Smart Contracts and the Indian Contract Act, 1872: Analysing the Enforceability of Self-Executing Code, Digital Signatures, and Jurisdictional Challenges

INTRODUCTION

Digitization of technology in recent decades has dramatically altered the way business transactions are negotiated, performed and enforced. [1] Blockchain technology provides for decentralized method of transacting between parties without involvement of any conventional intermediary like a bank, escrow service or a regulatory body.[2]  Perhaps the biggest advancement, however that blockchain has spawned, is the smart contract-a self-executing computer program programmed to automate the fulfillment of contractual obligations based on predetermined conditions. [3]The major difference between smart contracts and their counterparts in natural language is that the former, being code run on a blockchain network, offers automation, transparency, immutability and efficiency.[4]

These computer contracts, once confined to cryptocurrency, have spread like wildfire to various areas of operations like the financial sector (DeFi), supply chain management, insurance, licensing intellectual property, the health industry, digital identity, real estate, cross-border payments and other e-commerce.[5] Many jurisdictions around the globe-lawyers, legislators and courts included-have had to question how the law as it stands applies to agreements entered into on the blockchain.[6]

In a world of high growth digital economics, the Indian Government has stressed upon good digital governance, financial innovation and the creation of blockchain-powered solutions. While it has displayed interest in Distributed Ledger Technology in multiple sectors, ranging from banking, land records to logistics and public administration, India doesn’t currently have a legal framework that explicitly defines and regulates smart contracts.[7] Enforcement of blockchain based agreements has had to be dealt with under the general provisions of contract law by applying various laws such as the Indian Contract Act, 1872 (hereinafter referred to as “Indian Contract Act”), the Information Technology Act, 2000 (hereinafter referred to as “IT Act”), the Copyright Act, 1957, the Patents Act, 1970, and most importantly the Bharatiya Sakshya Adhiniyam, 2023 with respect to electronic evidence.[8]

This absence of legislative framework raises various crucial questions.

Whether a computer code is itself a valid contract?

Whether execution of a transaction on the blockchain constitutes proper ‘acceptance’ under section 2(b) of the Indian Contract Act?[9]

Whether ‘cryptographic’ authentication via ‘private keys’ can substitute legally accepted ‘digital signatures’? [10]

How will the Indian Courts establish a competent jurisdiction over contracts entered between two anonymous parties across geographies operating through a decentralized blockchain network?[11] Can a ‘coding error’ in the computer code of a smart contract, rendering it invalid in the eye of law, be ignored simply because it is executed precisely as it was coded? These questions reveal a fundamental conflict between technologically-driven execution and the established legal doctrines.

Unlike conventional agreements in natural language which involve two parties reaching common consent through their conscious, voluntary and active participation to agree to terms written in such language, smart contracts, typically written in programming languages such as Solidity or Rust, are enforced by code rather than by the voluntary actions of the contracting parties. [12]This technological difference has profound implications on fundamental principles like consent, contractual intent, interpretation of terms, mistake, fraud, breach of contract and remedies, as well as on the process of judicial oversight. While blockchain offers the advantage of certainty through code execution, contract law has traditionally developed through common law precedent, enabling interpretation, equity and the exercise of discretion by judges. Reconciling these two contrasting legal traditions poses perhaps the greatest challenge to contract jurisprudence in our times.[13]

The uncertainty surrounding smart contracts does not end at contract formation stage, but extends to issues of ownership over smart contract codes[14], intellectual property over patented blockchain solutions[15], digital signatures, admissibility of evidence recorded on a blockchain,[16] conflict of laws in the case of international transactions and regulatory concerns. The UK, Singapore, the USA, and the EU have already moved ahead in legalizing smart contracts either within their existing framework or by judicial pronouncements. However, India, for now continues to be tied to the XIX century framework of contractual law.[17]

This article examines whether Indian contract law can provide a suitable framework for the enforcement of blockchain based smart contracts.[18] It delves into the legal validity of computer code as a binding agreement[19], the implications of IT Act on electronic signatures used in blockchain transactions[20], challenges with cross-border contracts and their jurisdictional issues[21] and issues concerning intellectual property rights for coding smart contracts.[22] It also compares with the current situation in leading jurisdictions and suggests potential amendments and solutions for the way forward.[23]

EVOLUTION AND THE CONCEPT OF SMART CONTRACTS

The notion of smart contracts goes back decades prior to blockchain technology.[24] Coined by the American computer scientist and legal scholar Nick Szabo in 1994,[25] a smart contract has been defined as “computerized transaction protocols that would execute the terms of a contract.[26]” He theorized that computerized programs could be used as a substitute for contractual enforcement[27], decreasing the transaction costs and risks associated with intermediaries and reducing human error. While the underlying idea of such self-executing contracts was groundbreaking at the time, the technology did not yet exist to enable them at scale.

In 2008, a pseudonymous creator of the digital currency Bitcoin, known as Satoshi Nakamoto[28], demonstrated that a decentralized, distributed ledger technology (blockchain) could be used to record digital transactions without the need for a trusted third party or central authority. However, the scripting language on Bitcoin was intentionally simplistic and not capable of handling more complex contractual relationships. The true breakthrough came with the introduction of the Ethereum blockchain in 2015 by Vitalik Buterin.[29]

Ethereum offered a Turing-complete, programmable blockchain that could facilitate sophisticated smart contracts through the Ethereum Virtual Machine (EVM). [30]

Ethereum transformed blockchain technology from a payment system to a decentralized platform on which decentralized applications and automated agreements across a wide range of industries could be developed.[31]

Today, smart contracts are found in use across various blockchain ecosystems including Ethereum, Solana, Polygon, Hyperledger Fabric, Avalanche, Cardano, and Binance Smart Chain.[32] These programs automate a vast array of transactions related to decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), exchanges, insurance, supply chains, voting systems, health records, licensing agreements and much more[33]. As smart contracts gain widespread adoption, it highlights a societal desire for automation, increased transparency and reduced reliance on intermediaries.

While technologically impressive, it is important not to conceive of a smart contract simply as a program. Instead, a smart contract should be understood as the marriage of legal intention and technical execution. Essentially, a smart contract is a computer program that represents a contract’s legal intent and automatically executes the contract’s terms when specific conditions are met.

For instance, a smart contract governing an insurance policy may trigger the payment of an insurance claim upon receiving verified weather data confirming that the insured event, a particular natural disaster, occurred.

Likewise, software programmed to pay copyright royalties on licensed material may automatically transfer funds to the original creator when that content is accessed or sold.

However, even the term “smart contract” may be somewhat of a misnomer. A smart contract is not necessarily “smart” in the legal sense and not all smart contracts may be legally enforceable[34]. Indeed, many applications operating on blockchains simply automate the execution of certain operations, which may or may not satisfy the legal requirements for a contract to be formed. In fact, whether a particular smart contract is enforceable will largely depend on whether it meets the essential elements prescribed by law, rather than on its technical functionality.[35]

Scholars often draw a distinction between the execution of code and legal enforceability. A blockchain network will simply execute computer code regardless of whether or not the transaction facilitated by that code is legally valid.[36] However, a court will analyse, for example, elements of consent, mistake, fraud, duress, legality and unconscionability before it would enforce the terms of the contract. As a result, technological execution of a contract can not totally replace judicial enforcement, especially given that many high profile blockchain dispute cases deal with issues such as the faulty implementation of smart contracts, the occurrence of unauthorized transactions and various aspects of decentralized finance platforms.

The philosophical precept underlying the emergence of the concept of “Code is Law”, or at least that “code acts as law,”, which became a prevalent mantra during the early days of the rise of the internet, popularized by Prof. Lawrence Lessig’s discussions concerning the control of cyberspace through code and design, can be applied here.[37] Proponents argue that since the contractual provisions have been encoded into an immutable contract, there is no need for external intervention by judicial bodies or any other mediating authority as the performance of contractual obligations happens automatically.[38]

Nonetheless, the proponents of the “Code is Law” premise were quite strongly critiqued.

It is not enough for the law to ensure compliance with an agreement; it should also provide a remedy where unforeseen circumstances, the principles of contract law such as consent, mistake, fraud and illegality come into play, and the code cannot take account of these doctrines.[39]

Accordingly, it can be safely concluded that smart contracts in the modern sense are not a substitute for the law of contracts, but rather a tool that functions within an existing legal structure[40], whose legal enforceability depends on whether the legislation governing e-transactions allows electronically signed contracts and whether the principles of contract law accommodate an agreement in code form as opposed to language form.

COMPARATIVE APPROACH TOWARDS TRADITIONAL CONTRACTS AND SMART CONTRACTS

Basis of Comparison	Traditional Contracts	Smart Contracts
Form	Written or verbal agreement	Computer code on a blockchain
Execution	Humans have to do the work	Automatic execution through programming
Intermediaries	Intermediaries level varies	Little or no presence
Enforcement	Can be executed through courts	arbitration, or tribunals          Executed automatically, existing dispute requires engagement of courts.
Modification	Can usually be modified by mutual consent	Hard to modify
Transparency	Not transparent	Transactions are easy to trace
Record Keeping	Data is kept on centralized servers or physical papers	Data is kept on distributed ledgers
Risk	Subject to human error, delays and breach of contracts	Subject to programming errors, cyber security breaches, and more

 

TECHNICAL ARCHITECTURE OF BLOCKCHAIN AND SELF-EXECUTING CODE

In order to answer the question whether smart contracts are legally enforceable, we need to know the technology behind their operation. Unlike a normal computer file stored on a server, smart contracts run on a decentralized ledger technology, commonly referred to as a Blockchain. [41]The Blockchain is a database where the entries are compiled into a block of data, which is then Cryptographically hashed and linked to a new block of data. [42]

Every node in the network stores an identical version of the blockchain ledger, and thus, no single participant controls the integrity of the contractual information. [43]

A key characteristic of this system is immutability; that is once the contract is deployed on the Blockchain and validated, the execution transaction is extremely hard to remove or tamper with.[44] However this can be challenging if there are mistakes made while writing code, bugs in the code, or unforeseen circumstances arise that make execution of the agreement in question physically or legal impossible. A smart contract typically runs on an If-Then logic.[45] For instance: IF a buyer pays for the agreed digital asset, THEN transfer the digital asset to the buyer.

Execution does not need human involvement since the contract itself handles the execution of payment to the smart contract’s address, the delivery and performance of its duties with no further approval of the parties, based solely on computational verification of conditions precedent.[46]

In this sense, smart contracts differ from traditional electronic contracts; while ordinary agreements made electronically-for example, via email, through a web page, or over an e-commerce site-will require human execution even after agreement-smart contracts combine the formation of the agreement and execution thereof into one automated process. This automation of execution, nevertheless, depends on oracles for reliable delivery of outside data into the network such as weather data, market prices, shipping notifications or election results, in a correct and timely manner. Any incorrect information or fraud provided by an oracle will result in an execution of the contract that would otherwise be accurate from the Blockchain’s point of view but fundamentally flawed for practical or legal purposes.

The ‘Oracle problem’ is arguably one of the biggest legal and technical problems with smart contracts that will challenge legal concepts such as breach, liability and enforceability in a traditional contract setting.

INDIAN CONTRACT ACT, 1872 ENFORCEABILITY OF SMART CONTRACT

The Indian Contract Act, 1872 was passed in an age when the transactions between business people occurred through face-to-face meeting, letters or by hard documents. Thus the lawmakers did not even imagine that at some point of time there will be use of technology like Blockchain technology, Distributed ledger, Cryptographic signature, and auto-executed software capable of fulfilling the contract obligations automatically. But the law has been drafted in a language so wide that it has the capacity to adopt new technologies and new form of transactions.

The Act did not stipulate any particular format in which the contract must be put.

What the Indian Contract Act has prescribed is that the contract must contain essential components that is to say: Offer, Acceptance, Lawful Consideration, Free Consent, Capacity of parties, Lawful Object, and Intention to create legal relationship.

Hence, it would not be correct to question on the form of transaction i.e. Electronic form but rather question of existence of blockchain based contract for that purpose will be on the fulfilling of these basic elements required by law to make it valid Indian contract. If these all elements are fulfilled, there is no rational behind denying enforceability of such contract just because the terms were expressed in computer code instead of human language. Blockchain has unique feature which cause problems of legal significance, it’s time to address all the problems in detail.

1.Offer and Acceptance Under Section 2(a) and Section 2(b)

Section 2(a) defines ‘proposal’ to be an expression by one person to another of his willingness to do or to abstain from doing something, with a view to obtaining the assent of the latter to such act or abstinence. Section 2(b) then defines a ‘promise’ when the proposal is accepted. These two provisions lay down the foundation of the entire contract law in India.

Typical contracts usually have negotiations which might be conducted through written agreements, emails, letters, oral or otherwise.

Smart Contracts on the contrary is something else all together. Smart Contracts replace this negotiation process with computer code which then runs on a blockchain. One of the most pertinent question that needs to be addressed is whether putting code onto the blockchain will constitute as an ‘offer’ and whether using the code constitutes an ‘acceptance’. On the perspective of contract law, deploying a smart contract on a blockchain might amount to the formation of an offer.

The computer code specifies the terms, the offer and consideration.

As soon as another party chooses to accept this offer, they may be doing so by simply sending currency to a specified smart contract, signing the transaction with their private key or instructing their blockchain wallet to initiate the corresponding action. The agreement between the parties, i.e., what would be transferred from one party to another will be initiated as soon as these specified terms and conditions are met by both parties. In this type of acceptance, unlike a traditional contract there is no need for post acceptance verification from either side, because the parties act on their understanding and acceptance by interacting with the contract, as per its terms and conditions.

This concept of acceptance through conduct was recognised way back in India by virtue of law. The challenge, however, comes where the contractual terms of the smart contract is contained solely in the computer code, and such programming language might be beyond the understanding of an average contractual party. Usually they rely on the graphical user interface presented to them.

What would be considered as legally binding in case there is a mismatch between what is presented in the graphical user interface of a blockchain application and the computer code is the ultimate deciding factor in many future cases of smart contracts.

2.View of the concept as per section 2(d)

Section 2(d) of the act states that the consideration includes any act or abstinence or promise made at the desire of the promisor[47]. As such the same consideration can be seen as a requirement to every kind of contracts as per Indian law unless any exception provided by the statue is applicable on the same. Thus, normally in case of the smart contracts, there is nothing which does not lead to satisfy such condition.

Usually there is an exchange of crypto-currencies or tokens or digital goods/services or promise.

Each party offers something and expect performance in return from other party. No one would deny that transfer by technology medium is not consideration. The exchange between parties would take place and can even automatically take place. Take an instance in case of smart contract, an automatic copyright royalty distribution system, will transfer the license money to the software programmer every time the software is downloaded by using license by the other party, or release of digital property upon repayment of the digital loan from the decentralized lending platform.

All of them have consideration from the party and it has taken place without the manual effort, which does not reduce its value as a consideration.

But if the transactions involve something in decentralized autonomous organization or governance token transactions or some other algorithmic transactions, its legal value might fluctuate a lot or even not legally recognised under the present framework of the Indian laws for the financial transactions. In this case when even the substance of transaction is not recognised in the legal arena, then such can be a point to determine that such there is no consideration.

3.Contractual Capacity of Parties under Sections 11 and 12

Section 11 and 12 stipulates that only a person of sound mind, major and competent to contract under the provisions of law is capable of forming a valid contract.[48] These provisions provide protection to those who are not aware of the consequences of the agreement they are entering into.

These statutory protection provisions prove difficult to apply to the inherently decentralized architecture of the blockchain technology. Public blockchains are normally accessed anonymously. Participants are merely represented by a unique cryptographic wallet address not by traditional identifiers. Hence, a smart contract and blockchain protocol itself neither confirms age nor mental capacity nor legal competency.

This anonymity makes adherence to Sections 11 and 12 extremely difficult. A smart contract cannot itself ascertain whether the person is a minor, of sound mind, or entering into an agreement under a disability. If the transaction is with the minor concerning assets which are digital and highly valued, the status of the consequent contract and remedy in the form of restitution would be very much in question.[49]

Traditional methods for contract enforcement rely heavily on identity checks, documents, etc.

Decentralized public blockchains avoid these, and hence create ambiguity regarding contractual capacity although facilitating other aspects of contracts like efficiency. Permissioned or private blockchains incorporate KYC measures and digital identity checks before they are even able to be used in the transaction.

4.Free Consent under Sections 13–22

Free consent is one of the important principles underlying Indian contract law. [50]In Section 13, consent is defined as agreeing to the same thing in the same meaning, while Sections 14-22 deal with situations where consent can be vitiated on account of coercion, undue influence, fraud, misrepresentation or mistake.

It is important to note that the application of these principles to smart contracts is much more complicated than they are in traditional contracts since blockchain transactions can automatically occur almost at the same moment the user initiates it.

5.Consent

The question arises regarding whether blockchain users are aware of the duty or obligation they are undertaking. It is found that most participants use the graphical interfaces instead of going through the programming code. This means that if the interface does not accurately reflect the underlying logic of the smart contract, then genuine consent may not exist even if the technology works as intended.

Adding to this, highly complex coding may not be understood by lay consumers. Therefore, while a consumer may agree to purchase a digital asset believing that the software works in a certain way, in reality, he is bound to obligations due to the coding which he does not understand.

6.Fraud and Misrepresentation

The occurrences of fraud and misrepresentation remain immutable in blockchain arenas even with co-existence of technical automation. A software designer can deliberately develop a malicious program that hides functions that might be feigned. Similarly, false declarations made about decentralised applications might convince involved parties to proceed with smart contracts, they would otherwise rebut.

The mere presence of a smart code does not abolish liability for fraudulent activities. The courts can verify if misrepresentation was responsible for consent under a contract and whether any remedies applied for illegal activities should still be enforced.

7.Mistake

Perhaps the greatest contractual pitfall for smart contracts is the issue of mistake. Coding errors can, through no fault of the technology, result in unintended legal consequences. A blockchain will do exactly what the programmer told it to do – regardless of whether those instructions truly reflect the actual intentions of the parties to the contract.

The famous DAO Hack (2016) serves as an excellent example of this problem. [51]

A programming loophole in the smart contract code allowed a hacker to steal millions in cryptocurrency while operating entirely within the bounds of the programmed instructions. Despite the fact that the code executed as designed on the blockchain, significant debate ensued over whether the resulting transactions were a valid reflection of contractual intent or the exploitation of a coding bug. Indian contract law recognizes that agreements formed under a fundamental mistake can be void in appropriate circumstances. The question of whether a coding error constitutes a legal mistake, a drafting error, or simple bad engineering, is one for which Indian courts have no precedent.

8.Lawful Object and Consideration under Section 23

Section 23 provides that any agreement based upon unlawful consideration or having an unlawful object is void.[52]

This section is of special importance in the blockchain world, given that decentralization allows for the facilitation of transactions that are potentially contrary to national legal frameworks. A smart contract designed to launder money, make ransomware payments, facilitate illicit gambling, traffic in restricted digital assets, or that allows for any other activity expressly forbidden by Indian law is not magically rendered legal simply because it executes on a smart contract. From a technological standpoint, the blockchain network may continue to facilitate the transaction, but from a legal standpoint, an Indian court would certainly not enforce the contract.

Similarly, if a smart contract is employed for the transfer of copyrightable material in contravention of copyright laws or used to execute transactions prohibited under various financial regulations, the agreement underlying such smart contract could potentially be voided under section 23. Technical neutrality does not mean freedom from underlying legal rules.

PERFORMANCE, BREACH AND REMEDIES

Smart contracts, it is argued by proponents, are capable of significantly minimizing the risk of contractual breach, in as much as the blockchain automatically enforces contractual duties when conditions laid down in the smart contract are satisfied, without any further human interaction. It has been said by some observers, on the basis of this fact, that smart contracts render the need for any legal enforcement completely otiose. Such conclusions, however, are far from the reality.

Automation guarantees performance in accordance with the coded program. Automation cannot guarantee either that the program will be a correct rendition of the legal contract entered into between the parties or that, once executed, further unforeseen events may not arise. Failure to perform due to, for example, programming flaws, cybersecurity issues, oracle failures, legislative changes, fraudulent manipulations etc, may be present even though the smart contract is successfully executed as per the code, thus still enabling resort to the standard remedies under the Indian Contract Act. Thus, Section 73 of the Indian Contract Act which provides for compensation for breach of contract and Section 74, which deals with compensation for breach of contract when a sum is named in it as amount to be paid on the breach, retaining great importance.[53]

If a party intentionally causes the oracle to submit misleading data or defrauds the oracle to insert false information and thereby influences the execution of the contract, the same would again bring the transaction under ordinary contract laws and rules pertaining to performance and breach.

Similarly, the applicability of Section 56 of the Indian Contract Act which covers the doctrine of frustration to smart contracts would be of much interest, given the inherent attributes of the

blockchain technology. What if the transfer of certain kind of digital assets are thereafter regulated and banned by the Government after deployment of the smart contract, yet before the contractual condition in smart contract gets fulfilled? Whether such supervening illegality under the smart contract, will result in the contract being void under section 56, is another issue that may very well fall to be determined by a court of law in future blockchain disputes.

So, while it can be said that the Indian Contract Act has enough inherent flexibility to handle many of the aspects of formation and enforcement of a smart contract, the inherent peculiarities of the blockchain such as its decentralized, irreversible, automated and immutably distributed nature has brought to the fore certain lacunas, that could not be foreseen by legislations of the nineteenth century. This, however will be much clear when we come to analysing the legal sanctity of electronic records and digital signatures under the Information Technology Act, 2000.

DIGITAL SIGNATURES AND ELECTRONIC CONTRACTS UNDER THE INFORMATION TECHNOLOGY ACT, 2000

Whereas the Indian Contract Act, 1872, sets out the criteria for an enforceable agreement, the Information Technology Act, 2000 (IT Act), establishes the legal framework for the acceptance of electronic record, electronic contracts and digital signatures in India. The enactment of the IT Act represented a major development in Indian commercial law by providing legal recognition for electronic transactions, which were otherwise tied to paper-based documents. Despite the fact that the Act was enacted prior to the emergence of blockchain technology, some of its provisions provide sufficient scope for accepting smart contracts, subject to fulfilling the requisite statutory conditions.

The legal link between the two Acts is complementary rather than contradictory. Where the former determines the presence of the necessary elements of a valid contract, the latter determines whether there is a valid electronic medium of such a contract. Consequently, a smart contract will have to satisfy both the statutes to be considered legally enforceable in India.

1. Section 4 – Legal Validity of Electronic Record

Section 4 states that where any law stipulates the requirement for information to be in writing or printed, or documented in any other way, it shall also mean that the same requirement has been met when the information has been documented or presented in an electronic format and can be referenced later on.[54]

This section is quite important in relation to the blockchain technology. A smart contract has all its documentation done electronically and then it gets documented in the distributed ledger technology. The blockchain information can be stored, accessed, verified, and reproduced, meaning that its purpose is fully achieved in this manner.

Thus, the fact that the smart contract is documented in blockchain and not on the paper does not render it legally void. What actually matters is the accuracy of the electronic document.

2. Authenticating Electronic Signatures

In the process of formation of a contract, authentication plays a very pivotal role. The traditional legal system places a variety of legal functions upon signatures. They are used to prove the identities of contracting parties; the signature confirms their intention to be legally bound by the agreement; they serve to authenticate the document on its face. However, authentication is performed differently using technology of blockchain and using various cryptographic keys and methods.

3. Section 3 and 3A – Digital Signatures and Electronic Signatures

Section 3 recognize Digital Signature, which can be made using systems of asymmetrical cryptography and hash functions[55]. Section 3A goes ahead to accommodate other reliable electronic authentication means as long as the same would meet certain standards of the legal requirement. The authorization of any of blockchain’s transactions happens with a private cryptographic key in the hands of the wallet owner and any transaction initiated by the wallet owner through his private key can only be executed after authentication by the blockchain network with public key cryptography.

Blockchain Authentication is highly Secure From a technical perspective blockchain’s authentication method is incredibly secure and, in many instances, cryptographic wallet signatures can be even more difficult to counterfeit compared to handwritten ones.

But one significant issue that needs attention is that, the Information Technology Act predominantly has the notion of ‘digital signature’ of persons licensed by a Certifying Authority under the framework of India. Blockchain’s authentication through wallets, in most cases is independent of the same and does not necessarily get them authenticated from the prescribed method. This creates ambiguity over blockchain authentication as valid under Sections 3 and 3A of the Act. Numerous legal scholars opine that the legislature should bring about future legislative amendment that recognize blockchain based cryptographic authentication to legitimize the enforcement of the smart contracts and other transactions that use technology for its operations.

4. Section 5 – Electronic Signatures are Lawfully Accepted

Section 5 declares that a document signed with a valid digital signature would not lose its legal validity[56]. What the provision tells us is that Indian law does not now require us to always use an actual signature to execute an agreement. In other words, law making in this country has already accepted that the function of an actual signature may be performed by an electronic means of identification. The issue is blockchain authentication may not always happen in the certified signature infrastructure envisaged by the IT Act so, even if blockchain signature fulfils the functional objective of authentication, we must ensure that clarity of law helps resolve the current ambiguities.

5. Section 10A – Legal Recognition of Electronic Contracts

Perhaps the most critical piece of legislation relevant to smart contracts is Section 10A of the Act. Introduced to the IT Act by virtue of the Information Technology (Amendment) Act, 2008, section 10A provides that where a contract is formed by electronic means then such a contract shall not be invalid simply on the ground that an electronic form was used.[57]

While there is no mention of the word ‘blockchain technology’, the words used by the lawmakers are general in nature. This is because it embodies the doctrine of technological neutrality. Rather than giving recognition to specific technology, it gives recognition to electronic means and modes. Thus, it would seem that if parties form a contract using blockchain technology and if all the essential ingredients for contract formation are present then the validity of the said contract should be upheld, in part at least, based on Section 10A.

However, section 10A, by itself, cannot validate every single blockchain transaction. An electronic contract which fails the tests of consent, lawful consideration, competency, lawful object etc., cannot become a legally valid contract merely by virtue of having complied with technological requisites for formation. Section 10A aids electronic contracting, and cannot replace the tests that form part of the Indian Contract Act.

6. Sections 11, 12, 13 – Attribution, Acknowledgement and Dispatch of Electronic Records.

Section 11, 12 and 13 laid down principles on attribution, acknowledgement of receipt and on the time and place of dispatch and receipt of electronic records. [58]This will come into effect with multi- jurisdictional blockchain transactions. For example if an Indian software company launches a smart contract on Ethereum platform. The buyer could trigger the transaction from Singapore.

The network of block validation nodes could be located in Europe, North America and Asia. The digital asset itself might be sitting in a blockchain network without any physical location. Then, it will become significantly difficult to decide on the place of execution of the contract as compared to traditional electronic commerce. Whilst section 11-13 provides useful guidance for regular electronic communications, they were framed around a centralized information system rather than the more complex system that a decentralized blockchain network represents.

JURISDICTION ISSUES IN CROSS-BORDER SMART CONTRACTS

When it comes to legal issues surrounding the use of blockchain technology, none is more complex than jurisdiction. Contract law makes the assumption that parties negotiate within a recognizable legal system.

Judicial authority is determined based on considerations like the location where the contract is made, the location where the performance will take place, residency of the parties, and the law selected by the parties themselves. Blockchain technology completely undermines this assumption.

Decentralization and Territoriality

Every country’s legal system is based on the idea of territorial sovereignty. The court normally exercises jurisdiction in cases where the person or property involved is associated with its territory. But the blockchain systems do not have any centralized geographic limitations. The smart contract executed on the Ethereum platform is located in thousands of computers located around the world at the same time. So, it becomes difficult to pinpoint the location for performing the contract.

1.Anonymity and Pseudonymity of Parties

Typically, most blockchain networks allow participation in transactions using cryptographic wallet addresses rather than legal names. Therefore, one of the contracting parties can be completely anonymous during the entire contractual transaction. The identification of the defendant becomes an extremely challenging task in case of subsequent dispute. The traditional approach is based on the premise that the parties have identifiable personalities and can accept notifications, file pleadings, and execute orders issued by the court. Blockchain technology greatly undermines this premise.

Despite the increasing use of Know Your Customer (KYC) requirements by cryptocurrency exchanges, decentralized finance systems often function without centralized identification procedures. Thus, even when Indian courts take jurisdiction over such transactions, enforcement against the anonymous defendant becomes practically unfeasible.

2. Governing Law Clause

International business agreements usually have a clause that states the governing law that is going to govern any disputes arising out of the contract. Smart contracts do not have this kind of clause because the contractual terms are stated only in software code.

In cases where there is no governing law specified, the courts are required to ascertain the law that is going to apply based on the traditional rules of conflict of law.

It becomes particularly difficult where the following circumstances exist:

• the software programmer comes from one country,
• the user comes from another,
• the blockchain validators act internationally,
• digital assets are held in decentralized networks,
• and payments are done in cryptocurrencies.

There are no established rules for this conflict that Indian courts have recognized till now. Future court rulings shall be significant for resolving this dispute.

3. Arbitration As The Most Practical Mechanism

There is no doubt among many scholars that the process of arbitration can be considered as the most practical mechanism to resolve any kind of dispute regarding smart contracts. Since Arbitration and Conciliation Act, 1996 recognizes electronically made agreements for arbitration.[59] It means that smart contract users can include clauses for arbitration within their legal documentation.

Some decentralized blockchain projects across the world have also started experimenting with decentralized methods for dispute resolution. But there can never be any dispute resolution mechanism in which judicial intervention is not required.

There are always certain kinds of questions related to fraud, public policy, copyright issues, crimes and even statutory interpretation which need to be decided by a court of law. Ownership, Licensing, Patentability and Commercial Exploitation of Source Code Is An Emerging Area Of Technology Law.

4. Intellectual Property Considerations Smart Contracts

The very nature of a smart contract as an electronic program ensures that they give rise to various complex intellectual property considerations. Questions of source code ownership, licencing of such code, its patentability and commercial viability are areas in the ongoing evolution of technology law. Copyright Protection Computer programs are defined as literary works under Section 2(o) of the Copyright Act, 1957. [60]

The source code used to construct the smart contract would normally automatically enjoy copyright protection on creation, if original.

As a result of Section 14, the copyright owner alone has the right to reproduce, adapt, distribute, communicate to the public, or commercial exploit the software in question. Therefore, commercial exploitation or copying of confidential smart contract code could constitute copyright infringement. It is, however, very common for many of the projects building on blockchain to offer their smart contract code on an open source license. In this case, such code may freely be reused, modified and developed by others, subject to conditions stipulated in the license.

Patentability of Smart Contracts It is highly debatable whether smart contracts per se would be eligible for a patent.

In India, patent protection is denied under Section 3(k) of the Patents Act, 1970 [61]for: “a mathematical or business method or a computer program per se or algorithms.” Therefore, it is unlikely that software that merely puts contractual logic into code will obtain separate patent protection in India. However, it is possible that technologies building on blockchain to produce a technical effect beyond that of normal computer programming may be granted patent protection based on the facts of the particular invention.

Indian patent practice is in constant development in this regard, so future court and Patent Office judgments may provide clarity.

LEGAL POSITION COMPARATIVE OVERVIEW: INDIA AND SELECTED FOREIGN JURISDICTIONS

Smart contracts are regulated differently in each jurisdiction; depending on technological sophistication, legislative priorities and judicial approach. Some countries have introduced laws for blockchain-based contracts whereas other continue to rely upon the principles of conventional contract law for enforceability of contracts. Comparison is useful in that it shows how existing legal framework is adapting to new technology while maintaining legal certainty and protect of rights. It gives useful insights to India as no special law for regulation of smart contract exists in India.

INDIA

No dedicated law for the regulation of smart contract or smart contracts based transactions exists in India. Currently, enforceability of smart contracts is being determined by reading together the provisions of the Indian Contract Act, 1872 and Information Technology Act, 2000. The Indian Contract Act deals with the substantive validity of contracts.

Contract requires offer, acceptance, lawful consideration, competent parties, free consent, lawful object etc to be valid.

Whereas, the IT Act provides legal backing to electronic records, electronic signatures and electronic contracts and hence to smart contract based contracts.

Although the said acts are broad enough to cater for most forms of electronic contracts but these were passed prior to emergence of blockchain and thus do not address issues of self-executing codes, decentralized verification and validation, programming error in smart contracts or cross-border jurisdiction issues relating to distributed ledger technology. The legal position remains uncertain and role of courts is anticipated in establishing framework for smart contracts in absence of specific laws.

UNITED KINGDOM

UK has taken a progressive stance towards smart contracts by adopting common law principles as opposed to a specific legislative act for regulation. Under English contract law the existence of intention of both parties to enter into a legally binding contract, consideration and certainty of contractual terms are of importance rather than medium of contract execution.

A major development was made when the UKJT published its Legal Statement on Cryptoassets and Smart Contracts in 2019. [62]It was stated that smart contracts could potentially create binding contractual obligations under English law. There were four basic requirements for creation of binding contracts according to English law.

First being offer and acceptance, intention to create legal relations and consideration and finally certainly.

According to the statement, smart contracts can satisfy all such requirements. [63]Even an automated code execution does not make it legally unenforceable. This is an example of adaptability of common law and has put UK at front for blockchain related innovation.

SINGAPORE

Singapore is one of the most advanced jurisdictions on the globe on account of digital technology and transactions, which includes regulation of blockchain transactions. Instead of providing separate legislation on smart contracts Singapore courts interpret it using already existing legal principles of contract and e-commerce law.

The courts have taken an accommodative view. A prime example is the ruling of Quoine Pte Ltd v. B2C2 Ltd[64] in which it was observed that even if code automatically execute itself, the basic contract law principles still apply to cases involving contractual intent, mistake and enforcement issues. Authorities in Singapore have introduced pro-innovation policies and have maintained stringent legal safeguards, which have made the country an attractive business hub.

UNITED STATES

One of the most statutory of approach have been made by US. Some states have passed legislation specifically mentioning blockchain based records and smart contract to be legal enforceable documents. For example, in the state of Arizona, House Bill 2417 specifies that contract can’t be legally invalid just because it contains a smart contract term or because of its recording on a blockchain. [65]

Similar bills are introduced in other states such as Tennessee and Nevada[66] making it legally enforceable for parties to transact in business involving blockchain based commercial contracts.

These laws not only provide certainty to businesses on such transactions, but also promote technological innovation by acknowledging its legal validity while allowing basic legal provisions to be taken care of by traditional contract law principles i.e., for matters like illegality, contractual capacity and fraudulent conduct.

Though no federal law covering the specific aspects of smart contracts yet exists. But state law reforms have made substantial contribution towards promotion of blockchain based commercial transactions in the US.

EUROPEAN UNION

Rather than enacting legislation specifically targeting smart contracts, many jurisdictions, including the European Union, have indirectly addressed them through existing electronic commerce, digital identification, consumer protection, and data governance laws. For example, the EU’s eIDAS Regulation guarantees legal status of electronic signatures [67]and identities across Member States, which aids in cross-border electronic transactions. MiCA addresses crypto-assets and related services across the EU[68], providing a uniform set of rules for the digital asset landscape even if smart contracts aren’t explicitly included.

Beyond those, the EU framework encourages consumer protection, cybersecurity, responsible innovation and transparency.

This model is another proof point that established digital regulations may be sufficient.

The comparative study illustrates that, across many of the leading legal jurisdictions, traditional contract law is not being dismantled. Instead, lawmakers and judges are applying technology-neutral interpretations to existing legal principles or making narrowly focused legislative reforms. The UK and Singapore have, by and large, relied on court decisions.

Some US states, meanwhile, have gone so far as to pass legislation specifically recognizing blockchain contracts.

The EU has done so via its digital regulatory framework, and India continues to work within the confines of legislation from before the blockchain was even conceived. The existing framework within the Information Technology Act of 2000 and the Contract Act of 1872 provide a viable base for electronic agreements. However, specific legislative clarity concerning smart contracts, digital signatures, distributed ledger technology, cross-border disputes and jurisdiction would go a long way to advance smart contracts and other blockchain solutions within India.

JUDICIAL DEVELOPMENTS AND CASE LAW ANALYSIS

1. Trimex International FZE Ltd. v. Vedanta Aluminium Ltd., (2010) 3 SCC 1

Although the Supreme Court did not address blockchain technology directly, this judgment is a key reference in India regarding the enforceability of contracts made electronically[69]. The dispute involved negotiations through emails about supplying bauxite. One party claimed that no binding contract existed because both sides intended to sign a formal agreement later, and no such document was ever signed.

The Supreme Court disagreed and stated that a valid contract does not always need a formally signed document if key elements for forming a contract are present.[70] The Court noted that once the parties agree on the essential terms and show a desire to create legal obligations, a lack of a signed agreement does not invalidate the deal. The Court stressed that business transactions should be understood practically, reflecting modern business realities rather than strict formalities.

This judgment is significant for smart contracts because it recognizes that electronic communications can establish contractual obligations. Smart contracts are electronic agreements stored on blockchain networks and executed by computer code. If Indian law already recognizes contracts formed through emails and other electronic means, there is a solid legal foundation for applying the same reasoning to blockchain contracts. This decision supports the idea that the validity of a smart contract should focus on whether it meets the criteria of the Indian Contract Act, 1872—such as offer, acceptance, lawful consideration, free consent, and intention to create legal relations—rather than the technology used to form the contract.

However, the ruling also subtly points out a limitation. Unlike emails, smart contracts execute automatically when certain conditions are met. So, while Trimex shows that electronic communication can create enforceable agreements, Indian courts will need to address issues specific to blockchain technology. These issues include coding errors, automated execution, and decentralized performance. Still, this decision lays an important groundwork for recognizing smart contracts within Indian contract law.

2. Quoine Pte Ltd. v. B2C2 Ltd., [2020] SGCA(I) 02 (Singapore Court of Appeal)

This decision from the Singapore Court of Appeal is viewed as one of the earliest and most important rulings on blockchain-based automated transactions[71]. The case began when an automated cryptocurrency trading platform performed several trades at unusually abnormal exchange rates due to a software glitch. Quoine reversed these transactions, claiming they were caused by an unintentional programming error. On the other hand, B2C2 argued that the trades were valid under the platform’s rules.

The main legal issue for the Court was whether standard contract law could apply to transactions carried out automatically by computer algorithms. The Court ruled that software involvement does not eliminate the need for contractual intention. [72]Even though the transactions were handled by automated systems without direct human involvement at the time, the relevant intention belonged to the programmers and parties who designed and set up the software beforehand. Thus, normal contract rules about mistakes, agreement, and interpretation still apply, despite the automated nature of the transaction.

The Court also noted that technology cannot take the place of legal analysis. A blockchain or automated platform may accurately execute computer code, but whether the resulting transaction produces legally enforceable rights is a legal question, not a software issue. The Court, therefore, rejected the argument that “code is law” in an absolute way and reaffirmed the ongoing role of judicial oversight in resolving disputes linked to automated contracts.

While this judgment is not binding on Indian courts, it holds significant persuasive power because both India and Singapore share essential aspects of their contract law from common law principles. The decision shows that self-executing code should not be seen as outside the legal system. Instead, smart contracts remain bound by traditional contractual rules about consent, mistakes, fraud, and enforceability. For India, where there is currently no specific law governing smart contracts, Quoine offers a useful framework showing how existing contract law can be used with blockchain technology without discarding established legal principles.

CONCLUSION

Smart contracts are one of the most significant developments in modern commercial law. They combine contractual obligations with automated software execution using blockchain technology.[73] Their ability to cut transaction costs, remove middlemen, increase transparency, and improve commercial efficiency makes them a more appealing option for digital commerce. However, technology cannot function without legal regulation. The enforceability of smart contracts depends on their alignment with established legal principles around contract formation, electronic authentication, jurisdiction, and dispute resolution.

This article shows that the Indian Contract Act, 1872 has enough flexibility to include many types of smart contracts.[74] The Act emphasizes the actual contractual requirements instead of the medium through which agreements are made. Similarly, the Information Technology Act, 2000 establishes a legal basis for recognizing electronic contracts and records, supporting the legal validity of transactions on the blockchain. Still, neither law specifically tackles several issues tied to decentralized technologies, such as blockchain authentication, coding mistakes, oracle failures, anonymous contracting parties, and cross-border jurisdiction.

Looking at developments in countries like the United Kingdom, Singapore, and the United States [75]shows that existing legal principles can adapt successfully with technological progress. India should take a similar approach by implementing specific legislative reforms instead of overhauling its current contractual framework. A dedicated legal framework that acknowledges blockchain technology, clarifies rules on jurisdiction, and regulates smart contracts will enhance commercial certainty while fostering technological growth.

In the end, smart contracts should not be seen as a replacement for traditional contract law. Instead, they are a modern method for fulfilling contractual duties. The future of digital commerce relies not on choosing between law and technology but on making sure both work together within a clear, predictable, and effective legal framework.

FREQUENTLY ASKED QUESTIONS (FAQS)

1. Can smart contracts be legally binding in India?

Yes, only if the smart contract meets the requirements of a valid contract as per the Indian Contract Act, 1872 and adheres to the Information Technology Act, 2000.

2. Do the Indian Contract Act, 1872 make any reference to smart contracts?

No. There is no reference to blockchain or smart contracts in the Indian Contract Act, 1872. Enforceability of smart contracts will be determined based on the existing principles of contracts.

3. Are blockchain transactions considered as acceptance under Indian laws?

Yes. Acceptance can be proved through conduct when both the parties intend to transact on the smart contract by complying with the conditions of the smart contract.

4. Are blockchain wallet signatures recognized as digital signatures?

Yes. But there are provisions in Indian law for electronic and digital signatures. Whether the blockchain wallet signature is considered as digital signature is a debatable issue.

5. Can coding mistakes make smart contracts invalid?

Yes. In case of coding mistakes, the court might take into consideration issues related to mistake, consent and interpretation of the contract.

6. What is the law that regulates electronic smart contracts in India?

The Indian Contract Act, 1872 regulates the legality of contracts whereas Information Technology Act, 2000 legally recognises the electronic record and electronic contracts.

7. What are the key jurisdictional issues in blockchain transactions?

Decentralisation of blockchain, anonymous parties, execution of transactions across borders and lack of geographical location make the issue of jurisdiction difficult.

8. Is the smart contract code copyrighted as per Intellectual Property Law?

Yes. The Computer programs in general are copyrighted as per the provisions of Copyright Act, 1957 subject to conditions of originality and ownership.

9. Are smart contracts patentable in India?

Invention related to software inventions is not patentable under Section 3(k) of Patents Act, 1970. Whether such invention is patentable or not will depend upon its technical contribution to a computer program per se.

10. Is there any need for special law of Smart Contracts in India?

Though there is a basic legislative framework available to recognise smart contracts, a special law for smart contracts would help to have better legal clarity

[1] Chris Reed, How to Make Bad Law: Lessons from Cyberspace, 73 Mod. L. Rev. 903 (2010).

[2] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008).

[3] Nick Szabo, Smart Contracts (1994).

[4] Primavera De Filippi & Aaron Wright, Blockchain and the Law: The Rule of Code (Harvard Univ. Press 2018).

[5] World Economic Forum, Realizing the Potential of Blockchain (2018).

[6] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019).

[7] Indian Contract Act, 1872.

[8] Bharatiya Sakshya Adhiniyam, No. 47 of 2023.

[9] Indian Contract Act, 1872, § 2(b).

[10] Information Technology Act, 2000, §§ 3, 3A.

[11] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019).

[12] Nick Szabo, Smart Contracts (1994).

[13] Kevin Werbach & Nicolas Cornell, Contracts Ex Machina, 67 Duke L.J. 313 (2017).

[14] Copyright Act, No. 14 of 1957, §§ 2(o), 14.

[15] Patents Act, No. 39 of 1970, § 3(k).

[16] Bharatiya Sakshya Adhiniyam, No. 47 of 2023, §§ 61–63.

[17] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019); Arizona House Bill 2417 (2017); Regulation (EU) 2023/1114 (MiCA).

[18] Indian Contract Act, No. 9 of 1872; Information Technology Act, No. 21 of 2000.

[19] Kevin Werbach & Nicolas Cornell, Contracts Ex Machina, 67 Duke L.J. 313 (2017).

[20] Information Technology Act, 2000, §§ 3, 3A, 5, 10A.

[21] UNCITRAL Model Law on Electronic Commerce (1996).

[22] Copyright Act, No. 14 of 1957; Patents Act, No. 39 of 1970.

[23] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019); Quoine Pte Ltd. v. B2C2 Ltd., [2020] SGCA(I) 02.

 

[24] Nick Szabo, Smart Contracts (1994).

[25] Nick Szabo, Formalizing and Securing Relationships on Public Networks, 2 First Monday (1997).

[26] Id.

[27] Max Raskin, The Law and Legality of Smart Contracts, 1 Geo. L. Tech. Rev. 305 (2017).

[28] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008).

[29] Vitalik Buterin, A Next-Generation Smart Contract and Decentralized Application Platform (2014).

 

[30] Vitalik Buterin, A Next-Generation Smart Contract and Decentralized Application Platform (Ethereum White Paper, 2014).

[31] Primavera De Filippi & Aaron Wright, Blockchain and the Law: The Rule of Code (Harvard Univ. Press 2018).

[32] World Economic Forum, Realizing the Potential of Blockchain (2018).

[33] Kevin Werbach, The Blockchain and the New Architecture of Trust (MIT Press 2018).

[34] Max Raskin, The Law and Legality of Smart Contracts, 1 Geo. L. Tech. Rev. 305 (2017).

[35] Indian Contract Act, 1872, § 10.

[36] Primavera De Filippi & Aaron Wright, Blockchain and the Law: The Rule of Code (Harvard Univ. Press 2018).

 

[37] Lawrence Lessig, Code and Other Laws of Cyberspace (Basic Books 1999).

[38] Lawrence Lessig, Code: Version 2.0 (Basic Books 2006).

[39] Kevin Werbach & Nicolas Cornell, Contracts Ex Machina, 67 Duke L.J. 313 (2017).

[40] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019).

 

[41] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008).

[42] Melanie Swan, Blockchain: Blueprint for a New Economy (O’Reilly Media 2015).

[43] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008).

[44] Primavera De Filippi & Aaron Wright, Blockchain and the Law: The Rule of Code (Harvard Univ. Press 2018).

[45] Nick Szabo, Smart Contracts (1994).

[46] Max Raskin, The Law and Legality of Smart Contracts, 1 Geo. L. Tech. Rev. 305 (2017).

[47] Indian Contract Act, 1872, § 2(d).

[48] Indian Contract Act, 1872, §§ 11–12.

[49] Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114 (PC).

[50] Indian Contract Act, 1872, §§ 13–22.

[51] The DAO Hack Explained, CoinDesk (2016).

[52] Indian Contract Act, 1872, § 23.

[53] Indian Contract Act, 1872, §§ 56, 73–74.

[54] Information Technology Act, 2000, § 4.

[55] Information Technology Act, 2000, §§ 3 & 3A.

[56] Information Technology Act, 2000, § 5.

[57] Information Technology Act, 2000, § 10A.

[58] Information Technology Act, 2000, §§ 11–13.

[59] Arbitration and Conciliation Act, 1996, § 7.

[60] Copyright Act, 1957, §§ 2(o), 14.

[61] Patents Act, 1970, § 3(k).

[62] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019).

 

[63] Id.

[64] Quoine Pte Ltd. v. B2C2 Ltd., [2020] SGCA(I) 02.

[65] Arizona House Bill 2417 (2017).

[66] Tennessee Senate Bill 1662 (2018); Nevada Senate Bill 398 (2017).

[67] Regulation (EU) No. 910/2014 on electronic identification and trust services (eIDAS).

[68] Regulation (EU) 2023/1114 on Markets in Crypto-assets (MiCA).

 

[69] Trimex International FZE Ltd. v. Vedanta Aluminium Ltd., (2010) 3 SCC 1.

[70] Id.

[71] Quoine Pte Ltd. v. B2C2 Ltd., [2020] SGCA(I) 02.

[72] Id.

[73] Primavera De Filippi & Aaron Wright, Blockchain and the Law: The Rule of Code (Harvard Univ. Press 2018).

[74] Indian Contract Act, No. 9 of 1872; Information Technology Act, No. 21 of 2000.

[75] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019); Quoine Pte Ltd. v. B2C2 Ltd., [2020] SGCA(I) 02; Arizona House Bill 2417 (2017); Regulation (EU) 2023/1114 (MiCA).