Are Smart Contracts Really Smart? Decrypting the Issues of their Legality, Enforcement and Interpretation

Abstract

Law has been effectually responding to the legal issues raised by technological advancements. It has indeed recognised electronic contracts (or e-contracts), i.e. the formation of contracts in electronic form or by means of exchange of electronic records. Currently, the contract law especially is confronted with unique challenges posed by smart contracts, which have the potential to produce manifold advantages. Smart contracts are computerised programs or ‘transaction protocols’ which automatically execute the terms of agreement upon the fulfilment of conditions recedent agreed upon by the parties. The difference between a smart contract and a traditional paper-based contract appears to be in the manner in which a smart contract is recorded/stored and performed. This difference, however, does not alter the character of a smart contract altogether from being essentially a ‘contract’. As these contracts also manifest the agreement between the parties and are actually entered into and recorded in a specific way, therefore, their validity, enforceability and interpretation will be subject to the contract law. If viewed from a broader perspective, these contracts are essentially special species of e-contracts, with some additional, advanced technology-based striking features. The fast expansion of smart contracts necessitates a legal examination of the extent to which the fundamental principles of contract law, existing provisions of the Indian Contract Act, 1872 and the Information Technology Act, 2000 deal with the contract law issues raised by these contracts. These contracts are increasingly expanding their ambit beyond financial transactions. The four specific research questions which this paper attempts to address are: (a) What is the current legal position of smart contracts in India? (b) To what extent, the established legal principles of contract formation apply to smart contracts? (c) What are the legal challenges posed by this modern form of contracting? (d) Are smart contracts to be enforced and interpreted in the same manner as any other contract? Additionally, the paper also discusses the future of smart contracts in India.