SMART CONTRACTS

IN LIGHT OF
INDIAN CONTRACT LAW

Candidate number: 7015

Submission deadline: 15-08-2020

Number of words: 14800

ACKNOWLEDGEMENT

I would first like to thank my thesis supervisor Ms. Yulia Chernykh, who
now holds PhD. Degree from the University of Oslo for providing me an
insight of the subject for my thesis. I would like to thank my professors at
the University of Oslo, Faculty of Law, who have at all the times taught us
the essentials of the Public Internal Law and made sure we understand
the topics that were taught during the LLM program.

I would also like to acknowledge and thank the authors of various articles
obtained from the web, without which this thesis would have been
incomplete.

Last but not the least I would also like to thank my family and friends
without whose support this thesis would not have been completed. They
extended a helping hand to me in whatever manner they could. They also
provided me with unfailing support and continuous encouragement
throughout my studies and through the process of researching and
writing this thesis. Thank you.
Table of contents

I. INTRODUCTION

II. OVERVIEW OF BLOCKCHAIN

1. Definition of Block Chain
2. Types of Block chain
3. How the block chain works?

III. UNDERSTANDING SMART CONTRACTS

1. What are Smart Contracts?
2. Characteristics of Smart Contracts
3. Comparison of Smart Contracts with Electronic Contracts
4. Advantages and Disadvantages of Smart Contracts
5. Uses of Smart Contracts

IV. CONTRACT ELEMENTS UNDER INDIAN CONTRACT ACT IN CONTRAST

WITH SMART CONTRACTS

1. Agreement
2. Capacity to Contract
3. Consideration and Object
4. Free Consent
5. Void Agreements
6. Challenges to Smart Contracts under Indian Contract Law

V. CONCLUSIONS

VI. BIBLIOGRAPHY
 I. INTRODUCTION

Some say that Smart Contracts or blockchain technology is still in infant stages.
However many governmental authorities, commercial entities and financial
institutions are already experimenting with applications of these technologies
in existing work processes with intentions to build a modern digital
infrastructure. Most professionals believe that one day mortgages, loans,
insurance and even global trade will be run on the block chain technology.

A smart contract is a self executing contract. Unlike the traditional Contract, a

smart contract is basically a computer program with the terms of the
agreement between the buyer and the seller. The terms agreed between the
parties are directly written into the code which ensures Compliance,
Enforcement and Performance. The code controls the execution, and the
transactions are traceable and irreversible. Thus, Smart contracts automatically
executes the terms parties have agreed on to regulate their relations. These
Contracts are based on the platform of Block chain technology which is a
globally distributed and decentralized Network. The blockchain is a database
with an immutable history, meaning that nothing on the blockchain disappears
or changes. Contrary to the traditional databases one can change information
on the blockchain only by adding new entries1.

The purpose of this thesis is to analyse whether smart contracts are prepared
to deal with the Indian Legal System and to look into the challenges it may
face by the traditional Indian Contract Law. However, it is important in the
beginning to take an overview of the platform of Blockchain technology upon
which Smart contracts are based.

This paper is divided into four sections. Section 2 gives the overview of
Blockchain and how it works and Section 3 defines Smart Contracts, its

1Robert Knight, ‘Mattereum And Business on the Blockchain’

<https://www.youtube.com/watch?v=foIo7wbiWsA> accesed 10th February 2020.
characteristics and advantages. In Section 4, the basic elements of a contract
under the Indian Contract Law are discussed and we test the smart contract
under the Indian Contract Law on formation, performance, breaches and
interpretation. Lastly, Section 5 gives the conclusion whether Smart Contracts
can be enforced in India.

Research Question
Where Smart Contracts can be enforced under the Indian Contract Act, 1872?

Research Methodology
I conducted online research as well as relied on several other resources such
as books, journals, research publications, articles and legislation. I have also
relied on my experience as an Advocate earlier.
 II. OVERVIEW OF BLOCKCHAIN

The technology of Block chain was introduced by Satoshi Nakamoto in 2008

when it was successfully implemented and became popularized as the
technology behind crypto currency Bitcoin. The idea revolved in the digital
world since 1991 but it was only in 2008 when the technology opened a whole
new dimension by supporting and enforcing digital transactions. Initially, the
possible applications of the technology included storage of information in the
form of digital register and enabling online payments. It provided a platform to
process online payments by bitcoin without the intervention of a financial
institution as an Intermediary. Thus, it established an independent and
alternative payment mechanism. Later on, the numerous possible applications
of the blockchain technology came into light.

In the recent times, the blockchain technology has received huge attention
both by its followers and critics. It is now in focus of the financial corporations
and the legal industry around the globe due to its notable uses.

1. Definition of Blockchain

A blockchain is a digital record of transactions where information is stored in

the blocks. The individual blocks are linked with each other and form a chain.
For example, blockchain is used for recording the transaction when payment is
made with a bitcoin.
From time to time several experts, academicians and authors have made
attempts to define Blockchain in a comprehensive manner. The definitions can
easily confuse any reasonable mind as the technology is often associated with
famous Cryptocurrencies such as Bitcoin. At this time, it will not be wrong to
say that the world knows Blockchain through Cryptocurrencies. This approach
however neglects the other important useful areas of its application and
development. Many beginners take such a selective and narrow view when
they start gaining knowledge about Blockchain technology. In its pure technical
sense, it can be summarized as follows.
“The blockchain is a purely distributed peer-to-peer system of ledgers that
utilizes a software unit that consist of an algorithm, which negotiates the
informational content of ordered and connected blocks of data together with
cryptographic and security technologies in order to achieve and maintain its
integrity”.[1]
The technology of blockchain allows data to be stored on multiple servers
where anyone on the network has access to the entries made by others. Thus
it is also known as Distributed Ledger Technology. The system is highly
decentralized as no single computer on the network solely controls a
transaction and each transaction added to the blockchain is validated by
multiple computers on the network. The system configured for specific
blockchain transactions forms a peer to peer network which ensures that each
transaction is valid before it is added to the blockchain. When a new block is
added to a blockchain, it is linked to the previous block by using a hash which
has a unique identity. This ensures that each block has been permanently
added to the chain and the chain is never broken.

2. Types of Blockchain

The two primary types of blockchain can be categorised as follows:

a.) Public blockchain: It is possible for anyone to access a public blockchain.

Miners, users, developers or anyone with an internet connection can read
and add information. The details of the transactions can be examined by
any user irrespective of location or nationality. The structure of the chain
makes it fully decentralized with no scope for control or manipulation.
When every user can read and validate transactions, it becomes permission
less e.g. Bitcoin. However, when all users can read transactions but only
predefined users can validate transactions, it is known as Permissioned
blockchain.
b.) Private Blockchain: As the name suggests, only participants with prior
consent are allowed to access the network. The transactions can be
examined only by the participants on the network. They are also called
permissioned blockchains when only predefined users can examine
 transaction data and only users with special rights can validate transactions.
Eg. Hyperledger Fabric.

Thus, access to examine data and permission to validate transactions are

important factors which distinguish the different models of blockchain.

3. How the block chain works?

In a block chain, the blocks which form a chain are created by Miners. In a non
technical sense Miners can be compared to the construction workers at a
building site. Miners are nodes or specialised computer hardware which are
connected to the network. They work for an economic revenue or Crypto
currency like Bitcoin2. They are responsible to record the transactions in a
block. Not only this, they further validate those transactions which are
thereafter recorded in a block. One of the most advantageous features about
the functioning of block chain is that anyone can become a Miner, provided
they are not connected to either party in a transaction to avoid conflict of
interest. However, it will not be out of place to suggest that a Miner may know
a party involved in a transaction. There is often great competition between
several miners connected to the network to resolve intricate mathematical
calculations in order to earn the reward. Finally, before the block created by
the miner is added into the block chain, it is mandatory to have a unanimous
approval or acceptance of the approval by defined number of users.

Thus, miners are the backbone of a blockchain. They confirm the transactions
and provide security to the blockchain from external attacks3.

2 More information can be found on the following link:

https://www.blockchain.com/charts/miners-revenue last accessed on 15.02.2020
3 More information can be found on the following link.

https://www.buybitcoinworldwide.com/mining/ last accessed on 24.02.2020

III. UNDERSTANDING SMART CONTRACTS

Would it be justified to simply say that Smart Contracts are automated

contracts between the parties done on a Computer? Are they the same
traditional legal contracts which will now be executed on the computers
instead of a paper? Will it consist of the same traditional legal documents
being uploaded on Computer? Will the parties still be dependent upon the
services of a legal expert for executing a smart contract between them? Will it
require the assistance of an IT expert for execution? Will there be any
requirement of an intermediary? Is there something more into it? These are
the primary questions which come into the mind of a layman who has been
dealing with the traditional system of executing legal contracts for decades.

It is believed that Smart Contracts will bring a revolution in the field of law and
business. It will give a new shape to the ways of functioning in the legal
industry. However the questions which come into the mind of lawyers, jurists,
academicians, legal consultants and students of law are even more interesting
and important. Are smart contracts legally binding and enforceable under the
law? Will there be any challenges to it from the existing legislations? Will there
be a need for amendment in the laws to make it legally binding? Will there be
a change in the drafting of laws? Will there be rules for drafting of smart
contracts? Will there be any challenges to Smart Contracts in different
jurisdictions? Will there be a requirement of consensus between different
jurisdictions to enforce Smart Contracts on an international level? This list is
not exhaustive. The journey towards the digitalization has just started. Lastly,
the most important and relevant question is about the challenges to the Smart
Contracts from the Contract Law. Smart contracts may or may not be in
conflict with the rules of Contract Law within several jurisdictions. In this thesis
I will analyze the challenges to the Smart Contracts with a special focus under
the Indian Contract law. I will also highlight challenges to the smart contracts
from general legal principles of law.

The challenges which smarts contracts will face may be different in the
developed countries from the developing countries. As the developed
countries have solid IT infrastructure and supporting technologies which can
strongly contribute to the success of Smart Contracts. Also, the percentage of
users connected to the Internet with respect to the overall population is
extremely higher in the developed countries when compared to the developing
countries. The reliance of legal industry and businesses upon the new
technology of smart contracts can be assumed to grow more rapidly in the
developed countries. On the other hand, developing countries will also benefit
the most with the numerous applications and benefits of this new technology.
The technology of Smart contracts will boost digital infrastructure and
economic growth in the developing countries.

1. What are Smart Contracts?

A smart contract is a self- enforcing piece of software that is managed by a

peer to peer network of Computers. Smart contracts are e client rights
management tools that provide a coordination and enforcement framework
for agreements between network participants, without the need of traditional
legal contracts. They can be used to formalize simple agreements between two
parties, the bye laws of an organization or to create tokens. [2] This definition
of Smart Contracts may be technical but it is more comprehensive than the
definitions used by other leading experts on the subject so far. We will further
analyse the other available definitions of Smart contracts which too describe
them quite effectively.

It is noteworthy to mention that the concept of Smart Contracts was first

introduced by Nick Szabo in 1996 as “a set of promises, specified in digital
form, including protocols within which the parties perform on these
promises”4

Today, there is still no consensus over the definition of Smart Contracts as the
technology is still under development and testing. In a leading article on the
subject, the author gave a natural functional definition as follows “Smart
contracts are digital contracts allowing terms contingent on decentralized
consensus and are self-enforcing and tamper-proof through automated
4N.Szabo.Smart Contracts: Building blocks for Digital Markets.
https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/sza
bo.best.vwh.net/smart_contracts_2.html ( Accessed 25.03.2020)
execution” [3]. Thus, it is clear that a Smart Contract is a user defined program.
The transactions are governed by specific rules and enforced by a network of
peers which will eliminate the need of intermediaries and save the transaction
costs which are a necessary part and parcel of traditional legal system. As
Smart Contracts are based on the platform of Blockchain, the miners do get an
economic reward for validating the transactions. But, this economic cost will
not have to be borne by the parties to a Smart Contract.

Over the last few years the concept of Smart Contracts has received huge
attention especially after the introduction of Ethereum in 2015. It has been
supported by all the major industries as they will save huge financial costs
currently being spent for the management of active contracts. The thousands
of contracts between leading multinational corporations not only have
financial constraints for the corporations but they are also exposed to legal
liabilities due to non enforcement, non compliance, wrong interpretation and
other issues in the everyday management of the contracts.

Time is an important factor in most transactions. Even in contract law, time is

essence of the contract. The contracts are often heavily worded. They contain
a lot of clauses and annexure. This makes their due diligence a cumbersome
process. Smart Contracts claim to eliminate the efficiencies caused by the
challenge of time. For example, upon the death of an ancestor in a family, the
property can be automatically registered into the names of the heirs. In this
case, the transfer of property is contingent upon the event of death. This type
of smart contract can also be called a contingent contract or a self executing
contract in accordance with different contract laws. Thus, in such a case the
time taken is relatively very less from what it would be if the ownership of
property had to be transferred manually. Therefore, Smart Contracts will be
useful not only to big corporations but small businesses and individuals too.

The critics of the technology of Smart Contracts have pointed out that a Smart
Contract is not a contract but software. They say the terms are already
determined by the parties and executed by a computer program. The contract
merely manifests the intention of the parties by way of a computer program.
However, even if the contract is made by a computer program it needs to
satisfy all the fundamental of the contract under the Contract Law like
Consent, Object and other essential elements.

2. Characteristics of Smart Contracts

In order to give a better meaning to the definitions of a Smart Contract in the

previous section it is worth to highlight some unique features of a Smart
Contract[4].

a.) Electronic Character: The traditional contracts are usually in writing. Some
legal systems even allow oral contracts to be valid and legally enforceable.
Today most of the contracts which are executed on a computer are called
Electronic Contracts. For example when a purchase is made on an e-
commerce website, a contract is executed between the buyer and the
seller. Such contracts are executed sometimes merely by making a payment
which is considered as an acceptance of the terms of the agreement. The
contracts are further supported by documents such as receipts and
invoices. However, a smart contract do possess an electronic character but
it cannot be considered as an electronic contract of the above kind. The
electronic character of a Smart contract implies that it can only exist in an
electronic form. A smart contract which is based on blockchain technology
is self enforceable and stores digital signatures by way of cryptography.

b.) Software code: A Smart Contract is without any doubt a contract which is
run by Software. All previous discussions above point out this very
important aspect. The terms between of the agreement between the
parties are predetermined and simply coded into the computer language.
Thus as a smart contract is a computer program, it will also fall into the
purview of Intellectual Property Law. It is not necessary that a party will
choose a smart contract over a traditional one but with the increasing
reliance on computer in our everyday tasks, it might turn out to be the
wisest decision to do so. A software program can reduce human effort
significantly.
c.) Increased certainty: The parties in a contract agree on specific promises
made to each other for the conduct of business. The formal clauses in a
contract are however open to interpretation and might be interpreted in a
way contrary to what a party intended. This uncertainty is highly reduced in
case of a Smart Contract as the interpretation is done by the computer
itself. The programming of the contract makes its outcome highly
predictable which can be a very important aspect for contracting parties.
The parties may disagree to what was agreed to be incorporated into a
smart contract but that can be same in case of a traditional contract. Thus,
a smart contract is more certain and precise than a traditional contract.

d.) Conditional Nature: Most of the computer programs and languages

function conditionally. Coding simply follow conditional statements like if
‘a’ then ‘b’. Similarly a programming algorithm follows a procedure which
determines the steps to be taken in order to find a solution or reach a goal.
Each consecutive step is taken as soon as the conditions of the previous
step have been fulfilled. In case of a smart contract, the conditions
accepted by the parties to the contract must be fulfilled before the contract
is executed. This also implies that the contract will not be executed even if
one of the conditions in the contract has not been fulfilled unless it has
been waived off by the parties.

e.) Self enforceable: The most salient feature of a smart contract is self
enforceability. As soon as a smart contract has been concluded, its further
execution is no longer dependent on the will of the parties or any third
party or intermediary. It does not require any additional approvals from any
of the parties. Thus, the execution is automatic. This prevents any chance of
human error which can lead to default in some transactions and make the
contract void. It is important to note that the subsequent change of
intention or circumstances in the case of a smart contract is irrelevant. For
example, if the tenant agrees to pay the rent on the 1st of each month to
the landlord for a period of 1 year. The payment will automatically be
debited from the account of the tenant and credited into the account of the
landlord on the 1st of each consecutive month without any approval or
request from either party.
f.) Self Sufficient: A smart contract is self sufficient. It does not require
mandatory or ancillary legal rules to function or serve its purpose. It
eliminates the need of a lawyer to draft the agreement between the parties
which is required in case of a traditional contract. A smart contract does not
require legal institutions like courts of law to be enforced. However, some
legal experts say that smart contracts pose a threat to the legal system as
they are not regulated by it. Not only this, any attempt to regulate it would
be too early as it is still in experimental phase. The prime minister of Russia
Dmitry Medvedev stated in its speech on the perspectives of development
of law, “Smart Contracts represent new challenge to legal regulation.
Systems creating such contracts live by their own rules, beyond the
boundaries of law”5. The independence of smart contracts from the legal
system can be useful for international transactions. In the case of an
international transaction, the parties often find it difficult to figure out
about which national law will apply. The parties may reside in different
jurisdictions. Sometimes the legal rules of one country are in conflict with
the laws of another country. Smart contracts can provide a solution to the
difficulties faced by the parties as they are not regulated by national laws.
Self-sufficiency of smart contracts is an important tool in transborder
transactions. It allows parties to a contract not to be dependent on
differences in languages, national laws and their interpretation.

3. Comparison of Smart Contracts with Electronic Contracts

In many ways, Smart Contracts can be said to be similar to Electronic

Contracts. Before making a Smart Contract the parties can negotiate the terms
they intend to incorporate into the contract by following the ordinary
contractual process. An offer can be made by one party and the acceptance by
the other will signify meeting of the minds and thus an agreement will be
reached. If the parties have the legal capacity to enter into the contract and all
other essential requirements of the contract law are satisfied, the agreement
becomes a contract enforceable by law. In the event of a dispute between the

5Vystupleniye Dmitriya Medvedeva na plenarnom zasedanii [Speech of Dmitry Medvedev on Plenary Session], Saint-
Petersburg International Legal Forum, 18 May 2016.
parties, they can solve it through legal solutions being provided on digital
platforms such as arbitration or mediation services. However, the consent of
both the parties is necessary before any service or authority is chosen for the
resolution of disputes. Similarly in case of most of the Electronic Contracts
where the contract itself contains Jurisdictional clauses specifying authorities
for dispute resolution, the party accepts the jurisdiction of the dispute
resolution forum simply by accepting the contract.

The contracts used in most of the Software licenses and online

transactions are known as Click-wrap contracts. Smart contracts can also
function in a fashion similar to Click-wrap contracts. The consent of the
party or the necessary information in such contracts is obtained through
user’s confirmation with a pop up window or in a separate webpage
asking for information. Before a smart contract is executed, the consent
of the parties can too be obtained with the help of a decentralized
computer application. However, it can be seen by many IT experts as a
challenge to automatic execution which is the most advantageous
feature of a smart contract.

In the new technology oriented world, Electronic contracts are the most
prevalent type of contracts. The contracts which are widely used
nowadays on e-commerce websites and which are executed while doing
business electronically on online platforms including emails are known
as Electronic Contracts. However, Electronic Contracts are still
considered to be traditional contracts as they are required to comply
with the mandatory rules of Contract Law. They are regulated by the law
in several jurisdictions.

For example, the Directive 2000/31/EC on electronic commerce for

electronic contracts guarantees their effectiveness and validity by
prohibiting any obstacles for the use of electronic contracts created by
any legal requirement applicable to a contractual process. Article 9 of
the directive lays down the following rules for treatment of Contracts [5]
1. Member States shall ensure that their legal system allows contracts
to be concluded by electronic means. Member states shall in
 particular ensure that the legal requirements applicable to the
contractual process neither create obstacles for the use of electronic
contracts nor result in such contracts being deprived of legal
effectiveness and validity on account of their having been made by
electronic means.

2. Member states may lay down that paragraph 1 shall not apply to all
or certain contracts falling into one of the following categories:
a. Contracts that create or transfer rights in real estate, except for
rental rights;
b. Contracts requiring by law the involvement of courts, public
authorities or professions exercising public authority;
c. Contracts of suretyship granted and on collateral securities furnished
by persons acting for purposes outside their trade, business or
profession;
d. Contracts governed by family law or by the law of succession.

In India, Electronic contracts are regulated by different legislations. The Indian

Contract Act 1872, the Information Technology Act 2000 and the Indian
Evidence Act 1872 are the three acts which primarily give validity and
recognition to Electronic Contracts in India.

Thus, the ordinary contractual process can be followed by the parties before
executing a smart contract and the regulations which are applicable to
Electronic contracts can also be applied to Smart Contracts with certain
modifications whatever is deemed necessary.

On the other side, there exist differences between Smart Contracts and
Electronic Contracts too. Smart Contracts run on the platform of Blockchain
Technology. The execution of smart contracts is done by all the distributed
nodes on the network and is not dependent upon an intermediary. The smart
contracts are immutable. They cannot be tampered. After a smart contract has
been made, it is not open to any changes. However, an electronic contract has
no relation to the blockchain technology. An electronic contract is too
executed on the computer with the use of Internet. It may be a standard
contract for the sale of the goods on an e-commerce website or an ordinary
contract between two parties executed on a computer. These contracts need
consent of both the parties before entering into an agreement which is also
open to amendment later with the consent of both the parties.

A smart contract is written in a programming language whereas an electronic

contract is written in a legal language. An electronic contract needs to comply
with the Contract law to be legal and enforceable however the regulations
currently do not apply to Smart Contracts.

Consideration is an important part of any contract. In most cases, the

consideration for the performance of a promise is money. Today a payment
can be made through several modes for example by paying cash, electronic
transfer between accounts, through credit or debit card etc. However, with the
introduction of digital currencies like fiat currencies, crypto currencies like
bitcoin the parties have a new choice to choose a method of payment. As the
value of digital currencies is not regulated by central banks, they are still under
scanner of several governments. But they have been accepted as a legal tender
of payment in most developed countries. A payment can be done between the
parties using a crypto currency in case of a smart contract but not in the case
of an electronic contract as they are not based upon blockchain technology.

4. Advantages and Disadvantages of Smart Contracts

As discussed above, there are several differences between smarts contracts

and traditional legal contracts. It is still important to know the advantages and
disadvantages of Smart contracts over traditional legal contracts.

The Advantages of Smart Contracts are as follows:

a.) Lower Cost: There is no intermediary in case of a smart contract. This

lowers down the cost of transaction very significantly. Usually, in case of a
traditional legal contract a lawyer or a bank or any other financial
institution acts as an intermediary. They charge high fees for contract
drafting, due diligence, contract management etc. which is often an
 expensive deal for the parties. Not only this, the processing fee for various
legal documents charged by various government offices can also be saved.

b.) Less time: Speed is another advantage of a smart contract. The time taken
to draft a contract with specialized legal terms or attach additional
paperwork in annexure consumes a lot of time. Whereas software like
smart contract simply uses digital records already stored on a computer.
Also as there is no third party involvement, this removes any slightest
chance of delay.

c.) Autonomous: Smart contracts are self executing. As soon as the parties to
the contract fulfil their respective obligations, the smart contract is
executed. For example ‘A’ sells his house to ‘B’. Upon payment by ‘B’ into
the bank account of ‘A’, the title of the house will automatically stand
transferred in the name of ‘B’. Since everything is dependent upon the
network and there is no human involvement, there remains no scope for
any kind of manipulation or delay.

d.) Certainty: Traditional legal contracts executed between the parties are
often lengthy legal agreements containing specialised legal terms which the
parties are generally not aware of. As they are drafted by lawyers and legal
experts the parties mostly rely on their assurance for the incorporation of
favourable terms into the contract. However in case of a conflict or
disagreement later on the terms of the contract, there are high chances of
breach of the contract or non performance of the contract. This situation
cannot arise in case of a smart contract. Smart contracts are conditional in
nature. Their execution depends upon the occurrence of specific events
already mentioned in the contract. So they are not ambiguous like
traditional legal contracts. Also as they are encrypted on a ledger, everyone
has one copy of the contract so the terms cannot be denied later on.

e.) Security: Smart contracts make the data highly secure. The data is stored in
the decentralized registry using cryptography and end to end encryption.
No third party can access the information contained in the smart contract.
But a paper based contract can be accessed by unfair means or can get lost.
 The data in case of a smart contract cannot be lost as each party has an
individual copy. A smart contract cannot be hacked because the blockchain
is extremely secure technology .

f.) Predictability: As the smart contract is based on a computer code, it has a

guaranteed outcome. This makes the results highly predictable for the
parties. A traditional legal contract is open to interpretation by the courts in
case of a dispute or a breach of the contract. Due to the changed
circumstances, the parties sometimes try to interpret the meaning of the
contractual terms in their own favour which gives rise to a conflict. Thus the
outcome is finally decided by the competent authority which in most cases
is a court of Law. All these hurdles to enforcement of the contract are
removed in a smart contract as the parties already know that smart
contracts are executed automatically and the terms cannot be changed
later.

The disadvantages of Smart Contracts over traditional legal contracts are as

follows:

a.) Anonymous: The concept of Smart Contract is still anonymous to the public
authorities. Whereas a traditional legal contract is completely regularised
by legislations which protects the interests of the parties to the contract. It
is believed that smart contracts can function to regulate the business
between the parties and do not require any legislation. However, it is hard
to say at this stage if such a contract would be recognized by the public
authorities.

b.) Suspicious: It will not be wrong to say that a lot of parties would be
suspicious to go for a smart contract over a traditional legal contract. The
parties have faith in the traditional legal contract system as there are
several remedies available to each party in case of a breach of the contract
or in case of non performance. Other people can find the technology too
complex to understand and trust due to insufficient user experience. People
may find it easy to simply write and sign legal documents as before.
c.) Third party involvement: It is a myth that third party involvement always
adds delay in the performance of a contract. Most of the parties are
occupied with their routine business and do not wish to get involved in the
tasks which are better handled by an intermediary like a lawyer, consultant
or a bank. It will be wrong to presume that there will be no third party
interference in case of a smart contract. The third party agents start playing
a different role but they do not disappear. The need for lawyers
experienced in IT increases in the future. The programmers of smart
contracts will need consultations of the lawyers for developing smart
contracts.

d.) Error: It is presumed that the output from the smart contract will always be
what the parties intended. There can be several instances where the parties
may not get the desired result for example if the code is not written
correctly or the terms which the parties intended to incorporate have been
wrongly written into the code. Thus such error will lead to a very
unpleasant and meaningless situation for the parties. If any clause is
wrongly entered into a traditional legal contract, it can be amended later at
any stage or the defect can also be cured earlier when the draft of the
contract is under revision.

e.) Rigidity: Smart contracts are not flexible in nature. As we all know that the
information once added cannot be changed later. This makes it extremely
difficult for the parties if they wish to change their mind at a later stage.
Whereas there is no limit to make amendments in a traditional legal
contract with the consent of all the parties to the contract.

f.) Confidentiality: Confidentiality means that unauthorised disclosure of

information does not take place. This is usually harder to establish in
blockchain-based systems, because the default is that information is visible
for everyone in the network. Information can be encrypted: asymmetrically
with a particular party’s public key, so that only this party can decrypt it; or
symmetrically with a shared secret key, so that the group of parties with
access to the secret key can decrypt it. The latter case requires a secure
 means of exchanging the secret key off-chain. However, once information
needs to be processed by smart contract methods, this information needs
to be decrypted. This is because smart contract code runs on all nodes of
the network, and thus any of them needs to be able to process the input
data. This is required to achieve consensus on the outcomes of smart
contract execution. Embedding keys within a smart contract would reveal
the key to all participants. [6] Thus, the information stored on a smart
contract is available to all the nodes on the network which means there
exists less confidentiality. Whereas, the contractual terms in a traditional
legal contract are only know to the parties to the contract unless the
contract is accessed by unfair means or is lost.

g.) Uncertainty: Smart contracts may prove to be a very successful technology

in the future but right now its future is uncertain. Whether a smart contract
will be regulated by the existing contractual legislations or will it require a
model law to be adopted in several jurisdictions or will it require an
international cooperation between several jurisdictions? These questions
are still unanswered which creates huge uncertainty for immediate reliance
on Smart Contracts.

5. Uses of Smart Contracts

Smart contracts are expected to bring a revolution in the Global businesses

and the Legal Industry. They can eliminate the need of intermediaries in a lot
of applications and processes. Following are the examples where the uses of
Smart Contracts have been highlighted.
 Table 1: Range of use case applications for smart contracts6

Use case What the smart contract can do?

Manages approval workflows between

Trade clearing and counterparties, calculates trade settlement
Settlement amounts, and transfers funds automatically
Automatically calculates and pays periodic
Coupon payments
Financial Services coupon payments and returns principal
upon bond expiration
Performs error checking, routing, and approval
Insurance claim workflows, and calculates payout based on the
processing type of claim and underlying policy

Calculates and transfers micropayments based

Micro-insurance on usage data from an Internet of Things-
enabled device (example: pay-as- you-go
automotive insurance)
Provides transfer and/or access to medical
Electronic medical
health records upon multi-signature
records
approvals between patients and providers
Life sciences and health care Grants health researchers access to certain
Population health data personal health information; micropayments
access are automatically transferred to the patient
for participation
Tracks patients’ health-related actions through
Personal health tracking
IoT devices and automatically generates
rewards based on specific milestones
Technology, media, and telecom Calculates and distributes royalty payments to
Royalty distribution
artists and other associated parties according
to the contract
Autonomous electric Processes a deposit, enables the charging
Energy and resources vehicle charging station, and returns remaining funds when
stations complete
Updates private company share registries and
Public sector Record-keeping
capitalization table records, and distributes
shareholder communications
Transfers payments upon multi-signature
Supply chain and trade
approval for letters of credit and issues port
finance
payments upon custody change for bills of
documentation
lading
Facilitates chain-of custody process for
Product
products in the supply chain where the party in
provenance and
Cross-industry custody is able to log evidence about the
history
product
Matches parties and transfers payments
Peer-to-peer transacting automatically for various peer-to-peer applications:
lending, insurance, energy credits, etc.

Validates voter criteria, logs vote to the

Voting
blockchain, and initiates specific actions
as a result of the majority vote
Thus, Smart contracts can give boost to businesses across various sectors and
industries.

6Ream J., Chu, Y., Schatsky, D. (2016). Upgrading Blockchains: Smart Contract use cases in Industry. Blog at
Deloitte Insights. Available at : https://www2.deloitte.com/us/en/insights/focus/signals-for-strategists/using-
blockchain-for-smart-contracts.html [Last Accessed 26.06.2020]
IV. CONTRACT ELEMENTS UNDER INDIAN CONTRACT ACT IN CONTRAST
WITH SMART CONTRACTS

In order to understand that how a Smart contract will perform under the
Indian Contract Law, it is important to fully and deeply understand what is
meant by a “Contract” under Indian Contract Act. We look at the essential
elements of a “Contract” under Indian Contract Law to get a bigger picture
which will be used to compare with the concept of Smart Contracts discussed
in the preceding chapters.

According to Section 2(h) of the Indian Contract Act, 1972, “An agreement
enforceable by law is a Contract.” [7] All agreements are not enforceable by
law and, therefore, all agreements are not contracts. Some agreements may be
enforceable by law and others not. Thus all agreements are not contracts. [8]
So a smart contract must be an agreement between the parties which is
enforceable by law as per Indian Contract Act, 1872.
According to Section 2(e) of the Act, “Every promise and every set of promises
forming the consideration for each other is an agreement.”[7]
All such agreements which satisfy the conditions mentioned in Section 10 of
the Act, 1872, are contracts. Section 10 is as under:
“All agreements are contracts if they are made by free consent of parties
competent to contract, for a lawful consideration and with a lawful object and
are not hereby expressly declared to be void.”[7]
The essentials needed for a valid contract, therefore, are as under-
1. An agreement between the two parties. An agreement is the result of a
proposal or an offer by one party followed by its acceptance by the other.
2. Agreement should be between the parties who are competent to contract.
3. There should be lawful consideration and lawful object in respect of that
agreement.
4. There should be free consent of the parties, when they enter into the
agreement.
5. The agreement must not be one, which has been expressly declared to be
void. [8]
The above sections lay down the specific requirements of a contract under the
Indian Contract Law. Any agreement which is to be enforced under the law is
tested on the above principles. Now we shall proceed to understand these
essential elements of the contract in a more detailed manner. We will also
analyse where and how a smart contract can link with these elements.

1. Agreement

We know that an Agreement between the parties is one of the essentials for
creating a contract. An agreement arises by a “proposal” or “offer” by one of
the parties and the “acceptance” of such proposal by the other party.

a.) Proposal
The term “proposal” has been defined in Section 2(a) of the Indian Contract
Act, 1872 as follows –
“When one person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal” [7]
The element of a proposal will be present in a smart contract also when a party
proposes another party to do or abstain from doing something.
A proposal is made by one party to another party to do something or abstain
from doing something. For example A’s willingness to sell his used car to B for
Rs.2,00,000, if B accepts to purchase A’s car. This amounts to proposal by A for
the sale of his car.
However if the statement has been made without any intention to obtain the
assent of the other party then the statement cannot be termed as a proposal.

• Proposal and Invitation to treat

A proposal is not an Invitation to treat. In many cases, a person may not offer
or propose to sell his goods but merely make a statement or give some
information with a view to inviting others to make offers on that basis. A
waiter shares a menu card to the customer at the restaurant, thus the menu
card is not a proposal by the restaurant to sell the food at the indicated prices.
It is customer who makes an offer to the restaurant to buy the food at the
indicated prices. Similarly, a shopkeeper has not made a proposal to sell his
goods which are there inside the shop. It is the customer which makes a
proposal at the counter to buy the goods at a specific price. Moreover, the
other party is always at a liberty to either accept or reject the proposal. In the
above example the customer may make a contract with shopkeeper for the
purchase of goods through a smart contract at prices stipulated on the online
webpage. In this case too, it is the customer who will make the proposal which
may be accepted or rejected by the shopkeeper. The prices of goods on the
website are merely an invitation to treat and not an offer by the shopkeeper.
In a famous case of Harris v. Johnson, the defendant announced a sale by
auction. The plaintiff went to the advertised place of auction to find that
defendant had cancelled the auction sale. He brought an action towards the
defendant for compensation of the expenses of his travel. The court held that
he was not entitled to the same as there was yet no contract between the two
parties, which could make the defendant liable. Thus the auction sale was
merely an invitation to treat and not a proposal.

• Intention to create legal relationship

A proposal should be made with an intention to create a legal relationship.

When an offer is made with an intention to create a legal relationship, only
then its subsequent acceptance can result into a valid contract. Generally a
promise made to do something or abstain from doing something in a social
context does not constitute a proposal. Such an agreement to go for a walk,
going for shopping or a movie cannot be considered as a contract and will not
be enforced as a contract later on in a court of law. Smart contracts will mostly
be used in business, commercial and financial transactions which are of serious
nature. The intention of parties must be apparent on the face of the contract.

• Communication of Proposal when complete

A proposal should be sufficiently communicated to the other party. An offer

may be communicated by the offeror - by any act or omission by which the
offeror
a.) intends to communicate such offer to the other party; or
b.) which has the effect of communicating the offer.
Therefore an offer can be made by words of mouth or by writing or by conduct
in a manner which has the effect of communicating the offer to the offeree.

The communication of a proposal is complete as soon as it comes to the

knowledge of the person to whom it is made. It is however important to
mention that an offer cannot be accepted unless it has been brought to the
knowledge of the person to whom it is made. [7]

• Standing, Open or Continuing Offer.

An offer which is allowed to remain open for acceptance over a period of time
is known as a standing, open or a continuing offer. [8] For example, an offer
whereby a manufacturer promises to supply 10,000 litres of milk from 1st
January to 31st December, in accordance with the orders which may be placed
from time to time by the customer, is a standing offer. If there is an order from
the customer on 20th May for 100 litres of milk, such an order will constitute an
acceptance of the offer to that extent. However, the remaining quantity in the
offer can still be revoked like any other offer. Similarly, a tender for the supply
of goods over a period of time is a kind of standing offer but an advertisement
whereby tenders are invited is merely an invitation for quotations. Upon
approval, the tender becomes a standing offer. Whenever an order is placed
on the basis of the tender, it results in acceptance of the offer creating a
binding contract between the parties. The offer can still be revoked anytime
before an order is placed.

The contracts made by Standing offers can also be made using Smart contracts.
For example In case of supply of goods on fixed days over a period of time, the
payment can automatically be transferred from the buyer’s account to the
seller’s account upon shipping of the goods. The shipping receipt can be the
proof for automatic transfer of payment. This will cut short the time taken by
intermediaries and save financial costs. However it is still hard to say if the
parties would prefer a smart contract over a traditional one as there are some
shortcomings of smart contracts which will be discussed later.

• Letters of Intent
A letter of intent simply speaking is a prelude to a contract. It is merely a
charter containing the terms and general conditions subject to which a
contract would be governed.[8] Often drafting of a contract with exact terms
which parties bear in mind before a contract is concluded is a difficult task. A
letter of intent serves a base to contract by containing the terms which parties
incorporate later into the contract. Smart contracts may have standard terms
in most cases. But a private individual might decide to negotiate their terms in
writing before they execute a smart contract. A letter of intent might serve
purposeful in case of smart contracts too.

b.) Acceptance
The term “Acceptance” has been defined in Section 2(b) of the Indian Contract
Act, 1872 as follows –
“When the person to whom the proposal is made signifies his assent thereto,
the proposal is said to be accepted. A proposal, when accepted, becomes a
Promise”. [7]

The person making the proposal becomes bound only after the acceptance of
the proposal. After the acceptance of the proposal, it becomes a promise
which makes both the parties bound to it. The proposal or acceptance can be
in words (express) or otherwise than in words (implied).
The element of acceptance will be present in a smart contract also when a
party accepts the proposal to do or abstain from doing something from the
proposer. The acceptance may be express or implied.
It is important to note that the party receiving the offer is not bound to accept
the offer. The party is free either to reject or to make it lapse by non-
acceptance. Likewise, a person inviting tenders may choose not to accept the
highest bed and can choose to re-auction the goods. If the essential conditions
of the tender are not met with, the person inviting the tender may reject the
bid. Also, the person inviting tender reserves the power to rejects all the bids if
he deems it fit to do so.

• Effect of Acceptance
 It is only after the acceptance of the offer, a contract is created. No party is
bound before the acceptance of the offer. At that stage the party who made
the offer is free to revoke or withdraw the offer and the party to whom the
offer has been made is free either to reject the offer or simply not accept it.
However if the offer is accepted, it becomes a promise. Both the parties are
bound by the promise if all the other conditions of a valid contract are
satisfied. It is important to note that the effect of acceptance is what a lighted
match is to gunpowder. The outcome cannot be changed later on.

• Essentials of a valid Acceptance [8]

In order that acceptance of an offer can result in a contract, the acceptance

must satisfy the following requirements mentioned below. The requirements
will be the same in case of smart contract.

i. Acceptance must be communicated by the offeree to the offeror.

When the person to whom the offer has been made signifies his assent to the
offeror, the offer is said to have been accepted. This means that if the offeree
intends to accept the offer than he must communicate his acceptance to the
offeror. The acceptance can be communicated by any act or omission of the
offeree. It can be oral or by post, telegram, messenger or phone if parties are
at distance to each other. Acceptance can also be communicated by conduct.
For example if the passenger boards a bus to travel for his journey to home, he
impliedly assents to pay the necessary fare or the ticket price.
Moreover Communication of acceptance should always be made by the
offeree himself or his authorised agent, only then the acceptance can be
treated as valid. Also, communication of acceptance by the offeree to wrong
perspn will not make the offeror bound.

ii. Acceptance should be absolute and unqualified.

An acceptance should be absolute and unqualified in order to be treated as a

valid acceptance. The letter of acceptance cannot provide conditions for future
negotiations for the finalization of the terms of the contract, therefore in such
 case no contract comes into existence by such an acceptance. A conditional
acceptance is not a proper acceptance for the creation of a valid contract. For
example if ‘A’ offers to sell his watch to ‘B’ for Rs 200. B agrees to buy it for Rs
150. It should be noted here that the response of ‘B’ to the offer of ‘A’ is not an
acceptance but only a counter offer. However a contract can arise if in this
case ‘A’ agrees to accept the counter offer by ‘B’ and agrees to sell his watch
for Rs 150. The original offer is deemed to be rejected by conditional
acceptance or the counter offer. If the original offer is destroyed, it becomes a
dead offer and cannot be accepted unless it is renewed.

iii. Acceptance should be made in some usual and reasonable manner, unless the
proposal prescribes the manner of acceptance.

If the party who sends the proposal has prescribed a manner for acceptance,
the acceptance has to be done in the prescribed manner only. Normally,
acceptance can be done in a reasonable manner which means according to the
usage or custom of trade which includes post, telephone or in writing. If the
proposal prescribes the fulfilment of certain conditions for example payment
of an advance, then no contract comes into existence unless such payment has
been made. However acceptance of the proposal in a manner different from
the prescribed one does not automatically invalidate the acceptance. The
proposer can ask the acceptor to accept in the prescribed manner. If the
proposer fails to notify to the acceptor any objection for the acceptance within
a reasonable time, then he is deemed to have accepted the same and that
results in a valid contract.

iv. Acceptance should be made while the offer is still subsisting.

We already know that the offer can be withdrawn anytime by the offeror or
the offer is automatically revoked under certain circumstances. If the offer has
been withdrawn or has lapsed by reason of non acceptance, then there is
nothing which can be accepted. It is therefore important to accept the offer
when it is still subsisting. No contract can arise by acceptance after the offer
has lapsed. The original offer may be destroyed by rejection or a counter offer
and later on acceptance of the same will not give rise to any legal obligation.
 c. Revocation of Offer and Acceptance
According to Section 5 of the Indian Contract Act, “A proposal may be revoked
at any time, before the communication of its acceptance is complete as against
the proposer but not afterwards”. [7]
Section 6 of the Act mentions various modes of revocation of offer. [8] The
section is as under:-

A proposal is revoked-
i. By the communication of notice of revocation by the proposer to the other
party;
ii. By the lapse of time described in such proposal for its acceptance, or, if no
time is so prescribed, by the lapse of a reasonable time, without
communication of the acceptance;
iii. By the failure of the acceptor to fulfil a condition precedent to the acceptance;
or
iv. By the death or insanity of the proposer, if the fact of his death or insanity
comes to the knowledge of the acceptor before acceptance.

Revocation of Acceptance

Section 5 of the Act lay down as follows-

“An acceptance may be revoked at any time before the communication of
the acceptance is complete as against the acceptor, but not afterwards.” [7]
For example ‘A’ offers to sell his car to ‘B’ by a letter sent by post. ‘B’
accepts the offer through a letter sent by post. It is possible for B to revoke
his acceptance at any time before the letter communicating it reaches ‘A’,
but not afterwards.

2. Capacity to Contract

As per Indian Contract Act, a party who enters into the contract should be
competent to do so. Competency to contract is one of the essentials of a valid
contract as per Section 10 of the contract act.
 Section 11 of the Contract Act lay down as follows:
“Every person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound mind, and
is not disqualified from contracting by any law to which he is subject.”[7]

It means that the following three categories of persons are not competent to
contract:-

i. A person who has not attained the age of majority, i.e., one who is a minor. As
per Section 3 of the Indian Majority Act 1875, a person is deemed to have
attained the age of majority when he has completed the age of 18 years.
However in case of a person for whom a guardian has been appointed by the
court, the age of majority is 21 years. Thus, a minor is not competent to
contract.
But in case of an agreement with a minor, whether the agreement would be
void or voidable? The controversy was set at rest by the decision of the Privy
Council in Mohori Bibee vs Dharmodas Ghose [8], in 1903. It was held that an
agreement by a minor was void.
Brief facts of the case are as under: The plaintiff Dharmodas Ghose, while he
was a minor, mortgaged his property in favour of the defendant, Brahmo Dutt,
who was a money-lender to secure a loan. At the time of the transaction the
attorney, who acted on behalf of the money lender, had the knowledge that
the plaintiff was a minor.
The minor brought an action against the money lender stating that he was a
minor when the mortgage was executed by him and therefore, the mortgage
was void and inoperative and the same should be cancelled. The court
observed: “There can be no estoppels where the truth of the matter is known
to both the parties, and their Lordships hold, that a false representation made
to a person who knows it to be false, is not such a fraud as to take away the
privilege of infancy.”

ii. A person who is of unsound mind.

 As per Section 11 of the act, only a person of sound mind is competent to
contract. A contract entered by a person of unsound mind will just be void ab
initio like in the case of a minor.
Section 12 of the Act lay down what is meant by sound mind for the purpose of
entering into a valid contract.
“A person is said to be of sound mind for the purpose of making a contract if,
at the time when he makes it, he is capable of understanding it and of forming
a rational judgement as to its effects upon his interests.” [7]
A person who is of sound mind while making the contract but later turns into
unsound mind is deemed to have made a valid contract. Soundness of the
mind is relevant at the time of entering into the contract. This also implies that
the person who is usually of unsound mind can make a contract during the
intervals when he is of sound mind. Whenever the judgement of a person to
secure his interests is affected by drunkenness or a disease, a contract entered
by him during that time cannot be treated as a valid contract.

iii. A person who has been disqualified from contracting by some law.
In order to enter into a valid contract a person should not be disqualified or
barred by any law. A contract entered into by such a person will not be treated
as a valid contract.

A smart contract will need to comply with Section 11 of the Indian contract in
order to be enforceable by law which means a contracting party need to be of
the age of majority, of sound mind and should not be barred by any law.

3. Consideration and Object

Before we look into what a lawful consideration and lawful object means for
the purpose of a valid contract, we must first understand the importance of
consideration and the role it plays in the formation of the contract.
A Consideration is one of the essential of a valid contract. An agreement
without consideration is void. The requirement of consideration is same when
the parties decide to execute a smart contract between them. Consideration is
defined under section 2(d) of the Indian Contract Act as follows-
“When, at the desire of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from doing, or promises to
do or to abstain from doing something, such act or abstinence or promise is
called consideration for the promise.”[7]

• Essentials of a valid Consideration [8]

i. Consideration to be given ‘at the desire of the promisor’.

It is important that the consideration is given at the desire of the

promisor. The consideration cannot be given voluntarily or at the instance
of a third party. In Durga Prasad v. Baldeo [8], the consideration for the
promise had not moved at the desire of the promisor but some other
person, and it was held that the same was not a sufficient consideration
to support the promise.

ii. Consideration to be given ‘by the promisee or any other person’.

As per the Indian Contract law, a consideration can be given by a promise

or any other person. This means that the consideration can also be given
by a person who is not a party to the contract. For example A promises to
sell his car to B for 1000 euro and the payment of 1000 euro is made by X.
Thus, the consideration is given by X for the purchase of car by B. This is a
valid contract. The doctrine of privity of contract states that only those
persons who are party to the contract can enforce the same. However,
Section 2(d) does not violate the principle of privity of contract as
consideration can be given by a third person also. Thus, the contract will
be valid even if the consideration is paid by a third person according to
Indian Contract Law.

iii. Consideration may be past, present or future, in so far as the definition

says that the promise:
a) has done or abstained from doing (past), or
b) does or abstains from doing (present), or
c) promises to do or to abstain from doing (future), something.
 Past Consideration means that the consideration was given earlier before
the promise is made. It is however important that the consideration must
be paid at the desire of the promisor. The consideration cannot be given
voluntarily. If the consideration has been given voluntarily, it is no
consideration and does not bind the promisor. For example If ‘A’ request
‘B’ to find his lost cat and promise to pay Rs 100 later. This is a case of
past consideration. The effort by ‘B’ to find the lost cat is the
consideration which has been given before the ‘A’ has fulfilled his promise
to pay ‘B’ Rs 100. Thus, the consideration makes the promise enforceable.
Similarly, if in the above example a person ‘X’ voluntarily goes out to find
the cat belonging to ‘A’ and later on asks ‘A’ to pay Rs 100. We know that
the consideration has not been given at the desire of the promisor. It is a
voluntary consideration and is not enforceable against the promisor.

Present Consideration means that one of the parties to the contract has
performed his part of the promise which is the consideration for the
promise of other party. This is also known as Executed consideration. The
only thing which remains is the performance of the promise by the other
party. For example, A promises to sell his Television to B for Rs 2000. B
makes the payment and is ready to take delivery. As soon as A delivers
the television into the hands of B, his part of the promise is also complete.
In the case executed consideration, the consideration is provided
simultaneously along with the making of the contract.

Lastly, in case of Future Consideration both parties promises to perform

their mutual obligations after the making of the contract. This is also
known as executory consideration. For example A agrees to supply 100 kg
of wheat to B on a future date. The contract between A and B is valid but
the promises are to be performed in future.

iv. There should be some act, abstinence or promise by the promisee, which
constitutes consideration for the promise.

At the desire of the promisor, the promisee does or abstains from doing
something. Such act or abstinence or promise is called consideration for
 the promise of the promisor. We know that the promise of one party is
the consideration for the promise by other party. When there is no act or
abstinence and there is nothing in exchange for the promise, there is no
consideration. There is no contract if there is no consideration for both
parties.

The consideration in a contract may be too high or too little. The contract
is not void if the consideration is inadequate. The contract will still be
valid and enforceable. The court may look into the case to analyse if the
consent of the parties was freely given and there was no undue influence.
For example A promises to sell his house to B for 10,000 euro which is
actually worth 2,00,000 euro. If A gave his consent to B freely and without
any influence, the agreement between A and B is a contract and the
inadequacy of the consideration is immaterial.

The consideration may be inadequate, but it must be real and something

unsubstantial. Also the performance of an existing legal obligation cannot
be a consideration for a promise.

• Legality of Object and Consideration

The object and consideration of a contract must be lawful and not illegal.
It is one of the essentials of a valid contract in the Indian Contract Act. If
either the object or the consideration in a contract is unlawful, the
contract will be void. The object or consideration must be lawful in case
of a smart contract in order to be enforceable by Indian Contract Law.
Section 23 of the Indian Contract Act, 1872 lay down when the object or
consideration is unlawful.

Section 23: What consideration and objects are lawful, and what not:
The consideration or object of an agreement is lawful, unless –
it is forbidden by law, or is of such a nature that, if permitted, it would
defeat the provisions of law; or is fraudulent; or involves or implies
injury to the person or property of another, or the court regards it as
immoral, or opposed to public policy.
 In each of these cases, the consideration or object of an agreement is
said to be unlawful. Every agreement of which the object or
consideration is unlawful is void. [7]

An agreement which is in conflict with any statutory law, rule or

regulation is forbidden by law. An agreement to commit a crime is
punishable under Indian Penal code. Such an agreement cannot be
enforced and is forbidden under Contract Law. The agreement is void ab
initio(from the beginning) if the object or consideration of the
agreement is against any statute or public policy.

An agreement with an object or consideration to commit a fraud is void

too. For example if A and B agree to share the stolen money from a bank
in half. Such an agreement is not enforceable and is void.

If the object or consideration of an agreement is to cause an injury to

the person or property of another, the agreement is void. If the court
finds that the object or consideration of an agreement is immoral or
opposed to public policy. Such an agreement is unlawful and void. For
example A agrees to let her wife for hire to B for concubinage. The
agreement is void because it is immoral. The agreement which is
opposed to public policy is unlawful and void. The definition of public
policy has not been defined precisely. It is upon the court to interpret
the meaning of public policy in a larger context, as it is the duty of the
court to strike a balance between an individual’s right of contractual
freedom and the interest of society. Generally what is injurious to the
interest of the society is against public policy. Public policy means the
policy of the law at a given time.

4. Free Consent

Free consent is one of the essentials of a valid contract as per Section 10 of the
Indian Contract Act, 1872. Free consent is equally important for parties who
execute Smart Contracts.
 According to Section 14, consent is said to be free when it is not cause by
i. Coercion, as defined in Section 15, or
ii. Undue influence, as defined in Section 16, or
iii. Fraud, as defined in Section 17, or
iv. Misrepresentation, as defined in Section 18, or
v. Mistake, subject to the provisions of Section 20, 21 and 22.

Consent is said to be so caused when it would not have been given but for the
existence of such coercion, undue influence, fraud, misrepresentation or
mistake. If the consent of the party to an agreement is caused by coercion,
undue influence, fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused. If the
consent is caused by mistake, the agreement is void. [8]

i. Coercion

According to Section 15 of the Indian Contract Act, “Coercion is the

committing, or threatening to commit, any act forbidden by the Indian Penal
Code, or the unlawful detaining, or threatening to detain, any property, to the
prejudice of any person whatever, with the intention of causing any person to
enter into an agreement.”[7]

If a person commits or threatens to commit an act forbidden by the Indian

Penal Code in order to obtain the consent of the other person to an
agreement, the consent in such a case is deemed to have been obtained by
coercion. For example A threatens to stab B’s wife if he does not agree to sell
his house to him at a favourable price. The consent of B has been obtained by
coercion. The agreement is voidable at the option of B.

If a person detains or threatens to detain any property to the prejudice of any

person in order to obtain the consent of such person to enter into an
agreement, the consent in such a case is deemed to have been obtained by
coercion. For example A gives loan to B and keeps B’s gold watch as a security.
A later refuses to release the gold watch given by B after the repayment of the
 loan until B agrees to sell him his gold watch on a future date. The agreement
to sell the gold watch to A is voidable at the option of B as the consent has
been obtained by coercion and unlawful detention of B’s gold watch to the
prejudice of B.

ii. Undue Influence

Section 16 of the Indian Contract Act, defines Undue Influence as under:

1. A contract is said to be induced by “undue influence” where the
relations subsisting between the parties are such that one of the parties is
in a position to dominate the will of the other, and uses that position to
obtain an unfair advantage over the other.
2. In particular and without prejudice to the generality of the foregoing
principle, a person is deemed to be in a position to dominate the will of
another-
a.) where he holds a real or apparent authority over the other; or
where he stands in a fiduciary relation to the other; or
b.) where he makes a contract with a person whose mental capacity
is temporarily or permanently affected by reason of age, illness or
mental or bodily distress.
c.) Where a person who is in a position to dominate the will of
another, enters into a contract with him, and the transaction appears
on the face of it or on the evidence adduced to be unconscionable,
the burden of proving that such contract was not induced by undue
influence shall lie upon the person in a position to dominate the will
of the other. [7]

There may be several cases where a person may have a real or apparent
authority over another. For example An employer may have an authority over
his employee or a senior police officer may have an authority over his
subordinate officer. However, it is always expected that the person in the
dominant position will not abuse his authority over the other person. Similarly
in the case of a fiduciary relationship based on trust and confidence, the
contract is voidable at the option of the party who has been betrayed. The
 relationship between a solicitor and a client, a parent and a child, a doctor and
a patient are examples of fiduciary relationships.

If the mental capacity of a person is temporarily or permanently affected by

reason of age, illness, mental or bodily distress, there are chances that such a
person can be subjected to exploitation. The person’s position may be
exploited and an unfair advantage may be taken by the other contracting
party. There is deemed to be undue influence in a case where a contract has
been entered by such person prejudicial to his interests. For example a nurse
asks a patient with mental health disorder to pay him an unreasonable amount
for his professional services. Here undue influence has been employed by the
nurse.

Normally, the onus of proving that the consent was not free and was induced
by undue influence is upon the plaintiff. But in case of an unconscionable
bargain, there is a presumption of undue influence when both the parties are
on unequal footing. Thus, if the party who has obtained some benefit under
the contract is in a position to dominate the will of the other and the
transaction between the parties appears to be unconscionable, the law raises a
presumption of Undue Influence. For example A has taken loan from B who is a
money lender in the village. A takes a new loan from B on a high interest rate.
The transaction appears to be unconscionable and the onus lies on B to prove
that the contract was not induced by Undue influence.

iii. Fraud

If the consent of a party to the contract has been obtained by fraud, the
contract is invalid for want of free consent. The contract is voidable at the
option of the party whose consent has been so obtained.

Section 17 of the Indian Contract Act, 1872 defines fraud as follows:

“Fraud” means and includes any of the following acts committed by a party to
the contract, or with his connivance, or by his agent, with intent to deceive
another party thereto or his agent, or to induce him, to enter into the contract:
 a.) the suggestion, as to a fact, of that which is not true by one who does
not believe it to be true;
b.) the active concealment of a fact by one having knowledge or belief of
the fact;
c.) a promise made without any intention of performing it;
d.) any other act fitted to deceive;
e.) any such act or omission as the law specially declares to be fraudulent.

Explanation - Mere silence as to facts likely to affect the willingness of a person

to enter into a contract is not fraud, unless the circumstances of the case are
such that, regard being had to them, it is the duty of the person keeping
silence to speak, or unless his silence is, in itself, equivalent to speech.[7]

The statement of a fact made by a party to the contract must be a false

statement in order to constitute a fraud. The statement should be made with a
wrongful intention of deceiving another party thereto and in order to induce
him to enter into a contract. Mere opinion of a person cannot constitute fraud.

Mere silence is not fraud but in some circumstances silence may be deemed to
be an act of deception. So, when there is a duty to speak, keeping silence is
fraud or when silence is in itself equivalent to speech, such silence is a fraud.
We need to examine the views of the apex court on the above matter.

In Life Insurance Corporation of India v. Asha Goel [8], the apex court held that
the contracts of insurance including the contracts of life insurance are
contracts uberrima fides and every material fact must be disclosed, otherwise,
there is good ground for rescission of the contract. The duty to disclose
material facts continues right up to the conclusion of the contract and also
implies any material alteration in the character of the risk which may take
place between the proposal and its acceptance. If there are any misstatements
or suppression of material facts, the policy can be called into question. For
determination of the question whether there has been suppression of any
material facts, it may be necessary to also examine whether the suppression
relates to a fact which is in the exclusive knowledge of the person intending to
 take the policy and it could not be ascertained by reasonable enquiry by a
prudent person.

iv. Misrepresentation

Section 18 of the Indian Contract Act, 1872 defines misrepresentation as

under: [7]
“Misrepresentation” means and includes-
1.) the positive assertion, in a manner not warranted by the information
of the person making it, of that which is not true, though he believes it to
be true.
2.) any breach of duty which, without an intent to deceive, gains an
advantage to the person committing it, or anyone claiming under him, by
misleading another to his prejudice or to the prejudice of anyone claiming
under him.
3.) causing, however innocently, a party to an agreement, to make a
mistake as to the substance of the thing which is the subject of the
agreement.

Positive assertion is a statement by a person which is not true, though he

believes it to be true. The false statement should be made innocently without
any intention to deceive. This is what distinguishes misrepresentation from
fraud because in the later case the statement is made with the intent to
deceive the other contracting party. For example A sells his dog to B which is of
unsound mind but A himself does not know about this. He told B that the
horse is healthy and sound. There is misrepresentation in this case. Thus the
contract is voidable at the option of B.

v. Mistake

Section 20 and Section 21 of the Indian Contract Act, 1872 deals with mistake
as to a matter of fact and mistake as to a matter of law respectively. The
contract is void and not voidable in both the cases. Section 22 further deals,
when one party is mistaken as to a matter of fact.
According to Section 20 of the act,
Where both the parties to an agreement are under a mistake as to a matter of
fact essential to the agreement, the agreement is void.

Explanation— An erroneous opinion as to the value of the thing which forms

the subject-matter of the agreement, is not to be deemed a mistake as to a
matter of fact. [7]. For example A agrees to buy from B a boat. It turns out that
the boat had sunk in the sea. At the time of the agreement, neither party was
aware of this fact. The agreement is void.

According to Section 22 of the act,

Contract caused by mistake of one party as to matter of fact —A contract is not
voidable merely because it was caused by one of the parties to it being under a
mistake as to a matter of fact. [7]

Hence, the contract is void even if one party is mistaken as to a matter of fact.

21. Effect of mistakes as to law — A contract is not voidable because it was

caused by a mistake as to any law in force in India but a mistake as to a law not
in force in India has the same effect as a mistake of fact. [7]

For example A and B grounded their contract on a wrongful presumption that a

particular debt is barred by the Indian Law of Limitation; the contract is not
voidable but void.

5. Void Agreements

The Indian Contract Act, 1872 lay down some agreements which have been
specifically declared to be void. The agreements are not enforceable even if
they satisfy all the conditions of a valid contract. A smart contract may be
executed but is not enforceable if it has been declared void under this section.
A few agreements have already been discussed above. The following
agreements have been declared void by the act: [8]
 i. An agreement without a lawful object or consideration (Section 23 and
24)
ii. An agreement without consideration (Section 25)
iii. An agreement in restraint of marriage (Section 26)
Every agreement in restraint of the marriage of any person, other
than a minor, is void.

iv. An agreement in restraint of trade (Section 27)

Every agreement by which any one is restrained from
exercising a lawful profession, trade or business of any kind, is
to that extent void.

v. An agreement in restraint of legal proceedings (Section 28)

Every agreement,—
(a) by which any party thereto is restricted absolutely from
enforcing his rights under or in respect of any contract, by the
usual legal proceedings in the ordinary tribunals, or which
limits the time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or
discharges any party thereto, from any liability, under or in
respect of any contract on the expiry of a specified period so as
to restrict any party from enforcing his rights, is void to the
extent.

vi. An agreement which is uncertain (Section 29)

Agreements, the meaning of which is not certain, or capable of
being made certain, are void.

vii. An agreement by way of wager (Section 30)

Agreements by way of wager are void; and no suit shall be
brought for recovering anything alleged to be won on any
wager, or entrusted to any person to abide the result of any
game or other uncertain event on which any wager is made.

viii. An agreement to do an impossible act (Section 56)

 An agreement to do an act impossible in itself is void. Contract
to do an act afterwards becoming impossible or unlawful.—A contract to
do an act which, after the contract is made, becomes impossible, or, by
reason of some event which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful.

6. Challenges to Smart Contracts under Indian Contract Law

There may be several challenges to enforce a smart contract under the current
Indian Contract Act, 1872. The challenges can be in the formation,
performance, breach and interpretation of the smart contracts.

i. As we have seen above, a contract is formed by a proposal from one party

and its acceptance by another party. The role of proposal and acceptance
may get diminished in a smart contract. A smart contract is conditional in
nature. It is made when parties agree that if ‘X’ condition is fulfilled then
‘Y’ will be executed. In a traditional contract the parties have more
freedom to incorporate clauses into the contract and not limit their
contract on conditional events. An offer by one party may get a counter
offer and both the parties may agree to the new offer. The parties can
even enter negotiations before making a concrete proposal. For example,
a customer negotiates with the shopkeeper for the price of the goods and
the shopkeeper agrees to offer a discount. The customer accepts the
shopkeeper’s counter proposal and make a deal. If the same customer
uses a smart contract to buy the goods online, there will be no
negotiations, bargains or counter offers.

ii. Under the contract law, a contract with a minor is void. A party must be of
the age of majority to enter into a valid contract. As the smart contract is
still not regulated. There may be instances where a smart contract may be
executed by a party who has not reached the age of majority. For
example a mortgage executed by a minor. Thus, such a smart contract will
not be enforceable as per the Contract law.
iii. An agreement without consideration is void. The consideration and the
object of the agreement must be lawful. A smart contract must not be
executed for an unlawful object. For example a payment for the drugs. It
is possible to make payment through crypto currencies like bitcoin by
using a smart contract. However, crypto currencies are not legalised by
the central banks under several jurisdictions. It means there cannot be a
legal tender of crypto currencies because it is still prohibited. Thus a
smart contract will not be enforceable if the consideration is unlawful. For
example jurisdictions where crypto currencies are not accepted as a
method of payment.

iv. Free consent is one of the essential of the contract. A contract caused by
Fraud, Undue influence, Misrepresentation and coercion is voidable at the
option of the party whose consent has been so obtained. It is still
uncertain what will be the future of a smart contract where the consent
of a party has been obtained by the above mentioned factors. A smart
contract is not voidable because there is no going back once it is
executed. So, the party may choose a traditional contract over a smart
contract.

v. If a smart contract is executed for a subject that falls into any of the
agreements which have been specifically declared void by Indian Contract
Act, the smart contract will not be enforceable and will be void as per the
act. For example an agreement in restraint of trade, or an agreement in
restraint of legal proceedings.

vi. Under the contract law, if the parties have by mistake added a wrong
clause in the contract. It can be amended or at a later stage the court can
interpret the clause according to the intention of the parties or object of
the clause. In the case of a Smart contract, if there is anything written in
the code contrary
to what the parties intended, the outcome of the smart contract will
change after execution. A small input mistake in the programming will put
the parties to the contract in a very unwanted position.
vii. Whenever a party breaches any term of a contract, the other contracting
party always has a remedy in law in the form of compensation or specific
performance. A smart contract cannot be breached because the
execution is automatic but there can be events which may lead to non
execution. For example in case of default of payment from a bank account
with no amount. So there can be breaches in case of Smart Contracts too.

viii. Under the contract law, it is possible to amend the contract with the
consent of both the parties. Even though the parties have agreed to
certain terms in the contract, the parties may feel the need to amend the
contractual terms under changed circumstances. However, a smart
contract once executed cannot be modified. The modification is possible
only through the Application Programming Interface (API) technology
which could be high expensive for the parties.

ix. A smart contract may be more burdensome for the parties over a
traditional contract. As the parties can easily manifest their intention
through words in a traditional contract, it can be a huge burden for
parties to figure out if smart contract actually manifest what the parties
intended. An ordinary person does not know about the code but is well of
the traditional legal system of contract.

x. The interpretation of the law and of the contract is done by the courts. It
is usually easy to know the intention of the parties from the contract by
looking at its object, clauses and the consideration involved. In case of a
conflict, the court may or may not choose to interpret the smart contract
in the same manner as a traditional contract because a smart contract
should first be recognized as an enforceable contract under the Indian
Contract Act, 1872.The interpretation is an important tool for
enforcement and to provide effective relief to the aggrieved party under
the legal system.
 V. CONCLUSION

A smart contract is enforceable under the Indian Contract Act, 1872 provided it
complies with the mandatory provisions of the Act.

A smart contract is not a traditional contract executed on a computer. A smart

contract is an agreement made of codes and data in the form of software. In
technical sense, it is a digital contract deployed on a blockchain. The contract is
automatically executed once the predetermined events are triggered.

The enforcement of smart contracts is possible through the existing legal

infrastructure in India. The courts can explore the features of the smart
contract and interpret them in line with the provisions of Indian Contract Law.
The Indian Contract Act is supported by the Information technology Act,2000
for commercial transactions done by email, software and contracts made
through electronic means.

The essential elements of the contract must exist in a Smart Contract. The
commitment of both the parties can be seen when they submit their private
cryptographic key to the blockchain based smart contract. The contract is
posted on the blockchain platform by one party. It is in the form of a binary
code specifying the terms of the transaction. Once the technical formalities are
complete, the offer is open to acceptance by the offeree in the usual manner.
The offeree can also convey his acceptance to the offer by conduct. It can be
done by simply transfering control over a digital asset or cryptocurrency to the
smart contract. Thus, acceptance can either be by way of performance or by a
signature with personal cryptographic key. Such an agreement would be
enforceable if the agreement has a lawful object and consideration, the
consent of the parties was free and the parties are of the age of majority.
If there exist any minor defects in the law, the courts can play a big role in
curing the defects through its power of interpretation.

Although there are many challenges to adoption of Smart Contracts, as

described in previous section, it will save time, cost and effort. Thus, the new
technology of Smart Contracts and Blockchain should be supported and
embraced wholeheartedly. In the initial phases the progress will be much
focused in commercial areas like banking, insurance and IT sector and the
technology will take some time before it gets adopted widely.
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