DIGITAL CONTRACTS AND SMART CONTRACTS: LEGAL VALIDITY AND ENFORCEMENT
INTRODUCTION
A major paradigm shift in the creation, implementation, and enforcement of contracts has been brought about by the emergence of digital and smart contracts. A smart contract uses blockchain technology to automatically enforce contractual conditions without human involvement, whereas a digital contract is only the electronic equivalent of a traditional paper contract[1]. The enforceability of these contracts, especially smart contracts, is becoming a more important legal concern in today’s environment of growing digitalization.
Digital contracts are very simple to comprehend they use signatures, often electronic, to verify and bind the parties, much like paper contracts do. The complexity of smart contracts is far higher. When the blockchain-encoded requirements are met, these contracts automatically carry out the transactions as a result, intermediaries like banks, attorneys, and even courts are wiped out. Despite these assurances of efficiency and transparency, smart contract legality and enforceability is still controversial, at least in countries like India where rapid technology advancements necessitate amending the legislation.
COMPREHENDING DIGITAL AND SMART CONTRACTS
Smart contracts are software applications designed to leverage blockchain technology to execute, authenticate, and facilitate agreements. Since the agreement’s terms are encoded and stored on a blockchain, they take effect automatically when the predetermined criteria are satisfied[2]. Because of this, this type of contract is known as self-executing, which means that once it is made, it functions on its own without the parties’ further involvement.For instance, if a smart contract controls a real estate transaction, it could be able to transfer ownership of a house instantly when the buyer pays, eliminating the need for a third party.
Conversely, digital contracts comprise computerized equivalents of traditional contracts. These contracts, which are often signed digitally, are governed by the same laws as paper contracts. However, in India, the Information Technology (IT) Act, 2000, recognizes electronic contracts and grants both the electronic contract and the signature legal validity. As long as digital contracts meet specific requirements, such as possessing a legitimate digital signature, this law guarantees that they can be upheld in Indian judicial systems.
As long as they meet specific requirements, such as possessing a legitimate digital signature, this law guarantees that digital contracts can be upheld in Indian judicial systems.
While both digital and smart contracts allow for virtual transactions, the primary distinction is the level of automation and reliance on these intermediaries. In order to execute and enforce a digital contract, human engagement is required in the event of a disagreement, this typically entails the involvement of legal professionals, intermediaries, or judicial systems. Because blockchain technology completely automates the process of executing and enforcing the contract, smart contracts aim to eliminate these intermediaries.
LEGAL FRAMEWORK FOR DIGITAL CONTRACT IN INDIA
The current Indian legal system recognizes and accepts digital contracts. In India, the Indian Contract Act of 1872 serves as the fundamental framework for all transactions, including those executed online. A legitimate contract must fulfill the crucial components, under Section 10 of the same Act
Though, the Indian Contract Act of 1872 does not specifically stipulate that contracts must be in writing or signed with pen and paper signatures, unless the statute specifically requires a written contract. Nevertheless, this flexibility permits smart contracts to be recognized as legally binding as long as they meet the fundamental requirements of legality, mutual consent, capacity, and lawful consideration[3].
The information technology act 2000 provides provides greater weight to electronic agreement as it recognizes digital signature and electronic procedures as legitimate ways to carry out agreements. According to Section 5 of the IT Act, an agreement formed with a digital signature is presumed to be authentic, and Section 10A makes it clear that contracts established electronically are not null and void only because they were made electronically.
Consequently, India has a well-defined legislative framework for digital contracts that offers precise implementation guidance and solid legal foundations. But that isn’t the case with smart contracts because of their unique problems, such as the fact that they are automated and decentralized.
ENFORCEABILITY OF SMART CONTRACTS UNDER INDIAN LAW
In Indian jurisdiction, the legislation surrounding smart contracts is still unclear because there are no specific statutes that govern them.However, if the contract satisfies the fundamental requirements of it may still be deemed legitimate and enforceable under the Indian Contract Act, 1872. A smart contract that regulates a financial transaction, for example, can stipulate that Party A must send bitcoin to Party B as long as the products are fulfilled. There is no need for further contact between the parties if the contract immediately initiates a payment transfer when the products are successfully delivered and validated in the blockchain.
According to Indian contract act, the automated process under a smart contract meets the requirements for an offer and acceptance. However, because smart contracts are decentralized and do not need digital signatures verified by a government agency a requirement for electronic agreements under the IT Act of 2000 their enforceability is called into question.
Rather, smart contracts may not be accepted as a legitimate form of signature by Indian courts as they depend on cryptographic keys for verification In a situation like this, it might be difficult to demonstrate the authenticity of a smart contract in court because Section 65B of the Indian Evidence Act, 1872 states that an electronic record is only a document if it has a legitimate digital signature[4].
INTERNATIONAL PERSPECTIVES ON SMART CONTRACT ENFORCEMENT
Smart contracts are becoming legally recognized in many countries throughout the world.
In the United States, electronic contracts and signatures have legal force The legality of smart contract enforceability is still developing, though. Leading the way are many US states, like Arizona and Nevada, which have passed legislation confirming blockchain technology and smart contracts as legitimate means of enforcing contracts[5].
Assuming that smart contracts satisfy the fundamental requirements of offer, acceptance, and consideration, judicial authorities in Singapore and the UK is willing to discuss them in the framework of conventional contract law provisions. Therefore, the use of smart contracts is growing.
CHALLENGES AND FUTURE ASPECT
Even though these contracts have a lot of promise, they wouldn’t be generally accepted in Indian jurisdictions unless they overcome a number of legal obstacles. The absence of clear regulations pertaining to smart contracts is a major problem, particularly in nations like India
Although the Indian Contract Act of 1872 will serve as a solid foundation for a contract law, it does not meet the criteria for contracts like smart contracts, primarily due to its reliance on blockchain technology and cryptographic verification.
The absence of dispute resolution procedures in smart contracts presents another challenge. Conventional contracts usually include provisions allowing for arbitration or litigation in the event of a disagreement, allowing the parties to seek legal recourse in the event that one side breaches the agreement.
In the event that the contract is inadequately carried out or unanticipated events occur, this leaves the parties exposed. Nevertheless, there are some situations in which complicated agreements that still depend on human discretion which might not be a good fit for smart contracts.
Even though smart contracts are particularly successful at automating straightforward, objective processes like money transfers and product delivery checks, they are less efficient when dealing with issues that demand intricate legal interpretation.
CONCLUSION
The recent development of digital contracts and smart contracts demonstrates a radical shift in the implementation and enforcement of legal agreements. The Indian legal system accepts and enforces the growth of digital contracts, but because smart contracts are automated and decentralized, they present complicated problems.Smart contracts may be considered legitimate under the Indian Contract Act, 1872, if they meet the minimal requirements of competence, free assent, and lawful compensation.Though The Information Technology Act act and Indian Contract Act 1872 do provide a few obstacles, at least in regards to the need for digital signatures that have been approved by the government.
The majority of jurisdictions, including India, are likely to update their frameworks to incorporate the special features of smart contracts as blockchain technology gains traction. This will increase the clarity and protection of transactions involving blockchain technology for all parties involved.Until then, those offering smart contracts need to be aware of the limitations of the existing legal frameworks, be cautious, and have agreements in place that can withstand any potential legal challenge.
[1] “Digital Contracts and Smart Contracts: Legal Validity and Enforceability | Naya Legal.” Naya Legal, 2024, www.nayalegal.com/digital-contracts-and-smart-contracts-legal-validity-and-enforceability.
[2] IBM. “What Are Smart Contracts on Blockchain?” IBM, 2024, www.ibm.com/topics/smart-contracts.
[3]Frankenfield, Jake. “Smart Contracts.” Investopedia, 9 Feb. 2023, www.investopedia.com/terms/s/smart-contracts.asp.
[4]Lipton, Alex, and Stuart Levi. “An Introduction to Smart Contracts and Their Potential and Inherent Limitations.” The Harvard Law School Forum on Corporate Governance, 26 May 2018, corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations.
[5]Canna Law Blog. “Are Smart Contracts Legal Contracts?” Harris Sliwoski LLP, 26 Apr. 2023, harris-sliwoski.com/blog/are-smart-contracts-legal-contracts.