Author: Sangini Mehta, NMIMS School of law, Bengaluru
To the Point
Smart contracts, self-executing digital agreements embedded in code—have captured attention for their promise of automated and secure transactions without middlemen. However, India’s legal framework for contract law, anchored in the Indian Contract Act, 1872, is built upon centuries-old principles centered on human intention, consent, and judicial interpretation. This article analyses whether smart contracts genuinely align with the essentials of a valid contract under current Indian law, identifies areas where the law lags behind technology, and considers reforms necessary for legally integrating smart contracts into mainstream commerce.
Use of Legal Jargon
To evaluate smart contracts within the confines of Indian law, certain technical and doctrinal terms are essential. Consensus ad idem, literally “meeting of the minds,” is a foundational principle underscoring contract validity; the decentralized and autonomous nature of smart contracts complicates the establishment of this consensus. Offer and acceptance, as recognized by Section 10 of the Contract Act, occur through deployment and invocation of code rather than through written or verbal agreements. The concept of lawful consideration, defined under the same section, is transferred through tokens, cryptocurrencies, or digital assets, raising questions about valuation and legality. Free consent, a requirement under Section 14, is difficult to ensure in the absence of human negotiation and interpretation, raising concerns of inequity, fraud, or coercion, which are hard to detect in autonomous code. Privity of contract under Section 2(h) only allows contracting parties to sue, while smart contracts may unintentionally enable third-party interference or benefit. Under Section 11, only competent individuals—legally sound and above 18 can enter into contracts; the digital, pseudonymous nature of smart contracts complicates verifying capacity. The Information Technology Act, Section 4 provides recognition for electronic records, and Section 5 acknowledges digital signatures, yet smart contracts by design are signatureless and autonomous. Finally, the equitable doctrine of force majeure, if not explicitly coded, may not provide relief in cases of system failure or unanticipated global events.
The Proof
The Indian Contract Act, 1872, serves as the legal cornerstone for contractual obligations and requires specific elements for a contract to be recognized:
Offer and Acceptance – Under Section 10, there must be a lawful offer by one party and a lawful acceptance by another. In smart contracts, the code itself often functions as the offer, with acceptance embodied in actions such as sending cryptocurrency or invoking a function on the blockchain.
Lawful Consideration – The exchange of something of value must be lawful. Smart contracts frequently use stablecoins, cryptocurrencies, or tokenized assets as consideration, raising issues about valuation, legality under foreign exchange regulations, or tax compliance.
Competency of Parties – As required by Section 11, parties must be adults of sound mind. Smart contracts lack mechanisms for verifying capacity or identity, opening the door to contracts with minors or legally incapacitated individuals.
Free Consent – Section 14 mandates that consent cannot be induced by undue influence, fraud, mistake, or coercion. Autonomous execution limits the opportunity for human oversight or the rectification of errors in consent.
Lawful Object – The purpose of the contract must be lawful under Section 23. In smart contracts dealing with decentralized finance (DeFi), enforcement of gambling bans or adherence to regulatory norms may clash with coded transactions.
The Information Technology Act, 2000, offers some support. Section 4 recognizes digital records, Section 5 validates digital signatures, and Section 10A confirms contracts can be formed electronically. Yet, smart contracts perform without human signatures or direct human intervention and may run on decentralized platforms with no central operator to authenticate records. These laws acknowledge only superficial aspects of digital formality, not the substance of execution, error correction, and equitable remedies.
Abstract
Smart contracts usher in a new paradigm of automated, decentralized contracting, wherein code replaces human oversight. They offer advantages like cost reduction, immutability, and streamlined enforcement. However, India’s current contract law presupposes human consent, interpretive flexibility, and judicial intervention in cases of inequity, error, or changed conditions. Smart contracts challenge these assumptions by operating without negotiation or human oversight. They present obstacles in verifying consent, identifying responsible parties, appealing errors or bugs, and addressing jurisdiction and consumer protection. To reconcile smart contracts with Indian law, legislative and regulatory reforms are needed. These may include formal recognition of smart contracts and guidelines for fallback clauses, error correction, identity verification, jurisdiction determination, consumer safeguards, and dispute resolution.
Case Laws
Several cases underline how Indian jurisprudence has engaged with digital innovation and doctrinal principles that will shape the treatment of smart contracts:
Trimex International FZE Ltd. v. Vedanta Aluminium Ltd. (2010): The Supreme Court recognized contracts executed electronically—via emails and scanned documents—as binding, establishing a landmark for formal recognition of technologically mediated consent.
State of Maharashtra v. Dr. Praful B. Desai (2003): Recognized the validity of video conferencing for recording testimony, signaling judicial openness to technological integration in legal processes.
Haridwar Singh v. Bagun Sumbrui (1973): Reiterated that intention to create legal relations is essential, reinforcing the problem smart contracts face when executed without clear human intent.
Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas (1966): Determined that a contract is formed when acceptance reaches the offeror, which raises questions for blockchain transactions executed in multiple jurisdictions.
LIC of India v. Consumer Education and Research Centre (1995): Emphasized equitable remedies in contracts, underscoring that strict coded terms may fall short of judicial standards of fairness.
Carlill v. Carbolic Smoke Ball Co. (1893): A British case relevant for unilateral offers, where public offer and individual performance constituted a binding contract, drawing parallels with code-executed smart contracts.
These cases do not directly address smart contracts, but they define foundational principles that such smart contracts must satisfy.
Conclusion
Smart contracts offer an impressive mechanism for autonomous, transparent, and enforceable transactions across industries like DeFi, real estate, supply chain, and insurance. However, the Indian Contract Act, 1872, along with the legal interpretations developed around it, is fundamentally based on principles such as human intention, voluntary agreement, legal capacity of parties, and the ability of courts to interpret and ensure fairness in contractual dealings. Smart contracts disrupt this model and risk being legally brittle in the absence of reforms.
India must strike a balance—recognizing the technological advantages of smart contracts while embedding legal safeguards such as identity verification, error remediation, jurisdiction specification, consumer protection, fallback mechanisms, and dispute resolution protocols. Effective integration will necessitate legislative updates, incorporation of smart contract recognition into the IT Act framework, a fintech regulatory sandbox for supervised experimentation, standardized legal templates, and judicial outreach for awareness.
Without calibrated reform, smart contracts in India will continue to exist in a legal grey zone: technologically promising but legally precarious.
FAQs
Q1. What reforms should India prioritize?
India should pursue:
Statutory recognition of smart contracts
Digital identity verification frameworks
Model fallback legal templates
Regulatory sandboxes for supervised deployment
Judicial and public awareness initiatives
Q2. How is jurisdiction determined for blockchain-based smart contracts?
Jurisdiction should ideally be defined in smart contract code. Without it, courts may rely on factors such as residence, place of transaction, or server location, complicating enforcement in cross-border scenarios.
Q3. Can smart contracts be executed by minors or persons with limited legal capacity?
Legally, no. Under Section 11, such individuals cannot enter into contracts. Smart contracts lack practical mechanisms to verify age or competence, raising enforceability issues and legal risks.
Q4. Who is responsible if a smart contract goes wrong?
Liability is uncertain. Without identifiable parties, responsibility could fall on developers, deployers, or platform operators. Clear statutory guidelines are needed to assign liability and ensure accountability.
