must be obtained for ensuring the legitimacy and safety of electronic contracts. Section 3 of the IT Act empowers the use of electronic signatures or authentication for verifying the identities of contract parties. Certain Certifying Authorities are licensed to distribute digital certificates to consumers so that they could confirm their real identities online. These certificates ensure that the document or transaction has not undergone modifications and are used to digitally sign agreements. This procedure is similar to signing a contract in person, but it is done electronically.
Challenges with Digital Contracts in India
Authenticity and Trust Issues: As technology evolves, fraudsters have also found different ways to commit fraud and theft online. Even with the presence of digital signatures and certifying agencies, there are several questions which concern the legality of the signing party. Since it is done without physical presence, people may doubt the authenticity of the signature.
Technological Barriers: Everyone does not have access to digital tools or the internet especially in rural areas. This creates a technological gap in which people are unable to sign or understand digital contracts. This limits the depth as well as efficiency of digital contracts across the country.
Lack of Awareness: businesses, organizations and individuals remain unaware of the legal validity of digital contracts. It is therefore essential for creating education initiatives that aim to help people understand how these contracts work.
Smart Contracts and Their Legal Status in India
Legality of Smart Contracts in India
Smart contracts are a very recently developed concept throughout India, and there is currently no explicit legislation which regulates them. Although the India Contract Act of 1872 does not explicitly refer to smart contracts, some of its concepts can be applicable to these agreements. In this sense, smart contracts may be recognized as legitimate under Indian law if they satisfy certain essential criteria. The difficulty, however, is that smart contracts are implemented without human interaction and written in code, complicating their alignment with the traditional notion of contract creation, execution, and enforcement under the Indian Contract Act. they can still be analyzed using the core principles of traditional contract law.
Offer and Acceptance: “According to Section 2(a) of the Indian Contract Actan offer is made when one party expresses their willingness to do or abstain from doing something to obtain the assent of another party.” In the case of smart contracts, the publishing of the self-executing code can be seen as an offer. The code reflects one party’s intention to enter into a contract with another.
Acceptance: “Under Section 2(b) of the Indian Contract Act, acceptance occurs when the other party assents to the proposal.” For smart contracts, the act of fulfilling certain predefined actions, as specified in the contract, can be considered an acceptance. Once the other party performs the required actions, the contract is accepted.
Consideration: “As per Section 2(d) of the Indian Contract Act, consideration includes any act or abstinence performed at the desire of the other party”. In smart contracts, the execution of the agreed-upon actions (such as a payment or transfer of goods) serves as valid consideration.
Mutual agreement: In the case of smart contracts, this is achieved when both parties agree to the terms written in the contract’s code, ensuring they are in alignment.
Challenges in Enforcing Smart Contracts:
Lack of Clear Legal Framework: The existing laws of India do not explicitly provide a legal framework for smart contracts and their enforcement, which creates legal uncertainty.
Technology Reliance and Risks: smart contracts are designed using blockchain technology and digital systems, which makes them prone to a variety of technical challenges. There is a risk of software errors, security flaws, or cyberattacks that might hinder contract executions. If the code within a smart contract itself is at fault, then it is difficult to resolve these issues legally because there is no well-established legal framework to address such situations.
Jurisdictional and Enforcement Issues: Smart contracts are developed on a decentralized blockchain that connects numerous countries, which makes their enforcement difficult, especially when problems take place between parties in multiple areas. In India, the absence of specific regulations regarding smart contracts could make it challenging for courts to handle cross-border legal issues effectively.
WazirX hack 2024: WazirX is one of India's leading cryptocurrency exchanges. On July 18, 2024 it experienced a security breach which resulted in the theft of approx. 235 million worth of virtual digital assets. This incident is recognized as one of the largest cryptocurrency thefts in India's history. The WazirX breach underscores how smart contracts can be exploited if they are not properly secured. The case demonstrates the lack of a clear legal framework for addressing disputes related to blockchain based transactions.
Reserve Bank of India’s Digital Currency and Blockchain Initiative
In December 2022, the RBI published a blueprint for the retail digital rupee that contains blockchain based components. The digital rupee is India's version of central bank backed currency, as opposed to decentralized and uncontrolled cryptocurrencies such as bitcoin. The usage of blockchain in the digital rupee establishes precedence for its use in smarts contracts. While smart contracts are not yet officially regulated under Indian law, the Rbi’s approach shows that India is ready for future blockchain-based automated contracts in the banking, finance, and other sectors.
Advantages and Disadvantages of Smart Contracts and Digital Contracts
Smart Contracts
Advantages | Disadvantage | ||
Automation & Speed | Smart contracts execute automatically when preset requirements are satisfied, it minimizes human process delays. This allows for speedier transactions than standard contracts. | Irreversibility and Errors | Smart contracts are irreversible once they have been executed. Any inaccuracy in the code might have major effects, and correcting mistakes is difficult. |
Cost-Effective | Smart contracts drastically cut transaction costs by removing intermediaries (such as attorneys, notaries, and banks), which making them more inexpensive to consumers. | Limited Adaptability | They cannot be highly adaptive, especially for situations when traditional contracts usually include some discretionary authority by people or the involvement of humans themselves. |
Security & Transparency | Smart contracts use blockchain technology, which ensures high levels of security. After their installation, the contract conditions are available to all parties, which reduces the possibility of fraud. | Cybersecurity Risks | Since smart contracts are executed on blockchain, vulnerabilities in programming allow hackers or malicious attacks, resulting in hacks, exploits, or malicious attacks, making them a security risk. |
Trustless | The contract is automatically generated once the requirements are completed, thus the parties do not need to trust each other. The blockchain guarantees that the contract is executed without requiring a trusted middleman. | Regulatory Uncertainty | As governments change their policies on cryptocurrencies and blockchain, it leaves businesses unsure about the long-term viability of smart contracts in India. |
Reduced Errors: | Human error is reduced by employing programming to execute the contract terms, assuring contract processing accuracy. | Scalability Issues | Blockchain networks, particularly public ones, suffer scalability issues, which result in slower processing rates and greater transaction costs |
Digital Contracts
Advantages | Disadvantages | ||
convenience | The ability to make a digital agreement from anywhere: saves time, effort, saves on physical face-to-face contacts and paper to be used up | Legal and Technical Issues | Not all kinds of contracts are accepted digitally. For example, property sale agreements and wills are accepted only on paper. |
Cost efficiency | They incur less cost that is on reprints, even courier services are saved, meaning they are rather cheaper than when using the signed contracts | Cyber Fraud Risk | Digital contracts can be hacked into, data breached, and can be victims of cyber fraud leading to misuse |
Environment-Friendly | Helps in environmentally friendly as with no use of paper, ensures environmental sustainability. | Lack of Awareness and Digital Literacy | Many Indians, especially small-scale industries, lack awareness about digital contracts and are unable to accept it. |
Security and Authenticity | Digital contracts can be secured using encryption and authentications. Due to these encryptions and authentications, digital contracts can be tampered with less or not at all. | Dependence on Internet and Technology | Digital contracts require stable internet and access to electronic devices, which may not be available to everyone. |
Easy Storages and Access | Using cloud storage and databases, organizations and individuals may store digital contracts. It facilitates easy access if needed. | Verification Issues | While e-signatures are valid, proving the authenticity of digital contracts in legal disputes can sometimes prove to be a task. |
Legally Valid | Electronic contracts as well as E-signatures were recognized by Information Technology Act of 2000 in India | Regulatory Uncertainty | Laws regarding digital contracts are still developing, and changes in regulations could bring about a dent in their validity and enforceability. |
Key Difference between Smart Contract and Digital Contract
Aspect | Smart contract | Digital contract |
Execution | It requires human enforcement. | Self- executing through blockchain |
Legal recognition | Digital contract is enforceable under IT Act,2000 | Unclear legal status in India |
Security | They are prone to fraud, hacking and data tampering | Highly secure due to blockchain encryption |
Flexibility | It can be amended easily | Irreversible once deployed |
Intermediaries | Involves lawyers, courts or arbitrators. | It eliminates third party involvement. |
The Future of Smart Contracts in Corporate Law in India
The development of blockchain technology and artificial intelligence (AI) will have a significant impact on the use of smart contracts in Indian business law in the future. Their capacity to safely and transparently automate transactions has the potential to completely transform company processes in India.
Legal Reforms and the Need for Clarity
Right now, there are no clear provisions under Indian Contract Act of 1872 that establish the enforceability of smart contracts. The Indian government must amend existing laws to make these contracts binding by establishing guidelines. This will assure the consumers that smart contracts are considered genuine legal instruments. Implementing Indian contract law with international standards would strengthen the country’s competitiveness as an opportunity for tech-driven corporate ventures.
Opportunities for Indian Corporates
Smart contracts have the huge potential for business operation. Companies that have automated operations can reduce their operational cost, legal services and day to day administrations by using smart contracts. These contracts improve supply chain operations and secure transactions between countries by removing third parties which leads to cost savings.
Impact on Corporate Governance
Smart contracts could strengthen company governance by increasing transparency and accountability. Since smart contracts terms and executions are maintained on an irreversible blockchain, it will allow all the stakeholders, such as shareholders, employees, and regulators to track transactions and corporate activities. This type of openness enhances decision-making and eliminates fraud and mismanagement. In the long run, this can improve confidence in corporate governance processes among Indian businesses.
Conclusion
The future of smart and digital contracts involves not just technical innovation, but also rewriting the basic basis of contract law. While automation and blockchain-based agreements pick up momentum, business-to-business or even consumer-to business operations are sure to change as new types of contracts create agreements. Smart and digital contracts bring the promises of efficiency, security, and lower cost. Still, all of that relies on a high level of legal adaptability and acceptance through regulatory systems. Where smart contracts ensure no human intervention-and therefore no human error nor manipulation-they tend to make more rigid rules and strict code, which forms a new challenge in the overall dispute resolution and possible interpretation regarding the contract. Digital contracts offer flexibility but require robust cybersecurity frameworks to assume trust and enforceability. The evolution of these technologies will demand a balance between fostering innovations while safeguarding the legal and ethical considerations. It would seem that moving forward, it is going to be a journey of actualizing integration involving artificial intelligence, enhanced encryption mechanisms, and global cooperation in regulatory efforts, such that smart and digital contracts do their reshaping of commercial and legal transactions as much as possible. The opportunities ahead will be Awaited by the coming leaders of contract law.
References
The Information Technology Act, 2000, No. 21, Acts of Parliament, 2000 (India)
The Indian Contract Act, 1872, Acts of Parliament, 1872, (India)
WazirX, https://wazirx.com/blog/wazirx-cyber-attack-day-wise-report/ (last visited Feb 22, 2025) and Frontal io, https://frontal.io/wazirx-hack-what-happened-and-lessons-learned/ (last visited Feb 22, 2025)
Press Release, Reserve Bank of India, Operationalization of Central Bank Digital Currency – Retail (e₹-R) Pilot, 2022-2023/1275, Nov 29, 2022
