A standard supply chain comprises suppliers and/or manufacturers of raw material,

processing of the raw material in factories, transportation in larger quantities to retailers,

port operation, warehouse for storage of goods and lastly transportation in smaller
quantities to the consumers. India has been previously hit by the Coronavirus and there are
chances for the country to face another pandemic as even in 2023 we are fighting against
virus such as Nipah, which has already taken several life’s. The pandemic has demonstrated
dramatic impact of uncertainties on supply chains and has established the need for smart
contingency plans to help companies deal with these uncertainties in the right way. In
today’s digitally connected world, maximizing productivity by reducing uncertainties is the
top property across the industries. Additionally, mounting expectation of supersonic speed
and operational efficiencies further underscore the need to leverage the prowess of
Artificial Intelligence (AI) in Supply chain and logistics. AI in supply chain can deliver the
powerful optimisation capabilities required for accurate capacity planning, improved
demand forecasting, enhanced productivity, lower supply chain costs, and greater output,
all while fostering safer working conditions. The business advantage of AI in supply chain
include: accurate inventory management, warehouse efficiency, enhanced safety, reduced
operations cost and on time delivery.

However, having acknowledged the benefits the AI can bring, there are number of concerns
in legal context that needs to be clarified before making an full pledged utilization of AI in
business. The main concerns that is of interest in this paper is with regard of Indian Contract
law. First consideration that must be given is whether the smart contract functioning
through AI is recognised under the Indian Contract Law. The requirements of contract
formation in India law in order to hold them valid is: agreement, offer and acceptance,
capacity, consideration, and performance. We are analyse each of these requirement to
contest whether the current position of Indian Contract Law will be able to handle the
disputes arising from AI enabled contract.

Under Section 2(h) of the Indian Contract Act, 1872, a contract is an agreement that is
enforceable by law. When one of the parties to the contract ‘offers’ or proposes something
and the other party ‘accepts’ the offer, an agreement is formed. Section 10 of the Indian
Contract Act, 1872, elucidates upon agreements that can form contracts. It states that if
agreements are made by ‘free consent’ of parties who are competent to contract and if
these parties make such agreement for a lawful consideration and a lawful object, then such
agreements form a contract and are valid. For instance, in Shankarlal Narayandas Mundade
v. The New Mofussil Co. Ltd. (AIR 1946 PC 97), it was held that, unless an inference can be
drawn from the facts that the parties intended to be bound only when a formal agreement
had been executed, the validity of the agreement would not be affected by its lack of
formality. Smart contract contains an agreement between the user and the provider of the
service/good due to which they are accessing the forum of its service. The service or the
goods is delivered through the pre-coded programme that meet the specific result, which
enables the two minds to meet. An example of this can be vending machine, where the
instructions and the end result is clear from the provider of the goods/service and the user
goes through the actions to get the end product. The Indian Contract Act, 1872, uses the
term ‘proposal’ for offer and defines it in Section 2(a) as follows: ‘[w]hen one person
signifies to other his willingness to do or 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’.
Section 2 (b) of the act further points out that when the person to whom a proposal is made
signifies his assent, the proposal is said to be accepted; and, a proposal, when accepted, is a
promise. In Section 2(c) of the act, the person making the proposal is called ‘a promisor’ and
the person accepting the proposal is ‘a promisee’. Once the smart contract is deployed, the
offeree can accept in two ways: (a) by signature through a cryptographic private key; or (b)
in certain circumstances, by beginning or performing the contract itself. For now, the smart
contracts that we see are species of unilateral contract, i.e. a promise that X will be
transferred when Y is done. It is common to see the transfer of the digital assets, which
can be in the form of cryptocurrency or digital representation of an offline asset as an
example of performance by conduct. However, this should not pose any challenge when
determining the formation of a smart contract. That is, deploying a smart contract to an
Ethereum (or permission-less) blockchain and signing the smart contract with a private
key should constitute a valid offer and acceptance under applicable Indian law.

Furthermore, another the essentials of a valid contract, under Section 10 of the Indian
Contract Act, 1872, is that the parties should be ‘competent’ to contract. A competent
person, under Section 11 the act, is of the age of majority, of sound mind, and not
disqualified from contracting by any law. However this is a matter of concern as there can
be two types of AI enabled contract: smart contract and AI acting through a principal
agent. The case of AI acting through a principal agent is an accepted form of contract as
there is a presence of a human mind. However, in the case where AI can autonomously
execute the contract, a concern is the ability of an AI to execute and be bound by contracts.
Under Indian law only a “legal person” can be competent to enter a valid contract. The
general rule thus far has been that an AI may not qualify as a legal person. Hence, a contract
entered into by an AI of its own wish may not be regarded as a valid contract in India.

Also, Human beings are capable of forming an intention, intention gives rise to action. The
contract law also assumes that humans enter into a contract based on an intention to share
a goal. To have this goal legally enforceable is legal intentionality. Legal intentionality is
recognized by our Contract Act thus giving rise to legal obligations in the form of contractual
performance. Contracts drafted by AI lack the ability to form an intention. In the event that
AI is treated as an agent, acting on behalf of the principal, only then can the principal’s legal
intention be constituted as a valid element to enter into a contract. Intentionality ensures a
meeting of minds, but when two AI are individually contracting, there is a question on
what constitutes the meeting of minds? The Indian Contract Act, 1872 in its Section 11
mentions about who are competent to contract. According to Section 11, a person must
have reached the age of majority, must be of sound mind and is not disqualified by law to
contract. Hence, this definition refers mainly to a legal person only. Apart from this, the
court’s ability to understand the technicalities involved is also one of the issues that are to
be considered. The Indian Contract law is not advanced enough to meet cases when two AI
contract, as our current legislation is written for ‘human’ performed contracts.

Moreover, a possible way to legally attribute competency of a person accessing a blockchain

is to resort to Section 11 of the Information Technology Act, 2000 (IT Act). This section
states that an electronic record can be attributed to an originator, (defined under Section 2
(1) (za) of the IT Act, is the person sending, generating, storing, or transmitting an electronic
message) when such record is sent by an information system programmed by or on behalf
of the originator to operate automatically. In smart contracts, minds are nodes. Considering
Section 11 of the IT Act, a transaction could be assigned to the originator and, within a
smart contract, this originator can be known if there is- on the blockchain a ‘digital identity’
which can be linked to a unique individual. Thus, ‘minds’ can be identified within a smart
contract. Normally, when a person without legal capacity enters into an agreement, the
other party can seek action in unjust enrichment or reverse the transaction, if possible. In
smart contracts, the unwinding of a transaction on a blockchain is extremely complicated
and expensive because the transaction is recorded in a block that becomes a part of the
blockchain. However, factually speaking, the funds which are usually cryptocurrencies can
be retransferred if the sender knows the recipient. This is possible only when the purpose
of that smart contract was the transfer of funds. Users of blockchain platforms are
identified through their address, which is a set of numbers and therefore, suing someone
to unwind a transaction is not a straightforward process. Therefore, the remedy the Indian
Contract law offers such as rescinding the contract in case of breach of contract is not an
option that can undertake due to the expenses that can incurred since the programmes
are coded that cannot be modified.

Additionally, a basic contracting principle is, parties must enjoy genuine contractual
freedom, and they must be well-informed about their bargaining position in the contract.
Our current legislative system is not prepared enough to deal with these newer power
imbalances created by the introduction of AI systems. Clearly, AI systems are more adept at
drafting comprehensive clauses and documents than most humans, plus they are extremely
time-efficient. Nonetheless, one cannot ignore the brewing asymmetries AI systems can
cause by intensifying any party’s ability to manipulate contracts to individual benefit and
hence gain better bargaining power. Artistically drafted clauses can conceal conditions,
breaches, and remedies creating lopsided contracts which challenge the party’s autonomy
to determine the contents of the contract. One can argue that brilliantly drafted contracts
that have an underlying complexity and unpredictability were never a rarity in the legal
field, yet AI systems pose an unprecedented threat of this becoming a very common
occurrence where the innocent party will hugely suffer because their legal rights and
remedies will be curbed. Therefore, due to this concern, there can be increased number of
cases leading to void contract since the intention of the parties can be manipulated using
complex contractual drafting that common law will find difficult to understand.

Furthermore, consideration is an essential element of a valid under section 10 of the Indian

Contract Act 1872. Therefore the smart contract should be made with consideration, or
otherwise it is void as defined under Section 2(d) of the Act. In most smart contracts, the
consideration entails an exchange of digital assets like virtual currencies or the underlying
value for a digital asset. Computer nodes merely perform what is promised between the
parties before smart contract code is run. This exchange of promises may or may not consist
of an exchange of digital assets or cryptocurrencies as consideration. For example in an
insurance policy, the performance of a smart contract when certain conditions are met
makes out the payment, so here it acts as ‘conceptually and pragmatically’ sufficient
consideration for the contract.

However the concern is with regard to RBI 2018 notice and lawful consideration of
cryptocurrencies. On 6th of April 2018 RBI published a notification pertaining to Virtual
Currency. In this notification RBI strictly prohibited all the regulated entities to deal in or
provide services for the facilitation of virtual currencies. Any contract for being a valid
contract needs a valid and lawful consideration. Like any other contract even in Smart
Contracts if you are rendering a service or selling a product you expect a payment in return.
One of the key features of Smart Contracts is that it helps in making payment across the
globe swiftly in form of cryptocurrency. Cryptocurrency is a form of Virtual Currency. Parties
convert their currency into cryptocurrency through an exchange and then deposit it into an
escrow account. As soon as you receive the goods sold or receive the service rendered,
payment automatically gets sanctioned from that escrow account into the payments
account. Therefore, RBI notification leaves Smart Contracts high and dry. Neither RBI clears
its stance on the status of cryptocurrency as a valid form of currency or not. Neither any
enactment is available to clarify similar status indeed after 2 years have passed after the
announcement. Firstly, the question on validity of cryptocurrency and the implied bar over
uncertified digital signatures, makes it a very dicey affair for all the potential users of such
technology. It is not like the government is unaware of the transactions and crimes taking
place through cryptocurrency. It is just that the government is taking a lot of time in
formulation of statutory provisions clearly defining terms like Smart Contracts, virtual forms
of currency and the legal aspect attached to it. Secondly, along with a great insufficiency of
statutory vittles’ governing the conception, government institutions are cotemporary
promoting and accepting the use of Blockchain. The Telecom Commercial Communications
Customer Preference Regulations, 2018 goes to the extent of defining Smart Contracts and
permitting its use. Now the main question is what about the virtual currency which might be
used as a energy for similar contract. There are countries like Switzerland which recognize
cryptocurrency and have made legislative developments regarding the same. New Nevada
legislations recognize Smart Contracts and Blockchain as well. So it is high time India clear its
stance pertaining to Blockchain and Smart Contracts.

Lastly, self-performance is one of the key features of a smart contract. This implies that the
obligations are memorialised in the code itself. The contracting parties, therefore, need not
‘trust’ each other because contractual promises are within the code. The stated code is
bound to be executed whenever the parties send the transaction to the blockchain.
However, blockchain is the key technology behind smart contracts and makes these
contracts appealing to the financial sector and various industries. When smart contracts are
encoded on a blockchain, they become immutable and secure. Immutability of a smart
contract, or in simple words the inability to modify it, allows self-execution and self-
enforcement, that is, without
involving intermediaries like banks or supervision of a central authority. Despite the obvious
benefits of immutability, it becomes a source of problems when errors in the code are
discovered after the execution and encoding of smart contracts onto a blockchain. In the
event of errors in the code, the immutability of a smart contract prevents altering it, and
resolution of the errors can be extremely complicated and expensive. In 2019, a company in
charge of ‘Zcash’, a cryptocurrency using complicated mathematical problems to secure
transactions carried out by its users, discovered and fixed an error found in its code. The
company admitted in its blog that a hacker could have exploited the bug until it was fixed.
Another problem can occur because of immutability when the parties to the smart contract
in the ordinary course of business decide, either mutually or separately, to change the
parameters of the contract. Consequently, the parties to the smart contract can be
presumed to have consented to its terms. However, it is difficult for the parties to
understand whether the code has materialised their intentions until the code is executed
and encoded in the blockchain. Thus, the liability from a smart contract may be attributed
not only to the contract’s parties but also to the coders of the contract. However, in the
case of a blockchain-based smart contract, even shutting down the computer will not really
affect the outcome of the contract. This is because, once the transaction has been sent on
the blockchain, no influence can be exerted on the contract and the code will run and be
verified on all the nodes. Hence, what remedy can be offered that is recognised under the
law needs clarification as rescinding or substituting a smart contract is not easy.

Moreover, the concern in evaluating where the fault has happened in the smart contract or
an AI enabled contract is mainly because of “black box”, sometimes referred to as the
problem of AI interpretability or explainability, is currently the subject of a great deal of
academic research. Blackbox is any type of artificial intelligence (AI) that is so complex that
its decision making process cannot be explained in a way as a machine learning begins from
the coded programmes. Black box AI is any type of artificial intelligence (AI) that is so
complex that its decision-making process cannot be explained in a way that can be easily
understood by humans. It will be important for India to define norms around human –
machine commerce including the position of transparency that will be needed. Will a
company need to inform in that data is processed through an AI driven solution? Will there
be a distinction if the AI takes the decision autonomously vs. if the AI played an augmenting
role? Presently, the Niti Aayog paper has been silent on this question of transparency and
the concern that can arise from black box as the machine learning will not detect what made
the AI take a particular action. The problem with regard to AI enabled contracts is primarily
concerning Liability and Accountability. The use of AI in Contract law raises questions about
liability and accountability for AI generated decisions or errors. Determining responsibility
when an AI system generates contract terms, recommendations, or performs autonomous
actions requires legal certainty. The development of guidelines or legislation to allocate
liability between AI systems, developers and users is necessary.

The rules of the Indian Contract Act are applicable to AI systems as well because currently,
we do not have any comprehensive legislation for the same. The Indian Contract Act’s
application to AI systems has uncountable loopholes which can be easily leveraged to the
detriment of an innocent party. One cannot ignore the urgent need for radical legislation
which covers the scope of AI systems in contract law much better than the Indian Contract
Act, of 1872.