What is a Smart Contract?
A smart contract, also known as a crypto contract. It is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. It prevents the need for a middleman; it takes place between anonymous parties under a decentralized system accessible to all the parties who have the permit.
The lawyer’s role can soon be replace as the smart contract. Theys provide the customizable templates, these contracts can also enforce the parties of the obligation to enter into.
Legal Analysis of Smart Contracts
1. The contracts are in codes
There is a common requirement of certain contracts. It is to be in writing for them to be enforceable in the court of law. If these smart contracts in codes can be given the meaning of written is unclear. The primary aim of writing is permanency which is fulfill in smart contracts.
2. Understanding of codes by the parties to the contract
These contracts are written in codes and not in natural language which raises the question of understanding the terms of the contract by the parties. It is fundamental for contracts to be binding to the parties. All the parties should have a clear understanding of the terms of the contact. Further, all the parties should have a similar understanding as to the subject matter of the contract.
3. Liability of the Smart Contract developer
In the earlier stages of its growth, most of the companies getting into smart contracts will not have the requirements to develop it. It will have to take the help of a third party to develop the same or rely on the already existing templates provided by third parties. In both scenarios, there is a possibility of error in the smart contract by the developer of the same. There needs to be clarity as to the risk and liability of the third party in the smart contract.
4. Enforcing the Smart Contract
When there is a breach of contract, we generally go to the court for remedy or enforcement of the contract. In the case of smart contract there are already provisions that are applying according to the terms and conditions of the contract in case of non-performance of a smart contract. The usage of the court will have to change as it will now look to remedy the smart contract as it has already been executed or is in the stage of execution.
It is unclear what type of dispute resolution mechanisms should be use. Specifically to address the issues arising out of smart contracts. Furthermore, what will be the possible remedies that can be granted in case of disputes?
5. Automated nature of contracts
The smart contracts are executed automatically without any human intervention. These contracts are not easy to amend or terminate. This is a hurdle as it becomes difficult legally to settle disputes. There is no clarity on what will happen if the contract becomes impossible to perform.
6. Laws to apply in cross-jurisdictional Contracts
There are not many countries that have formulated the rules and regulations of the smart contract. The contracts made cross-jurisdictional will be problematic and there will be a need for global guidelines on the same issue.
Smart Contracts and their legal status in India
India has a proactive response to the blockchain technology. Various government institutions have started to include Blockchain as a part of their research and development programs. The Smart Contracts fill the essential elements of a contract. It is laid down in Section 10 of the India Contract Act, 1872. The Information Technology Act 2000 allows for digital signatures in contracts under sections 5 and 10. Moreover, these contracts are consider valid in the eyes of the law. They can be present as evidence as per Section 65B of the Indian Evidence Act 1872. However, these are all varied documents that can be interpreted to allow smart contracts. If there is any breach of such a contract, India lacks proper laws to address the issue.
There are more complexities involve in this case. As per Section 35 of the Information Act digital signature has to be obtain by the authorize government organization, however, in the blockchain technology, the digital signature is obtaine through blockchain technology itself. There is no legal clarity on this subject yet.
Conclusion
Both Smart Contracts and the laws are developing in the present time. There are a lot of measures to be adopted before the smart contracts can be accepted at the commercial level. One of them being the ability to amend and terminate the contract which is the present time business reality. It is need to gain commercial acceptance.
Amit Bharadwaj 300 million dollar cryptocurrency fraud in the Ponzi scheme and other related reasons raise a lot of questions at the regulatory framework of smart contract laws in the country. Moreover in April 2018 RBI published a notification on Virtual Currency. In this notification RBI strictly prohibited all the regulated entities to deal in or provide services for the facilitation of virtual currencies. In smart contracts the consideration is the virtual currency termed as the cryptocurrency, their invalidity will question the existence of Smart Contracts. At the same time, the Telecom Commercial Communications Customer Preference Regulations, 2018 goes to the extent of defining Smart Contracts and permit its use. India has still not cleared its stance about blockchain and Smart Contracts.
References
1. (Nick Szabo, Smart Contracts: Building Blocks for Digital Markets 1996).
2 https://blockgeeks.com/guides/smart-contracts/
4. Mahindra Group unlocks the disruptive potential of IBM Blockchain technology, https://mediacenter.ibm.com/media/Mahindra+Group+unlocks+the+disruptive+potential+of+IBM+Blockchain+technology/1_0qnjw112https://mediacenter.ibm.com/media/Mahindra+Group+unlocks+the+disruptive+potential+of+IBM+Blockchain+technology/1_0qnjw112.
5. India: The Enforceability Of Smart Contracts In India, https://www.mondaq.com/india/contracts-and-commercial-law/874892/the-enforceability-of-smart-contracts-in-india.
6. Two Startup Founders Arrested In Connection With Amit Bhardwaj’s $300 Mn Cryptocurrency Ponzi Scheme, https://inc42.com/buzz/two-startup-founders-arrested-in-connection-with-amit-bhardwajs-300-mn-cryptocurrency-ponzi-scheme/.
7. Blockchain and Smart Contracts – Indian Legal Status, https://www.lexology.com/library/detail.aspx?g=d7020de5-d816-431f-9459-e0191c96a522.
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